FRAMINGHAM (03/27/2000) - Skandia AFS in Stockholm didn't jump into the world of intangible asset reporting; it was pushed. In the early '90s, the venerable insurance and financial services company was heavily invested in real estate when the collapse of the Swedish real estate market shook the company's asset column. "Skandia had all these liabilities [insurance contracts], and its assets [land] were going down, so analysts thought we were in trouble," recalls Scott Hawkins, director of intellectual capital communication and development at Skandia USA in Shelton, Conn.
"We had incredible assets in our people, our customers and our processes, and the future looked very good, but traditional ways of reporting didn't enable us to fully tell that story," he says. "We needed a way to explain that we had a lot more value than just real estate."
Like many companies in today's economy, much of Skandia's value was intangible.
Its products were insurance contracts - agreements. Its business model was built around managing relationships. "But can you show me a warehouse full of relationships?" Hawkins asks.
A good question in 1992, and an even better one in today's knowledge-based, high-tech, e-commerce world, where the Securities and Exchange Commission and the Big Five accounting firms are among those struggling to develop reporting frameworks that can properly value what's really happening in the new economy.
Clearly, traditional accounting methods can't do the job. Baruch Lev, a Philip Bardes Professor of Accounting and Finance at New York University's Stern School of Business, points out that the market value of the Standard & Poor's 500 averages six times the net asset value on the companies' balance sheets, meaning that traditional accounting methods are measuring only about 15% of companies' value.
A lot of that value is in technology. Lev points to AMR Corp., whose shares of its information technology arm, Sabre Inc. in Fort Worth, Texas, constitute half the value of the entire company because of the intangible value of Sabre's reservations technology.
And the new e-commerce companies don't even pretend to play to the bottom line.
"E-commerce companies are not valued in the traditional way because they're not making money," says David Phillips, European leader of value reporting at PricewaterhouseCoopers in London. "They are building brand and customer loyalty, building the franchise. The investment community is putting value on a concept" - an intangible, he says.
IT plays two parts in this drama: It generates a lot of intangible value in companies and provides the tools that enable companies to measure that value for the first time. "A broader ability to measure for less cost is leading to a broader perspective" about what constitutes value, says Chris Meyer, director of the Ernst & Young Center for Business Innovation in Cambridge, Mass.
"Skandia is a pioneer in recognizing that and attempting to do something about it."
Specifically, Skandia has focused IT tools on one area of intangible value - intellectual capital (IC) - and begun to measure, manage and report its findings to investors.
Skandia began reporting on IC in a supplement to its 1993 annual report. The company defines IC as the sum of human capital (such as employee competence, relationship ability and values) and structural capital (such as software, databases, customer lists, manuals and trademarks).
Most companies try to highlight their IC in the management narratives that lead off their annual reports. But Skandia's reporting goes beyond that in two ways:
It quantifies IC and looks forward, reporting on factors that indicate how likely the company is to reach its strategic goals.
These measures are presented numerically and compared with those of previous years to show how Skandia's IC value is trending.
But how does a company determine what to measure? Skandia ties IC reporting directly to its strategic planning process, thus measuring only the IC that supports strategic goals.
During the strategic planning cycle, the IC staff facilitates meetings of workgroups to consider strategic goals and the success factors necessary to achieve them. Then they focus on five areas modeled on the "balanced scorecard" approach popularized by Robert S. Kaplan and David Norton [Business, Jan. 24]- renewal and development, employees, customers, processes and finance - and decide how they can build toward success in each area.
Recently, for example, Hawkins met with call center managers. Initially, they told him that they measure their success by comparing the number of calls, queue time, abandonment rate and processing mistakes with their numeric goals in those areas.
But Hawkins points out that those measures tell only part of the story. "Those are indicators of how well they're handling their processes," he says. "But what about their customers and their own people?"
He encourages managers to consider how people and customer value can be used to measure progress toward those goals. For example, a strategic goal might be more creative thinking, and one of the factors to achieve that goal is increased diversity in the workforce. The group looks for indicators - such as number of women and minorities in their unit - that the company is building those success factors. "It can take a few meetings to lead them through how to identify these," Hawkins says. But it's worth it because these choices are "rooted in our understanding of [what's] important to us."
The first of these facilitated sessions took place at the division level to get top management on board and produce the first IC report. The IC staff is currently facilitating sessions throughout the company, with a goal of eventually reaching every workgroup and all 6,000 employees worldwide.
As Skandia began to work through this process, it became apparent that it would need better IT tools than the quick-and-dirty Microsoft Excel spreadsheets it had used for the first IC supplement.
The early Excel spreadsheets evolved into a much more elegant, PC-based intranet system for collecting, organizing and reporting IC data. Called the Dolphin Navigator, it was created by the corporate IT group in Sweden and launched in October 1998.
Dolphin focuses on the connection between strategic objectives and key indicators within the five focus areas: renewal and development, customers, people, process and financials. Dolphin specifies long-term objectives, identifies critical success factors and activities that will achieve those factors and measures progress.
Dolphin is designed to show a top-level corporate overview of IC measures among the 24 operating groups around the world. Then it drills down to the division view, departments, workgroups and even individuals. "It allows you to input results so you can see how you're doing over time," Hawkins says. "And when you're ready to report [to the outside], you've got the data. Over the next few years, we want to integrate that all the way down."
Skandia is a highly decentralized company, and its international operations enjoy a lot of independence, so while certain fields in Dolphin define mandatory measures, others are left to the discretion of the operating company, division or department, as determined during their meetings with the IC group.
Hawkins stresses that it's important to give worldwide operations as much freedom as possible to determine what they'll measure. "It's important to be sensitive to cultural differences," he says. For example, while the U.S. office measures the number of women managers, that concept would be foreign in some cultures. "If you were to mandate that and they tried to live up to it, it could severely impact their ability to do business," he explains. "So you have to say, Company B knows what's best for itself.' We try to allow the maximum flexibility for each company, unit and individual."
Dolphin allows Skandia to collect IC data not only for reporting purposes, but also to manage IC better. "The reporting is a work in progress, but for the long-term development of the company, we feel it's more important that you manage the intangible assets," says Hawkins.
For example, the current high-level view shows certain patterns among Skandia's worldwide operations: Young companies just building their business focus their efforts on customer value. After four to eight years, there's a drop in customer focus and an increase in concern over getting the right people and processes in place to handle success. As the business continues to age, product lines near the end of their life cycles and the focus shifts to development and renewal.
Knowing this, Skandia can predict the kinds of concerns its operations will grapple with during any given stage of their development, and it can share best practices from others who have been there.
Another unexpected benefit of IC reporting has been that as employees go through the process of defining what they'll measure, they become more closely in tune with the company's strategic goals. "As they go through this process, they begin to understand why they're in the organization, what their function is, how they contribute to the company. They begin to align themselves," Hawkins says. "If you get people aligned and understanding the business, you will have a more productive business."
Evidently. Skandia's stock has climbed steadily since the asset crisis of a decade ago. Hawkins stresses that the company's success is attributable to many activities and initiatives, but it's clear that by tackling IC head on, Skandia has turned a financial calamity into an image victory. "Today, Skandia can be described as an innovative growth company rather than a traditional insurance company," President and CEO Lars-Eric Peterson says in a recent IC report.
"Through measurement tools and continued work on developing and applying new work methods, competencies and value-creating processes, we are making invisible capital visible."