Managing intellectual capital

In the previous article we discussed trends that determine how HR professionals will work in the near future. Next, we try to show how and why HR professionals are forced to show how their work impacts business results.

Let's start not by discussing HR function, but something in Finance - called "intangible assets".

"Things you can’t drop on your feet"

Imagine two friends that want to be their own bosses and open their own businesses. One of them - let's call him Johnny - wants to start craft bakery, another one - let's call her Jenny - wants to open her own legal (accounting, management consultancy or web design) practice. Who needs more money to start? Johnny, of course! He needs to buy some very expensive equipment and master not so simple processes.

Jenny just needs a table, chair, pen and paper.

After some time both businesses take off. Jonny's balance sheet is quite "heavy": he has significant equipment as fixed assets, as well as raw materials and inventories which cost significant money and accurately reflected in the balance sheet. Jenny's balance sheet is "light" as she doesn't have anything like that.

Let's imagine that after some time both friends decide to sell their companies to institutional investors. After it is done, both companies are evaluated similarly. But how so? Johnny has many pieces of equipment (fixed assets) that can be seen working. Jenny doesn't have anything like that. In fact .. she has. Jenny's company has plenty of intangible assets.

Intangible assets are "things you can’t drop on your feet", they are hard to identify and measure.

These assets are intangible, yet they are crucial for many businesses.

Goodwill

As per Investopedia "goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists". Investopedia doesn't mention something of importance for us - intellectual capital.

In the last decades we are moving from the economy of tangible assets and physical products to the economy of knowledge and services.

In the average NASDAQ company fixed assets are less then 25% of its market value.

In other words, more than 75% of value is added by intangible assets. These assets are especially important in banks, software, insurance, telecom etc. And companies in these industries require new approach to management.

Example with Google

Many manufacturing companies mimic the army structures - the hierarchy is simple and effective. It is relatively easy to measure performance - by output or by hours. Compensation can be easily linked to performance (activities) as well.

And here how it is done in Google.Of course Google is one and only, and other companies should not copy everything they do.

They had their first sales (and hired somebody to manage it) when the team already worked for several years and had 10-12 top-notch engineers.

Google is known for pioneering free food, massage and other perks for its employees impossible in other companies. They could even experiment with the structure - at one point they got rid off all managers - and were able to survive the chaos. The managerial positions were returned eventually. With their multi-billion revenue and huge margins they can afford it.

Google is just one company in which the main value was added by intangible assets.

In Google value creation happens in the heads of its people - engineers, project managers, analytics.

Organisational structure is complex and fluid - projects, roles, reporting lines, programming languages and framework - all these changes monthly, if not weekly. And it is hard to evaluate performance by measuring activities: let's say one Google engineer works all day and writes a lot of code. Another one spends 80% of her time in the canteen with free food, then in one hour writes code (100X less in amount than then the first one) that works better and with less bugs. Now, how we determine "better" or "less bugs"? Bugs are not created equal and less code is not always better. And how should we motivate these employees?

Managing intellectual capital

Companies where intangible assets are a significant contributor to market value have new requirements for HR professionals: they should be able to adapt organisational structure, roles, motivation, compensation and benefits system to new tasks. And they should do it incredibly quickly. Nobody can replace HR here as it is their zone of responsibility.

So, the more important intellectual capital is for the company, the more important role should HR play. Traditional, "administrative" HR functions are not enough.

This change in the HR role is caused by new technologies and is not by ambitions of HR professionals.

We can say that most HR professionals are a bit surprised and not ready for this change. And this change is the most significant in the last 25 years.

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