X

Advice and Information for Finance Professionals

4 Ways to Master the Friction-Free Economy

Jon Gelberg
Principal Content Strategist

Who knows more about the weather than anybody else on the planet? The U.S. National Weather Service? The military? Google Earth?

Nope. It’s The Weather Company, the world's largest private weather enterprise. They make weather apps for just about every smartphone in the world. Most people don’t realize it, but there’s a barometer inside those smartphones that measures the air pressure and sends that data back to The Weather Company. Tens of millions of mobile barometers, sending information every day.

How much is that data worth to a farmer? Or to an insurance company that covers fires and floods? How much is it worth to The Weather Company?

If you look at their balance sheet, you probably can’t tell. Yet last October, IBM purchased The Weather Company for a reputed $2 billion.

This is just one example of “intangible value” given by Fortune Senior Editor at Large Geoff Colvin at the recent Modern Finance Experience in Chicago. Colvin is an authority on the “friction-free” economy, having studied the traits of today’s market leaders for his recent Fortune cover story, “The 21st Century Corporation: Why Every Aspect of Your Business is About to Change.”

The Friction-Free Economy

Colvin explained that the friction-free economy represents a paradigm-changing business environment in which “labor, information, and money move easily, cheaply, and almost instantly.”

The competitive landscape has been turned on its ear as barriers to entry are coming down. As a result, Colvin said, opportunity to compete and succeed has never been more widely available. The friction-free economy, Colvin explained, allows for “capital-light” upstarts to compete with and even surpass far more established companies in their own backyards.

“Every person and every organization can possess the 21st century’s most valuable assets: openness to new ideas, ingenuity, and imagination,” Colvin said.

Human capital and intellectual property are among today's most valuable business assets

To succeed in the friction-free economy, long-established companies must form entirely new and more fluid relationships with customers, workers, and owners. Those that don’t will either struggle to maintain market share, or fail entirely.

What happens to those incumbents who fail to adapt and evolve? This statistic from Colvin's article tells it all: the average life span for S&P 500 companies has declined from 61 years in 1958 to 20 years today. Colvin opined that this trend was almost certain to continue.

Capital-Light Companies

One of the big reasons for this is that capital-light companies can go from zero to 60 in no time flat, while  traditional incumbents  are often handcuffed by deeply entrenched policies and leadership which makes real innovation nearly impossible to achieve.

To illustrate, he pointed to three companies that have seemingly grown overnight from tiny start-ups to global powerhouses. In each case, they were able to succeed without a huge investment of capital:

“Alibaba is the world’s most valuable retailer but holds no inventory, Airbnb is the world’s largest provider of accommodations but owns no real estate, and Uber is the world’s largest car service but owns no cars.

“Each has found ingenious ways to take friction out of its industry, connecting buyers and sellers directly.”

Another company that has thrived using a similar model is Apple. While Apple is in the business of selling manufactured products, Colvin noted, “substantially all” Apple products are manufactured by other companies. 

Colvin sounded a clarion call to the senior finance executives in the audience at the Chicago event: thanks to dramatic, even revolutionary changes in the way business is conducted today, finance leaders must throw away old ways of measuring value and embrace entirely new KPIs.

“Traditional gauges no longer capture what counts,” he warned.

Measure Intangible Assets

It is the intangible assets that businesses need to understand, measure and exploit, Colvin said, in order to succeed. These include intellectual property, brand value, human capital and customer loyalty (the latter illustrated by a Harley Davidson fan, who tattooed the logo on his arm).

Colvin pointed to Google, noting that the global leader in search doesn’t even account for the value of their legendary search algorithm on their books:

“What’s the value of Google’s search algorithm? $10 billion? $50 billion? $100 billion? I looked at Google’s balance sheet to see what they say and you can’t tell. Because it’s not there.”

Colvin’s take on the value of measuring intangible assets dovetailed perfectly with the Oracle/Chartered Global Management Accountant (CGMA) study, The Digital Finance Imperative: Measure and Manage what Matters Next, which called upon finance leaders to drive innovation by gathering, interpreting and acting intelligently upon data surrounding such intangible assets.

While brand, intellectual property, and customer relations are all hugely important in today’s economic climate, the most important intangible asset is human capital.

To illustrate this point, Colvin provided the example of Pinterest’s anticipated acquisition of a company called URX. URX works on deep linking technology, which allows users to move seamlessly from a specific point inside an app directly from another app.

It was not necessarily the app that caused Pinterest to make the acquisition, Colvin noted; it was the brilliant engineers who developed the app.

“They are buying the company … because they want their people,” Colvin explained. “Those engineers have an economic value. That’s what you pay to have them on board. The value of human capital is something that is becoming more measurable and more important.”

Colvin then pointed to one of the tenants of San Francisco’s Oracle Arena, Golden State Warrior superstar guard Stephen Curry.

“How much is Stephen Curry worth to the Golden State Warriors today?” Colvin asked. “I don’t know, but it’s a lot and it isn’t recorded anywhere.

“We never used to see examples where a single human could raise or decrease the value of a company by millions or billions of dollars.”

4 Rules to Master (and Measure) the New Economy

With the friction-free economy changing all the rules, it is up to the finance team to figure out what their company’s most valuable assets are, find a way to accurately measure those assets and then use that information to guide their business decisions and drive transformation.

“Not only is finance challenged with having to measure these assets, but who really owns the assets?” he asked. “Who really owns the assets today? The employees do, because they are most of the assets in more and more companies.”

Leadership, in this new business environment, must be smarter and bolder than ever. Decisions have to be made intelligently, but they also need to be made and implemented quickly and decisively.

To lead in this new business environment, Colvin suggested, finance leaders should live by these four golden rules:

  1. Arm people with data to make smart decisions, but it’s got to be the right data. That’s a great challenge and a huge opportunity for the finance function.
  2. Don’t lead by consensus in a crisis. In this fast-changing economy, we all face challenges—more than we used to. People are looking for strong leadership. When the time comes, lead.
  3. Never stop building human capital, especially the high-value skills.
  4. Articulate a higher purpose. We’ve seen in the ways human beings actually work; they respond to a higher purpose. 

For a deeper dive into measuring intangible assets, I encourage you to download the CGMA research for some fascinating insights.

 

Be the first to comment

Comments ( 0 )
Please enter your name.Please provide a valid email address.Please enter a comment.CAPTCHA challenge response provided was incorrect. Please try again.Captcha