The benefits of the ICV membership
The costs and the benefits of working in an ICV work group - suggestion for the evaluation of intangible assets
by Dr. Herwig R. Friedag, work group Berlin-Brandenburg
The present article is the result of the ICV work group Berlin-Brandenburg having dealt with the topic "The costs and the benefits of working in an ICV work group" in September 2005. All the members of the group took part in the discussions on this topic and it was Dr. Herwig R. Friedag who put the results on paper. You can find out more about activity of the ICV work group Berlin-Brandenburg here.
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1. Intangible assets - the decisive factor of goodwill
Globalisation, technological development, changes in the buying behaviour and in the em-ployees' values as well as increasing pressure of competition are some of the representative changes of our time. The companies' ability of tapping the full potential of their intangible assets respectively of their intellectual capital has become one of the most important poten-tials for success. The critical factor of production is no longer the financial resources, but the human ones; at present it is the knowledge management - which implies the intellect - that plays a prominent part in a company.
In the meantime intangible assets have captured the attention of the stock exchange. 60% to 90% of the stock exchange value of the quoted large companies no longer resides in the clas-sical types of investment like money, movable and immovable assets. A proof in this respect is the fact that already at the end of 2001 the market value of the 500 largest US-American companies (S&P500) was more then six times as big as their book value.
It is not so important if it is 60% or 90% that we are talking about; fact is that more than a half of the companies' value is made up by intangible assets. This is not only the case of interna-tional corporations, but that of small- and medium-sized companies as well.
An illustrative example: a software company with 10 employees has annual sales amounting to 1,2 million €. The tangible assets ( computers, office equipment etc. minus depreciation) add up to less than 100.000€. As long as the company keeps on achieving profits, it should gain a goodwill between 0,5 and 1,5 million €.
This difference in goodwill (0,5 to 1,5 million €) is due to the different expectations of poten-tial purchasers regarding the company's future. They act on the assumption that the cus-tomer relationships would be maintained, the offered products and service would continue to be profitable and the employees at least just as committed as they are at present - the sales and the profits would not only stay constant, they would even increase.
It seems that "going concern- principle" works not only in the case of tangible assets, but also in that of intangible assets as well; this is the very reason why any purchaser of our soft-ware-company would certainly insist on the company's members continue to work there at least for some time.
The bigger part of goodwill derives from know-how and the customer relationships. Through knowledge, commitment and the ability of creating transparency within companies, control-lers do contribute to the company's goodwill, thus being themselves part of the intangible assets.
But how can we measure our own value, how can we exert positive influence on intangible assets and measure that? The ICA-work group Berlin-Brandenburg dealt with this subject at first within small teams and subsequently within the final meeting in September 2005. The present article is meant to present you the discussions on this topic and their results.
2. The costs and the benefits of working in an ICV work group
We are confident about the fact that the active cooperation in an ICV work group increases our own value as employees. As there are no universally valid approaches for quantifying such a value, we tried to illustrate a quantifying approach by taking one of the members of the work group Berlin-Brandenburg as an example.
2.1 Our example
Peter Brause is the head of controlling in an enterprise in the neighbourhood of Berlin which supplies motor vehicles. His company, let's call it Hell&Willig Ltd. has 250 employees in Germany and several factories in the USA in China. Hell&Willig Ltd. belongs to an interna-tional corporation, so controlling has to be customised to the central tasks of the corporation. There are two further employees working in the controlling department; Peter Brause also attends to the departments of commercial administration; he is directly responsible to the Chief Executive Officer. Peter Brause has been working for three years in an ICV work group.
2.2 Computing the costs and the benefits of working in an ICV work group
Like any other cost-benefit calculation, the evaluation of intangible assets also implies two steps: a) computing the incurred costs b) computing the earnings expected in the future The latter step is the more difficult one, so just let us start with the easier one.
2.2.1 The costs of working in an ICV work group
The following tables offer pretty accurate information about the incurred costs, divided in two categories: direct and indirect costs, most of them being costs related to the participation in and preparation of the work group sessions:
The element „Teamwork" stands for preparing a work group session and the respective topic.
2.2.2 The benefits of active involvement in an ICV-work group
Computing the profit that arises for Hell&Willig Ltd. from Peter Brause's active involvement in the ICV work group is a difficult task. Within the ICV activity, Peter Brause learned new things, enriched his controlling-knowledge and established new contacts. But how can all these things be quantified? How can one measure the profit arising for an enterprise out of:
- gain of knowledge through exchange of experience
- thinking outside one's own box
- enlarging one's private network, social contacts
- increasing one's own market value
- improving one's career chances
- informal exchange of ideas at regular's table
In this article we will concentrate on Hell&Willig Ltd.'s benefits out of Peter Brause's activity in an ICV work group, intentionally leaving Peter Brauses's own profit aside.
The company has certain expectations from Peter Brause as head of controlling. These are defined in a so called "skills profile"5:
The above listed skills had been defined especially for the position of head of controlling and they represented the basic criteria for choosing the best applicant.
A) In our case the skills profile is divided into four categories: "Knowledge", "Experience", "Social skills" and "Will". Each of these categories is once more subdivided. The most difficult thing to do here is to define and weight the most important skills for the position of head of controlling, especially then, when such soft skills as "leadership experience", "the ability to communicate with the executive board", etc are to be taken into consideration.
It is usually a gut feeling helping us take such decisions. Besides deciding about the content of each and every skill category, one also has to choose the proper weights (they sum up to 100%) and the adequate formulation of the assessment definitions (here from 1 = only partially fulfilled... until ...5 = completely fulfilled, but also what does „completely fulfilled" mean?)
B) The requirements to be met by the head of controlling are indicated on a scale from 1 to 5.
C) This column presents the actual situation, assumed by the Human Resources Manager or the superior together with the applicant. As one can see, Peter Brause has deficiencies in "Knowledge", but as far as "Experience" is concerned, he has more experience than required6.
D) The fellow controllers from the ICV work group decided together about Peter Brause's progress resulting from his ICV activity. This was the case with the SAP- knowledge and the improvements made in communication experience, social skills and will. Peter's progress was due to the discussions within the ICV work which provided him with new ideas and expanded his
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