Connecting intangible assets to the bottom line. (Foundation Findings).

If a tree falls in the forest, does it make a sound? That's a classic question for philosophical pondering. How about this one: If an asset is intangible, does it make an impact on the corporate bottom line? Of course it does. But how can this impact be captured, quantified or valued in the financial analysis?

The IABC Research Foundation's latest research project, debuting at the 2003 Toronto international conference, will help communication practitioners help their clients connect intangible assets to the corporate bottom line. "Intangible Assets and Communication," by the research team of Hanno Roberts, Peggy Simcic Bronn and Karl-Joachim Breunig, explores methods of identifying intangible assets, representing these assets in financial terms and communicating their value to the organization in concrete terms.

DEFINING TANGIBLE AND INTANGIBLE ASSETS

According to "The New York Times Dictionary of Money and Investing," an intangible asset is "a legal claim to some future benefit, typically a claim to future cash." Simply put, an intangible asset (also known as intellectual assets, intellectual capital, intellectual property or knowledge capital) is an asset that is not physical in nature. Examples include copyrights, patents, intellectual property, goodwill, brands, trademarks, ideas and relationships. The list can be extended to include elements like creativity, innovation, professionalism and loyalty. On the opposite end of the spectrum are tangible assets, which are typically thought of as things that determine a company's value, such as equipment, facilities and inventory.

The ABC Research Foundation's research team organizes intangible assets (goods and competencies) in three categories that correlate with the corporate bottom line: human capital (experiences and expertise of people who produce knowledge), relational capital (the connectivity and exchange process-knowledge production) and structural capital (organizational infrastructure that allows connectivity to take place--the knowledge production process enabler). The jump from relational capital to structural capital is where the knowledge production process becomes an organizational process.

Today, many companies derive their value from more than just things. Their worth and future success depend on intangible assets, as the new study makes clear: "From a communication point of view, intangible assets have become important as a result of the general higher level of knowledge in society. Stakeholders such as consumers, political authorities, interest organizations and potential employees are more conscious of where they stand and what they want."

USING RESOURCES EFFECTIVELY

The research team defines companies by their use of knowledge. But they remind the reader that "all organizations are knowledge organizations and they range from knowledge-intensive service providers to high-tech manufacturers. All organizations build on knowledge work as their primary valueadding process and, therefore, are exemplary showcases of the challenges of the new economy."

The authors point out that firms always have had knowledge as one of their resources, but its competitive relevance and intensity has dramatically increased over the last decade.

According to the study, knowledge organizations can be categorized on the basis of their knowledge utilization--the way they deploy their knowledge resource. Within the knowledge economy, firms can be either:

* knowledge-based

* knowledge-intensive or

* knowledge-driven.

The authors explain the differences this way: Knowledge-based firms, such as consultancies or educational institutions, have knowledge as the only outcome of their transformation processes. Knowledge-intensive firms, such as software development or car manufacturing, have knowledge as one of their outcomes in parallel to their manufacturing or service production. Knowledge-driven firms do not have knowledge as their main output but rather as their input, nor have they centered their transformation process on it. An example of a knowledge-driven firm is an electrical installation firm where the professional training of the operators is the main knowledge input.

MAKING KNOWLEDGE PAY

This concept of knowledge intensity is a continuum, ranging from a high to a low degree of knowledge use. With this in mind, all companies will benefit from determining the value of their intangible assets.

Often, communication is reflected in financial documentation only as an expense. Yet the research team shows through this study that managing communication is a key to creating value and to revealing the value of other intangible assets.

The researchers suggest that elements of the communication function must be acknowledged as assets for the company in financial documentation because the company's structural and tangible assets would not exist without it. Without intangibles such as human capital and relational capital, the company would not have profit-producing tangible products and services.

How can the value of these intangible assets be reported? The research team developed three screening devices to help communicators assess the relational, structural and human capital components of intellectual capital within an organization. The study also provides formulas for identifying these assets on a financial balance sheet.

The authors' research supports the concept of intangible asset reporting and intellectual capital statements. Similar to the corporate annual report, these statements provide financial analysis of intangible assets backed up by a narrative report. "An intellectual capital statement focuses on an extended resource definition and, consequently, on an extended definition of what value actually is and encompasses," according to the study.

The authors continue: "Knowledge resource is specifically included in that extended resource definition and what drives that knowledge resource is usually expressed as knowledge work and knowledge sharing, network cooperation and non-financial information. In other words, measurement in terms of value drivers covers many non-financial areas."

TELLING THE FULL ASSET STORY

In this model, communicators are doing what they do best-telling the story of the company through its intangible assets.

Through "Intangible Assets and Communication," Roberts, Bronn and Breunig provide the steps for identifying and communicating the value of intangible assets for companies and organizations. The study offers screening tools and intellectual capital statements that communicators can use not only to help organizations explain the value of their intangible assets but also to identify and position communication challenges surrounding this knowledge frontier.

RELATED ARTICLE: ABOUT THE FOUNDATION

The IABC Research Foundation contributes to a body of knowledge that advances the practice, perception and effectiveness of communication. It serves IABC, its members and others in the profession through research on organizational communication.

* The "INTANGIBLE ASSETS AND COMMUNICATION" report will be available in July 2003. To order online, visit www.iabc.com/store or call 800-776-4222 or [phone].

Tamara Gillis, ABC, Ed.D., is an associate professor

of communication

and department chairman at Elizabethtown College 

in Elizabethtnwn, Pa.,

and past chairman

of the ABC Research inundation. She can be reached at

[e-mail].