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July 25, 2007
A new metric for intangibles
A recent article in the McKinsey Quarterly proposes a new metric for measuring investments in intangibles: profit per employee:
* Today's approach to measuring financial performance is geared excessively to the capital-intensive operating styles of 20th-century industrial companies. It doesn’t sufficiently account for factors such as the contributions of talented employees that, more and more, are the basic source of wealth.The full article is available at the Massachusetts Manufacturing Advancement Center website.
* Financial performance—observed through balance sheets, cash flow reports, and income statements—is and always will be the principal metric for evaluating a company and its managers. But greater attention should be paid to the role of intangible capital and the ways of accounting for it.
* The superior performance of some of the largest and most successful companies over the past decade demonstrates the value of intangible assets.
* Companies can redesign the internal financial performance approach and set goals for the return on intangibles by paying greater attention to profit per employee and the number of employees rather than putting all of the focus on returns on invested capital.
The article is based on a forthcoming book Mobilizing Minds: Creating Wealth from Talent in the 21st-Century Organization by Lowell L. Bryan and Claudia I. Joyce. The book focuses on the issue of organization design in the Intangible Economy. As the authors noted in a recent interview:
We believe the time has come for corporate leaders to view organizational design as a strategic imperative and high-return, low-risk opportunity for investment. The classic definition of “strategy” is a plan for actions to be taken with which to gain competitive advantage. Using this definition, we believe corporate leaders need to invest more energy than they have invested in the past in taking actions needed to create the strategic organizational capabilities that will enable their companies to thrive. We are convinced that in the digital age, if you want to create wealth, there is almost no better use of the CEO’s time and energy than making the organization work better. So if corporate strategy is about preparing the corporation to gain competitive advantage, designing a more effective organization is certainly central to this endeavour.
. . .
We believe that nearly all organizations are replete with opportunities to streamline and simplify the use of hierarchical authority to remove unproductive complexities – while simultaneously increasing that authority’s effectiveness.
The approach we advocate involves redesigning a company’s hierarchical order, thereby improving management’s ability to use hierarchical authority to power a company’s performance. The effort centres on defining a “backbone” or central management structure; and developing general line management or clear decision authority and accountability for operating performance. By a “backbone line structure” we mean a chain of command that puts authority to make tactical decisions close to the front lines. By “frontline manager”, we mean someone with the authority to set aspirations, define tasks and roles, assign people and hold them accountable, mobilize resources, and make decisions for frontline workers.
We have used military analogies to illustrate both aspects of the model. In terms of a backbone line structure, in the military, there is no ambiguity about who a soldier’s commanding officer is, we believe the corporations should move more toward this model, than the traditional multiple bosses matrix approach. We also believe that the frontline manager should have more authority and accountability to make decisions at the front line, as do front-line military officers.
Sounds like an interesting read. But I am especially interested with their notion of using profit per employee as the metric of choice. That is an important step toward getting out financial measures right in the I-Cubed Economy.
Posted by Ken Jarboe at July 25, 2007 8:49 AM
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