P E T E R  S. C O H A N  &  A S S O C I A T E S
STRATEGIC BALANCE SHEET ANALYSIS

Companies can invest in business processes, enhanced through the appropriate use of technology, that convert intangible assets into cash.   Generally accepted accounting principles (GAAP) do not count intangible assets such as purchasing scale.  However, if purchasing scale can be harnessed to lower a firm's costs, then GAAP can quantify the benefits of transforming that intangible asset. 

Firms should analyze their activities systematically to identify all their intangible assets.  Examples of intangible assets that companies have converted into cash are highlighted below.










While these examples are not exhaustive, they are among the most well documented.  As such they may help companies start thinking about how to convert intangible assets to cash.  Nevertheless, because they are relatively well known, these opportunities will not represent long-term sources of competitive advantage.

The three opportunities highlighted above are described in terms of the intangible asset, the technology used to convert that intangible asset into cash, and the measurable benefits of that conversion.

Purchasing Scale  -- the ability to use relatively high purchasing volume to negotiate price discounts from suppliers.  Surprisingly, many large companies do not capture their full potential for volume discounts.  For example, GE used to purchase office supplies from its 12 business units rather than in one corporate purchasing unit.  As a result, GE was paying more for its supplies because it did not harness its corporate purchase volume as a negotiating lever.  Secondly, many GE employees found the purchasing approval process cumbersome.  So they bypassed it -- simply purchasing supplies from the nearest office supply store, causing GE to miss out on the volume discounts it had negotiated with preferred suppliers. 

Through electronic procurement GE anticipates cutting the cost of its office supply purchases by 20%, saving $1 billion in costs and streamlining its office supply purchasing process.  Electronic procurement will make office supply purchasing easier for GE employees and suppliers. 

Electronic purchasing will follow these steps

 
GE employees purchase supplies from their desktop computers;
  purchases will be approved via e-mail;
  orders will be placed electronically with preferred suppliers;
  items will be delivered to employees' desktops; and
  payments to suppliers will occur electronically, once appropriate controls are applied.


Customer information --
details of previous customer purchases, budgets, organization, and decision-making processes.  Most companies don't extract much value from this information.  For example, companies may lose detailed knowledge of a major customer when key sales people depart.  Simply by storing these details on a computer, a company can save itself time in rebuilding a customer relationship after a key employee leaves. 

Furthermore, information about previous customer purchases can be used to increase the size of repeat purchases.   Personalization software analyzes relationships between product purchases to make product recommendations.  Amazon.com uses personalization to recommend other books that might be of interest to a customer with a particular purchase history.  Levis.com used personalization software to recommend clothing purchases.  An independent research report found that customers actually followed these recommendations in 76% of the cases.  Hence, personalization software can convert the intangible asset of customer information into incremental revenues from existing customers.


Technical service information --
a set of technical problems and their solutions often resides in disparate locations in the minds of field service representatives around the world.  For a large company, the cost of letting this information languish in a disconnected form imposes significant costs.  For example, if a customer's computer network stops working, that customer's chief information officer (CIO) needs a rapid solution to the problem.   The cost of a delayed answer can be significant.  For example, if the CIO calls a technical service person, waits 10 minutes for a call back, learns that the answer may lie with the Sydney, Australia office, and must wait 24 hours before finding out the solution, then that CIO may be out of a job before the solution arrives.

Cisco Systems solved this problem by putting a global database of technical problems and solutions online.  In the process, Cisco saved itself from hiring $20 million worth of technical service staff while enabling its customers to get answers to their problems much faster than they had in the past by accessing Cisco's technical service database online.  As a result, Cisco was able to maintain high levels of customer satisfaction that were essential to its ability to grow rapidly.





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Intangible Asset
Purchasing scale                 Electronic procurement               20% unit cost reduction
Technology
Benefits
Customer information           Personalization                           76% purchase rate
Technical service info.         Web-based self service               Lower tech service costs