While many companies have strived to differentiate their annual reports and make them informative, attractive and easy to read, most still take a rear-view-mirror approach, focusing almost exclusively on history and analyses of past performance. But as we advance into the Information Age, more companies will find that those assets most easily measured are not necessarily most valuable; increasingly they will be forced to measure intangible assets in a predictive way that is more reflective of how the company is actually run.

At Celemi, I have been keenly aware of the value of knowledge since the company’s inception in 1986. Celemi is a global company that creates learning processes to support large-scale change and improve business performance. In many ways, it is a typical knowledge organization. We generate profits, not by selling a product, but by selling our capabilities, experience, and expertise. Our clients buy our knowledge in the field of learning to help overcome challenges in their daily operations.

Today, even traditional manufacturing companies are finding themselves not simply selling a product, such as a car, but selling customer service, a lifestyle, convenience, and so much more.

The airline industry provides another clear example of this phenomenon. Where airlines once had large tangible inventories of aircraft on their books, they now lease the equipment, changing the nature of the business to one built on intangible assets-landing rights, booking systems, customer service, and brand.

And if we consider the market value of Internet companies, we see shares trading at many times the book value of the company, even for companies that have never shown a profit. Clearly, no organization is untouched by the impact of knowledge.

Unfortunately, knowledge itself cannot be “managed.” But knowledge that is captured and converted into an asset (tangible or intangible) is indeed a commodity one can count on, literally, to improve the performance of the company and help generate profits.

At Celemi, we realized early on that the company’s balance sheet did not represent the true value of the business. Where was it reflected that we are a team of highly skilled professionals who provide effective service to our clients? Where would a stakeholder be able to assess the value of the unique learning processes that we create for our clients? Where did we account for the value of our loyal and growing customer base?

At about the same time we were wrestling with these questions, we began working with Dr. Karl Erik Sveiby, a leading researcher and author on knowledge asset values, to create a learning process that would simulate the real-life challenges of managing a knowledge-driven company, and help people understand the nature of this unique business environment.

The simulation, called TangoTM, was introduced in 1994, the same year Celemi’s board of directors decided to measure the company’s own intangible assets and publish the findings in the annual report.

WHAT TO MEASURE

At Celemi, our revenues are dependent on two critical factors: our clients or customers who want to buy our services, and our consultants and designers who provide these customers with effective solutions to their business challenges.

But we do not own either of these critical assets-our customers or our employees. The value they provide to our company is only temporary and cannot be considered a measurable asset unless, or until, it is captured and converted into something the company can own-any new knowledge or skill that can be reused or applied in other areas, be it a new learning process or a new operating policy.

The challenge for our organization then becomes to capture as much in the way of company-owned assets as possible from these two primary sources, and make them a tangible part of the organization. If you look at Celemi’s Intangible Assets Monitor, you will see that these three categories-“Our Customers,” “Our People,” and “Our Organization”-are represented across the top. These are the areas we have identified as being the fundamental factors, or drivers, of our continued success.

“Our Customers” represents our external structure and shows us how our relationships with clients affect revenue, growth, competence, and image. “Our People” shows the value of our combined competence and how well these competencies match customer needs. “Our Organization” represents our internal structure and helps us assess the value and impact of systems and processes, business tools, patents, trademarks, and our company culture.

These three categories do not change from year to year and provide a basic framework for the Monitor. Within this framework, long-term consistent measure-ment is ensured, as the evaluation of our client base and its contribution to our image, business structure, and competence growth will always be included.

However, there are also factors that may be revised during the years, such as certain investments and initiatives we need to focus on as they are implemented and developed. For example, the development of our IT capabilities, which at one time was a key measure when establishing new offices, is now monitored in relation to other investments in R&D and marketing. In the future, we expect other factors will periodically be measured to give an accurate assessment of our intangibles as the business evolves.

Once we understand the value of intangible assets, we can see, for example, that a customer project is worth more than the financial capital it generates. Managed correctly, we can use our relationships with customers to educate our people, create new solutions, and ensure continued knowledge and revenue growth for the company. As managers, we can then take a look at each of these areas and use our understanding of them to make the most appropriate strategic decisions.

Likewise, we must capture the skills and knowledge of employees and transfer them into company-owned assets. For example, the team members who created Tango may one day leave Celemi, but we have captured their expertise and knowledge in the form of a tangible simulation that we can continue to sell long after they are gone.

Once we capture these assets, however, we need to account for them, and this is what is expressed in our Intangible Assets Monitor.

GETTING THE WHOLE STORY

In contrast to the traditional financial statement, which is a lag indicator, Celemi’s Intangible Assets Monitor is a lead indicator. It is a tool we use to clarify our key assets, which happen to be largely intangible, and guide us in our efforts to move the company forward in an effective and profitable manner.

Consider the Growth/Renewal information found under each of the three main headings. Here you will see that revenue growth is up 22 percent in 1997, compared with 50 percent in 1996. You will also find some explanation for the slower rate of growth, due to long-term commitments and investments for the future, as well as indications of very positive trends in all three areas.

But to fully understand the long-term impact of our management decisions, you must also consider the other two factors within each area: efficiency and stability.

Since 1995, Celemi has undergone rapid growth. This places a burden on the company, as we must educate each of our new employees and help them apply their own unique competencies in the most effective way.

To accomplish this, senior sales consultants are asked to help educate new recruits, cutting into time spent on sales activities. In addition, new people need time to learn to locate information quickly and use internal systems efficiently. In the 1997 Monitor, we can see how these two situations contributed to a decrease in the company’s efficiency and had an impact on the rate of sales growth.

At the same time, we are building the stability of our company. Repeat orders are on the rise. Our Expert Turnover is down significantly, while seniority for both Experts and Administrative staff is up.

BROADER APPLICATIONS

The consolidated figures presented in the Monitor provide insight into the company at an organizational level, but to be useful to each employee, we had to first develop a universal understanding of intangible assets.

Before we started measuring our intangible assets, we had to help everyone understand what our intangible assets are, and what impact they have on the performance of the company. With this knowledge of the “big picture,” employees can begin to see how individual performance affects organizational performance. For example, our managers understand the importance of assigning a new employee to a competence-enhancing client rather than an image-enhancing client.

We have devised a systematic method of measuring intangible assets critical to the success of our own consulting organization, but the model is relevant to any business, with slight modifications in the specific measures, based on each business’s own drivers of success.

A company like Coca-Cola may wish to monitor the value of its brand names and distribution channels. Patents and R&D portfolios may represent a significant intangible value to a pharmaceutical company like Pfizer, so numbers and ages of patents would be logical categories to monitor. But franchise operations, like McDonald’s, would likely value their brand names as well as their network of outlets.

Retail is another example of an industry undergoing revolutionary change, and business leaders must be careful to identify the most relevant intangible assets. Typically in this industry, sales are generated by the personal interaction between sales associates and customers, so the intangibles would logically be found in the competence of the sales staff. However, at a retailer like IKEA, where sales are generated by enhancing the customers’ ability to help themselves, the intangible assets are found in the systems and processes that IKEA has created: how the IKEA catalog is set up, the store displays, the customer’s opportunities to do-it-yourself and keep costs down, and so on.

In any case, use caution before jumping in and measuring your intangible assets. First, there must be a shared understanding internally of what the intangible assets are and what they mean to the overall performance of the company. With this knowledge, people are able to interpret the information and make effective decisions in line with the strategic plan. At the same time, they are developing their own extraordinary business sense-an essential key to how we, at Celemi, meet our challenges as an innovator in a global environment.

Margareta Barchan is the president and CEO of Celemi (www.celemi.com), a company that creates learning processes enabling groups of people to quickly understand the changing needs of their business and react accordingly In 1997, Ms. Barchan was named Business Woman of the Year for Sweden and Celemi was named to Europe’s 500, a list of the fastest growing companies in Europe.