“In a bullish environment, some companies received more market value than others. In a bearish market, some company’s market value eroded more than others. Intangibles are so valuable because they say something about the future performance of organizations”, says C Mahalingam

The unprecedented pace of change is making it almost impossible to predict future beyond a few years. The economic depression that the world is currently facing was not predicted, even though the subprime housing bubble was building up for a while now. The ‘irrational exuberance’ exhibited in the financial markets continued unabated leading to disastrous consequences plunging most of the vibrant economies into an overnight tailspin. Collapse of the financial system, economic slump, mounting job losses and near complete erosion of purchasing power became a vicious cycle reinforcing each other.

Organizations such as Lehman Brothers and American Insurance Group (AIG) that were once considered as ‘built to last’ collapsed like pack of cards! Those that survived a possible eclipse from existence went through dramatic value erosion as we witnessed in the case of Citi Corp. Organizations that were solely built on tangible assets such as financial capital, or physical assets such as buildings and machinery, eroded much faster than anyone could have imagined. Welcome to the world of Intangibles!

Intangibles Impact a Firm’s Market Value

Intangibles as a source of lasting value for organizations are not new. Past several decades witnessed a clear shift in value towards intangibles as evidenced by many studies. The Economist offers an amusing definition of intangibles: “An intangible is anything in a firm that generates value that you cannot drop on your foot.”

Intangibles include a wide range of organizational dimensions. It can be a firm’s brand, culture, talent and capabilities. More recently, intangibles have also expanded to cover new and unique organizational designs and process that provide a lasting competitive advantage to organizations. Google is a great example of unique organizational design, culture and management practices that come to represent a value-enhancing intangible. By definition, these are unique to an organization and even more importantly embedded in their DNA, and therefore not easy for the competition to copy or emulate. Brookings Institute has documented the following shift in value from Tangible assets to Intangible assets:

Growing Importance of Intangibles (Brookings Institute):

                         Intangible(%)        Tangible(%)

1982                        38                       62
1992                        62                       38
2000                        85                       15

Future organizations must focus on creating Intangible Value

Business Leaders and HR leaders must learn more and more about the contribution of intangibles. They must identify those intangibles that will be unique to their organization and provide a long term, sustainable competitive advantage, besides bringing in measurable increase in the market value for their organizations. Human Capital practices constitute a significant intangible as has been recognized in the last two decades. Research by many Human Capital consulting firms as well as by professors of repute from business schools such as Ross School of Business (University of Michigan), Stanford, Rutgers, Cornell and London have confirmed a positive, measurable correlation between human capital practices and firm value.

HR Guru, Dr Dave Ulrich and his colleague at Result-Based Leadership Institute, Norm Smallwood, have produced a master piece book titled: ‘How Leaders Create Value’ in which they have systematically explained the value intangibles can create for organizations besides providing a road-map for creating such intangibles. Dave Ulrich went on to name these intangibles as ‘Investor Intangibles’ since investors are willing to pay a significantly higher price for those organizations that demonstrate these intangibles in their DNA!

The language of Value Creation for HR Professionals

HR professionals in the past did not quite have the benefit of the language of value creation. Their contributions within their respective organizations, as well as sharing of best practices outside in professional forums and platforms centered on controlling costs and delivering services with efficiency and speed. Even during the decades of HR automation that came to be characterized as the era of E-HR, the premise (and promise) was more to do with delivering HR services with speed, eliminating cumbersome paperwork and occasionally establishing a self service Business to Employee (B2E) portal on the intranet.

With the increasing awareness of the power of intangibles on building organizational value, HR professionals have found a new language for articulating their value to their organizations. It is true that not all investor intangibles are in the domain of HR. For example, establishing an effective R&D program that delivers patentable product or formulation that fulfills a long-unfulfilled human need, or cures a long-dreaded disease can be an intangible of lasting value - so is the brand reputation built over time for a reliable service or product. A vast majority of intangibles that an organization can build rest within the domain of the HR function as these intangibles are built with human capital.

HR professionals with right competencies, professional attitude and business acumen can create significant measure of intangibles for their organization with the help and participation of the business leaders. This provides a unique opportunity for the HR professionals to demonstrate that they can create value rather than than cut costs, become strategic players rather than remain strategic partners. After all, the HR professionals who do not score will be wasting an opportunity of their life time besides letting their organizations down!

Intangibles as the Future Focus of organizations

Business and HR leaders need to evolve a well thought out strategy towards investing in and building organizationally appropriate and uniquely advantageous intangibles for their organizations. While intangibles are difficult to create and even more difficult to sustain over time, there are two types of intangibles that HR professionals must be aware of:
The first one is more fundamental in nature and will therefore take a longer time and stronger commitment from the organization and its leadership. This relates to the DNA of the organization. I would place under this category, intangibles such as culture, management models and leadership brand. These are almost impossible for the competition to emulate. Here lies the competitive advantage. Semco Corporation, General Electric, South West Airlines, SAS Institute and Google, are examples of corporations that have created such intangibles.

Then comes the next level of intangibles which are difficult to create but not impossible to replicate by the competition - business processes, ability to innovate, speed, customer centricity as shared mindset, organizational learning, and talent. Innovation (Nokia as an example), speed (Federal Express as an example), organizational learning (McKinsey as an example), ability to execute (Dell as an example), employee engagement (SAS Institute as an example) are case in point.

Architecture for Intangibles

Dr Dave Ulrich and Norm Smallwood have made what may be called a first systematic effort in articulating a clear architecture for creating intangibles that add value to an organization. Their framework provides for the following four levels of intangibles for creating sustainable competitive advantage.

Level 1: Delivering Consistent and Predictable Earnings: Leaders make and keep commitments when it comes to delivering their commitments to shareholders.

Level 2: Articulating a Future Growth Vision: Leaders make a compelling case and create a widely shared vision for ground around customers, innovation and geography.

Level 3: Ensuring Future Competencies aligned to Business Strategy: Leaders invest in building leadership, technical and behavioral competencies in their people that are fully derived from, and aligned with their business strategy. This helps mobilize people towards one direction, making every day behavior strategy-focused, and avoids intentional or unintentional pulling in different directions and the consequent frittering of employee energy.

Level 4: Creating Organizational Capabilities:Leaders create organizational capabilities such as hiring appropriate talent, executing decisions with speed, building leadership capability across organizational levels, making people accountable to one another, generating and generalizing knowledge across organization, collaboration between individuals, teams & business units, instituting & institutionalizing a customer-focused culture and the like.

Culture, Management Models & Leadership Brand as Intangibles

HR professionals should work with business leaders to diagnose and understand if the existing culture and management models are proving to be a valuable intangible or a burden. This diagnosis is not easy and thankfully so - if only it is easy, anyone could do this! Let us look at each of these three key intangibles in some detail:

Culture: There are many different definitions of organization culture. Most of these definitions revolve around values, beliefs and embedded assumptions about how people should behave. The simplest definition of culture is: ‘how things happen here‘. Scholarly work on culture in the past has been very inward-focused in terms of leadership behaviors, how professed values are practiced and the like. The recent work by Dave Ulrich and others has a refreshingly different outside-in focus. Culture in this new context is more around the shared mindset of employees about creating the right brand or identity for the customers they are serving. For example, South West Airlines has created a great identity in the minds of its customers as dependable, on-time, economical and fun-filled airlines to fly. This customer identity has become its culture.

Management Models: Dr Gary Hamel (of Core Competence fame, together with Dr C K Prahalad) has this to say in his best selling work: ‘The Future of Management’: “Whiplash change, fleeting advantages, technological disruptions, seditious competitors, fractured markets, omnipotent customers, rebellious shareholders- these 21st century challenges are testing the design limits of organizations around the world and are exposing the limitation of management model that has failed to keep pace with the times!” He provides vivid examples of organizations such as Google, Whole Foods Market, South West Airlines and W.L Gore & Associates that have stood the test of time by innovating management models, and thereby creating a lasting competitive advantage. HR professionals as Organizational Architects, have both a long way to go, as well as have a golden opportunity to create a formidable intangible by working on management models.

Leadership Brand: Leadership Brand is an emerging intangible in the context of a firm brand or product brand which is already well established. For example, Proctor & Gamble has been steadily investing in creating a strong portfolio of brands that included 16 brands that were delivering a whopping US 1 billion in annual sales. Leadership Brand, as a new and emerging intangible for HR leaders to invest in and create, will deliver even a superior value to a firm than the firm brand or a product brand. An organization can be said to have a strong leadership brand when its leaders across organizational levels and geographies practice leadership in ensuring that customers’ expectations are tuned to employee behaviors in a consistent manner.

Companies such as Nordstrom, Nokia, Marriot and General Electric have done a tremendous job of establishing a leadership brand that helps customer experience the desired employee behavior at all times.

Rewriting the HR Agenda

HR leaders have come a long way in their understanding of how they can create value. Value creation calls for more than tinkering and tweaking with HR systems and processes. It demands that HR leaders think outside the box and become radically innovative. And innovation should be focused on creating intangibles like the ones discussed above. There lies the future of organizations and their competitiveness, and of course for the HR professionals, there lies their own future and credibility as strategic partners and players. The new mandate or agenda for HR professionals is crystal clear: creating significant return on the new ROI – Return on Intangibles!