How Does Intangible Capital Influence Results?

by Jay Deragon on 05/16/2013

In today’s marketplace organizations cannot afford to simply manage by results. An organization’s results are the effect of cumulative interactions between people, processes, markets, and the organizations strategy. Managing by results usually means adding or subtracting to reach a desired result.

For example a headline in Bloomberg Magazine yesterday read “HSBC Signals 14,000 Jobs Cuts in $3 Billion Savings Plan”. The copy read “HSBC Holdings Plc (HSBA), Europe’s largest bank, will eliminate as many as 14,000 more jobs as Chief Executive Officer Stuart Gulliver set out plans to cut an additional $3 billion of costs as he tries to revive profitability.

The bank expects to reduce the number of employees to as few as 240,000 over the next three years, Gulliver told reporters on a conference call today as he updated investors on his strategy for the London-based lender. HSBC had already announced plans to reduce headcount to about 254,000.”

“Gulliver, 54, is focusing on reducing costs, selling assets and expanding in faster-growing markets as he struggles to boost revenue that’s been crimped by the sovereign debt crisis in Europe. He’s already eliminated more than $4 billion of annual expenses, beating his initial target, and cut 46,000 jobs since he took over in 2011.”

Nothing about this story would be surprising to the average reader of the business press. It’s a common strategy: revenues go down, companies cut “expenses” and everyone’s happy. Well, it’s not that simple.

What you rarely see is an examination of how mismanagement of intangible capital led to these problems, what these cuts do to the intangible capital balance sheet and what this means to the company’s ability to grow and succeed in the future. So we’ll ask the questions:

  1. How did mismanagement of intangible capital contribute to this problem? HSBC’s stated strategy is to reduce costs, sell assets and expand in faster-growing markets while blaming external factors for the current conditions unforeseen and unpredictable. Really? Banks this big don’t have smart people watching trends and thinking about where their markets are going? The old strategy didn’t anticipate market changes correctly? For me, this means that HSBC didn’t have the right Human Capital needed to build the right Strategic Capital. But nowhere do we hear the CEO mention such things as relevant or important
  2. What do these cuts do to the intangible capital balance sheet? Announcing the layoff of 14,000 people begs the question why did you think you needed these employees previously? What types of employees were laid off? What impact does the layoff have on your Human Capital, Structural Capital and Relationship Capital? Wouldn’t you be better off using these experienced people to move you into new markets? There was no mention of such things because intangibles are not even in the vocabulary of organizations that manage and measure by financial results but ignore their intangible capital.
  3. What does this means to the company’s ability to grow and succeed in the future? Does HSBC think that their reputation will not be harmed by these types of announcements? The existing employees and future hires will likely wonder how long the organization will survive. Clearly the message to the employees and future hires is we are servants to our Stockholders and you are nothing but an expendable expense.

Except for cash, there is no tangible asset on HSBC’s financial balance sheet that gives it competitive advantage. I’m very sure that HSBC’s competitive advantage lies in its people, its systems and its relationships. There will very likely be serious deterioration of these intangibles from these actions. But the consequences of these lay-offs on the company’s intangible balance sheet are invisible under today’s reporting standards. So no one holds CEO’s and managers accountable for them.

So the answer to the question “How Does Intangible Capital Influence Results?” is that there is a direct connection between intangibles and financials. But without an intangible balance sheet, it’s hard to judge what’s really going on. One thing I know for sure is that the right mix of intangible capital is critical and ignoring IC is sure to produce the wrong results.

{ 1 comment }

Copi Valdiviez May 17, 2013 at 2:36 am

The final step is allocating a value to the brand or other intangible assets on a regular basis and tracking this over time. One of the key features is establishing the incremental earnings from the brand as this will play a key role in the ongoing valuation

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