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Intangible Value - an unusual strategic opportunity

November 13, 2009
by Joe Bormel
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(graphic modified from Celemi)

Intangible investment, Value, in simple terms, is the assets of a company that don't show up on the balance sheet. Big examples are investments in R&D, employee training, and the critical knowledge and experience of the staff.

In general, there exists a slump in intangible investment. Despite, or perhaps because of ARRA, it is apparent this has happened in our industry, EHRs, both ambulatory and inpatient/enterprise. The investment in R&D spending has been going to address certification requirements and implementation planning, starting with the selection and sales process. But precious little has taken place to address the non-goals (i.e. substantially upgrading usability or collaboration through exchanges.)

There's a nice discussion of this high-level issue in Mike Mandel's "Tracking Intangible Investments" in the video podcast here. He defines intangible investment as money spent on:
1. Research and Development
2. Product Development
3. Design
4. Worker Training
The points he makes are that our economic statistics don't track these things, and we (the US) are grossly under-investing in these areas. And because the GDP does not reflect this, things are gloomier than we think or have been led to believe.

The concept that intangible assets are critical in a knowledge economy, like HCIT and Healthcare delivery itself, is far from new. A decade ago, directors and VPs of a former employer were sent to a three-day training course by Celemi called "Tango" (created by Karl Erik Sveiby). The purpose was to stress the importance of managers and executives thinking in terms of:
1. Corporate Knowhow
2. Corporate Image
3. Personnel Competence . . .
and how these factors relate to business prospecting, staffing (both entry and higher levels), and the capacity to do various kinds of work.

The decisions produced by this thinking translate into two things. First, whether a company can handle simple or complex projects. No value assessment, both can be important and offer distinct opportunities for business health and growth. And second, whether a company is appropriately configured for low or high customer volume.

As we finalize our 2010 budgetary planning, both vendors and hospitals, we're all looking at the revenue and expense projections. We are all thinking about staffing and project management for millions in incentive dollars. In some cases, tens to hundreds of millions. The incredible opportunity, however, is to translate this into strategic implications and plays. Number one among those is staff turnover. Too high and discontent is rampant, which gets in the way of pleasing customers, old and new. Too low and stagnation and complacency rule the organization. Further, based on your organization's goals and capabilities, the mix of the four categories in the opening graphic (from Celemi) may be the most important initial point of focus.

This process offers us a true opportunity to quickly inventory our organizations' intangibles, thereby gaining insight to the best alternatives available so we can take action on what's really needed to succeed. Frankly, I'm both optimistic and excited about going into 2010. There's far more clarity than what we were facing 12 months ago.



The information gap that Mandel describes also exists at the corporate level. But it doesn't have to be this way. Companies should start keeping track of their accumulated investment. Here's a discussion of the conversation that should occur between the CIO and CFO

Perhaps the best, recent example of the ARRA-related staffing and planning is elaborated in Pam Arlotto's comment to Anthony Guerra's "Far From Shovel-Ready" (11/9/2009).

Pam wrote:

... Part of the challenge, however, is that their budgets are scrutinized and FTE addition discouraged. Most are lucky to get extra funding for the resources recommended by their vendor - which typically leaves out process redesign, informatics, education, back-fill, quality metric development, etc and many other activities that will have to occur to meet the MU requirements.

That comment resonates with my experience.  Management teams pursuing ARRA stimulus fund-supported projects are over-confident and skip essential steps like adequate project charters that capture the elements Pam refers to.  Or, the report to superiors who don't understand the intangible investments.  Their budgeting process and their org chart designs suffer with predictable results.

As several PMPs recently told me:  the senior executive team must have experienced a few horrific failures or they dont get project management, and implicitly, intangible investment value.  I think they were right!

The information gap that Mandel describes also exists at the corporate level. But it doesn't have to be this way. Companies should start keeping track of their accumulated investment. Here's a discussion of the conversation that should occur between the CIO and CFO

Mary, Thanks for your comment. In my experience, you are exactly right. My Celemi training was sponsored by my CEO at the time. He was and is a very successful entrepreneur. He never looked to the CFO or the corporate CIO to drive revenue growth, or to propose accounting for it. He, and this is true, grew up as a farmer. The whole concept of needing to make investments was part of planting. It's a gamble, but it's a better gamble than not planing.

Drawing from your blog, "... intangibles get expensed, tangibles get capitalized." I'm sure he expensed the cost of the Celemi training. I think it's the multi-quarter to multi-year time lag between investments and returns that are just impossible for some accountants to effectively conceptualize.