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Intervention by Denise Caruso Read Intervention by Denise Caruso, Executive Director of the Hybrid Vigor Silver Award Winner, 2007 Independent Publisher Book Awards; Best Business Books 2007, Strategy+Business Magazine

INTANGIBLE INVESTMENTS OR DISCRETIONARY OPERATING EXPENSES?

by Mary Adams ~ June 12, 2008.
Permalink | Filed under: Hybrid Vigor.

Business Performance Management magazine recently published an interesting article by Anand Sanwal, about OpEx as Investment   He describes and advocates an approach to managing what he calls “discretionary operating expenses.” These “expenses” include spending on marketing, sales, IT, operations, R&D and innovation.

He shares statistics from the Corporate Portfolio Management Association (CPMA)  that roughly 25-40% of corporate operating expenses are, as Sanwal calls them, “discretionary.”

After reading the article, I got on the phone with Anand and had a fascinating conversation. His concepts were developed through his work as VP of Corporate Portfolio Management and Strategic Business Analysis at American Express, a post he recently left to start a consulting business. His job was focused on traditional Corporate Portfolio Management, which uses quantitative and financial analyses to support investment decisions for physical capital assets like buildings and equipment. This is the classic type of investment analysis taught in business schools for decades.

But, over time, people started asking questions about other kinds of investments. Like “What will the return be on this marketing expense?” and “How can we measure innovation?” This led his organization into a whole new world of trying to apply traditional quantitative tools to intangibles. While the article outlines the steps toward building an analytical portfolio management discipline for intangibles, it acknowledges that quantitative analysis does not measure the full significance of intangibles. There is still work for us all to do in that sphere.

The funny thing is that Anand never uses the words intangible or intellectual capital in his work. He uses the vocabulary of accounting. In today’s accounting frameworks, investments to build intangible infrastructure—a company’s workforce, processes, intellectual property, brand and external network—are treated as expenses that hit the income statement in the period they are made. This is very different treatment than that used for investments in tangible assets, which are capitalized to the balance sheet and expensed over time through amortization and depreciation.

The vocabulary question is important. Talking about “operating expenses” fits the vocabulary and mental models of today’s executive. However, over the long run, this vocabulary is also limiting because work forces, operational processes and brands (to name just a few intangibles) are built over the course of years. If investments in intangibles are only examined as annual operating expenses, a big part of the picture is obscured.

Executives invest in intangibles to ensure the future strength of their companies. So this kind of investment should be examined from the perspective of the accumulated cost (and return) over time. After all, intangibles form the lion’s share of the “productive” assets of almost every business today. It’s time to call “expenditures” on these assets what they truly are—investments—and to analyze those investments as carefully and methodically as we would investments in tangible assets.

1 Response to INTANGIBLE INVESTMENTS OR DISCRETIONARY OPERATING EXPENSES?

  1. Investment Optimization | IC Knowledge Center

    [...] Thanks to Anand Sanwal’s Investile Dysfunction blog (got to love the title!) for the link to Business Finance Magazine’s interview of Gary Crittenden, CFO of Citigroup. Anand used to work with Gary at American Express. I have blogged before about his writings on “discretionary operating expenses” which are (in my language) intellectual capital expenditures. While all intangibles investments end up on the income statement, it is still important to think about them and track them as what they are: investments in the future cash flow generation of a company. Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages. [...]

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