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Over time, and particularly during the last decade or two, an everincreasing share of GDP has reflected the value of ideas more than material substance or manual labor input (Alan Greenspan, chairman of the Federal Reserve, in a speech to the National Association for Business Economics, as quoted in the New York Times, March 28, 2001).
Around the world, there is increasing recognition of the importance of intangible assets. There is also a pressing need for a set of widely accepted metrics by which corporate leaders and the investment community - indeed anyone involved in measuring and shaping corporate performance - can account for the non-financial factors that profoundly affect value creation in the modern enterprise. It is all part of the growing global demand for greater transparency in the marketplace.
Intangibles, though not always recognized, have always been a driver of corporate performance - and institutional investors who attribute a significant part of a company's market value to non-financial data take intangibles into account in their analysis and earnings estimates. Managers, by the same token, are increasingly adopting non-traditional methodologies of measurement.
Laying the foundation: new research
Cap Gemini Ernst & Young's Center for Business Innovation (CBI) is at the forefront of the movement to identify the importance of non-financial intangibles and to quantify their role in corporate performance. In its groundbreaking 1996 Measures that Matter study, the CBI established that non-financial performance plays a critical role in how public companies are valued, accounting for as much as 35 percent of institutional investors' valuation (Low and Seisfeld, 1998). It found a strongly positive correlation between sell-side analysts' reliance on non-financial performance and the accuracy of their earnings forecasts.
The CBI's second study, Success Factors in the IPO Transformation Process, found that intangibles are the most significant differentiating factor between successful and unsuccessful IPOs. The bigger and more long-range the role intangibles played in running the business, the more successful the IPO. Both show that the market at once demands and relies on non-financial information in company evaluations and valuation decisions.
The next step: a measurement model
Cap Gemini Ernst & Young researchers developed a rigorous, comprehensive model of value creation for progressive companies, one that would enable them to measure the impact of...