COMMENTARY
It seems that Jay Cross is a very thoughtful person, who has a deep understanding of learning and analysis of the world we live in. This book will give a flavor if Jay Cross and his work and may be purchased through Lulu.com at:
http://www.lulu.com/product/paperback/working-smarter-fieldbook-2011/18745249

The following observation about balance sheet and the recording (or not) of intangibles is a start to an important train of thought. It is a specific example of the failed metrics of modern society. At their best, markets tend to have better perception of value than analysts, and the case of Google is a perfect example. Twenty years ago, the same type of analysis and market perception applied to Microsoft, and to some exctent still does. It is part of the 'wealth creation' mechanism of the stock market ... but in my view, there are some important things missing from this model or mechanism that need to be addressed so that market will work effectively for society at large where some activities are very valuable but not profitable, and not merely for the activities of society that are profitable.

I have one modest disagreement with Jay Cross who writes '“You can’t manage what you don’t measure” is nonsense'. I argue that great successful entrepreneurs do measure things like intangibles though they may never articulate how they are doing it ... and they make decisions to get the best outcome for the measures they are using. In my view, measurement does not need to be precise ... nor indeed a quantified measure ... to still be measurement.
Peter Burgess

Balance sheets do not record intangibles

Business enterprises exist to create value for their stakeholders. Once upon a time, value as profit was a good proxy for the value earned by investors. Profit, the proverbial bottom line, is the difference between revenue and expenses, and these relate back directly to changes in accounts on the balance sheet. Balance sheets record tangible assets: factories, land, trucks, and paperclips, things you can see and touch.

In 1982, intangibles accounted for less than a quarter of the value the U.S. stock market. By 1999, intangibles, the no-see-ums, made up more than 80% of the value of the market. Balance sheets do not record intangibles, things like know-how, customer relationships, and reputation. On the balance sheet, highly-skilled people have the same value as new hires: zero.

Imagine Google. Google’s book value, e.g. the stuff you can see and touch, is roughly $5 billion. Investors value Google stock at more than $130 billion. The $125 billion bump is what investors are willing to bet that Google will get better and bigger. This is entirely intangible, i.e. not on the books and not on the bottom line.

- Jay Cross (Source: informl.com)

Excerpt

Many a corporation misses massive opportunities by demanding to know “Where’s the ROI?” in cases where ROI is an inappropriate and misleading indicator. Permit me to explain why.

Return on Investment means different things to different people To some, ROI is a hurdle a project must achieve to warrant investment. To others, ROI is a way to coax people to make the business case for a proposal. Some treat ROI as a formula, others as a philosophy.

Typically, the higher you go in an organization, the more expansive the definition of ROI and the less reliance on it in decision-making. A $10,000 decision is likely to require ultraconservative estimates, solid arithmetic, and measurements in accordance with Generally Accepted Accounting Principles. For a $5,000,000 decision, corporate politics, intangible benefits, and gut feel may overrule the numbers. And at the $50,000,000 level, the numbers are at best a footnote to the real way executives make decisions.

Picture this: A CFO has calculated an ROI of 154% for Project A and 155% for Project B. His CEO must decide which project to back to the tune of $100 million. Can you really imagine the CEO will make the decision based on ROI?

“You can’t manage what you don’t measure” is nonsense. The vast majority of what senior executives manage is immeasurable. They make judgment calls; they play hunches. How else do you select the right people for key jobs? How else do you choose your partners? How else do you divine the future? Organizations pay senior executives handsomely to buy their ability to make wise choices in the absence of simple measurements.

Intangibles rule

Business enterprises exist to create value for their stakeholders. Once upon a time, value as profit was a good proxy for the value earned by investors. Profit, the proverbial bottom line, is the difference between revenue and expenses, and these relate back directly to changes in accounts on the balance sheet. Balance sheets record tangible assets: factories, land, trucks, and paperclips, things you can see and touch.

In 1982, intangibles accounted for less than a quarter of the value the U.S. stock market. By 1999, intangibles, the no-see-ums, made up more than 80% of the value of the market. Balance sheets do not record intangibles, things like know-how, customer relationships, and reputation. On the balance sheet, highly-skilled people have the same value as new hires: zero.

Imagine Google. Google’s book value, e.g. the stuff you can see and touch, is roughly $5 billion. Investors value Google stock at more than $13bmillion. The $125 billion bump is what investors are willing to bet that Google will get better and bigger. This is entirely intangible, i.e. not on the books and not on the bottom line.

If you were making decisions at Google, what would you pay attention? Would you do ROI calculations on what might impact the $5 billion? Or would you make decisions to impact the $130 billion?

Where’s the ROI from implementing interactive technology?

I’m going to take ROI back to its roots. Instead of using the conventions of 19th century accounting, I’ll define return as an increase in shareholder value.

When interactive technology (blogs, wikis, social software) is applied to an area for the first time, the results can be staggering. Consider these three examples where costs were negligible, and returns are counted in eight figures.

• Three years ago, a staffer at Intel set up a wiki for sharing information among individuals throughout the company. It grew organically and has become a vital source of information throughout the company. Usage has surpassed a million page-views. The wiki is doing what knowledge management systems and intranets were supposed to do. The software was free. The wiki is self-maintaining. Benefits include time saved looking for things, less likelihood of using dated or inaccurate information, and accelerated ramp-up of new hires. If the system saves 30 minutes a week for its 20,000 active users, that’s more than 200 person-years, i.e. $30,000,000 or more in annual savings. The software was a free download. (Here’s a four-minute video on Intelpedia.)
• Four thousand professionals at CGI receive news and updates in their specialties by subscription instead of foraging for research findings on their own. There’s less likelihood of important developments slipping through the cracks, and the consultants can bill at least one incremental half-hour a week per person with the time saved. The value of two thousand billable hours per week? Astronomical. Costs were minimal.
• Tax preparer T. Rowe Price encouraged seasonal tax-preparation staff to contribute Frequently Asked Questions to a central repository. The central source of questions and answers enabled the 1,500 support staff to shave two minutes off the duration of the average customer phone call. The result? Better customer service and $15,000,000 in annual savings.