Thursday, January 10, 2008

Investing in Intangible Assets

Companies (or perhaps more properly individuals within companies) are regularly faced with decisions on how best to invest their limited resources. One asset class often suspected of underinvestment is "Intangibles." Intangible assets are things like staff skills, brand, R&D, and even supplier relationships. I will divide the decisions to be made about intangibles into two buckets:

1. Investing in intangible assets
–Whether to invest in intangibles
–Deciding amongst intangible investment options
–How much to invest over what duration

2. Capitalizing on previous intangible investment
–Leverage asset internally
–Leverage asset externally
–Hold as an option

The psychology of decision making regarding intangibles probably warrants several postings but I'd like to start with some internal monologues that could go through the minds of executives making decisions of type #1 that would lead to underinvestment:

Investment and return are significantly separated in time

* I have a large implied discount rate (which may be significantly greater than the one I have for tangible investments)

* My micro incentives are misaligned (I wont still be in this job when the return comes)

Complexity of system interactions that eventually lead to return

* The number of steps between investment and return makes this investment too confusing for me to be comfortable.

* Complexity means it will be hard for others to give me proper credit for the returns when they do come (Will they see I caused this positive return or will it be attributed to someone else?). On the contrary – it may be more difficult to assign losses.


* Because it is so hard to attribute gains, my spending on intangibles may be accounted for and seen by others simply as a cost versus an investment. No asset goes on the books to reflect my investment.


* I don’t have the same level of control over intangible assets which makes me nervous. I like to feel in control. I have more trouble becoming a gate keeper to my intangible asset which is a key source of power


* My investment doesn’t create a specific asset I can point to as “owning” which makes it more difficult to gain the respect of others (unlike a factory, supercomputer, etc.)


* It’s harder for me to tell which intangible asset business proposals are real and which are budget grabbing “scams.” Will this return actually happen or am I being tricked?

Of course it is very difficult to really know what is going on in the minds of decision makers but perhaps this gives us a few concepts to test.

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