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As much of the developed world faces a recessionary tide, age-old questions on the nature of creating and sustaining lasting market value are once again being asked. In the past, questions of market value creation were answered by investing in tangible assets. Today, those same questions are being answered by investing in intangible assets. Intangible assets, such as knowledge, patents, organizational structure, copyrights, information technology, business processes and brand, among others, now constitute the majority of value created by firms today. However, ultimately, businesses are made up of a network of relationships: relationships with customers, employees, suppliers and partners. These "relationship assets" constitute a firm's most valuable store of capital and their most important intangible assets. The ability to create and sustain maximum market value, therefore, requires a focused set of twenty-first century management rules. Rules focused on intangible, relationship asset leverage.

Introduction

Lately, the stock markets in the US have seen extreme volatility. Many industry sectors are again enduring painful layoffs. Warnings of slowing earnings and revenue growth abound. The indicators of a slowing economy have been evident for some time. Even the fear of a prolonged recession - and possible depression - is on nearly everyone's mind. In the midst of such turmoil - only heightened by the fact that the US economy is coming off its most prosperous period of growth in history - fear, uncertainty and doubt reign supreme. Additionally, with markets in Europe showing signs of weakness and with little hope of recovery in Japan anytime soon, paranoia and deep concern of a global recession run high.

In a period of slowdown and weakness, the age-old question is once again begged: How is market value created and sustained? Certainly, recent moves by many firms reflect short-term survival tactics. Furthermore, many sectors have seen massive value destruction (in the form of market capitalization loss) over the last several months, and along with that, individual investors have also seen severe wealth destruction. In spite of current conditions, firms would do well not to take their eyes off a long-term view - off the long-term strategies needed to create and sustain market value - even in such a period of seeming global economic slowdown and market instability.

In order to keep a firm focused on long-term value creation - its net future opportunities - effective management is essential. In order to manage for value creation, one must first understand what constitutes value. But what constitutes value is changing, and the rules of value creation have changed in the tweny-first century.

Value creation: new century, new uncertainty and new rules

Determining company value used to be a straightforward process. Chief financial officers, controllers and accountants painstakingly tracked their business's assets - items such as property, plant, equipment, machinery and inventories. Historically, these assets constituted the bulk of what contributes to a firm's overall value. They could easily be measured and utilized to calculate a return on investment, as well as easily reported from an accounting perspective. Over the last several years, however, increasing discrepancies of what determines a firm's market value have emerged. Arguably, for decades, public markets have valued firms by the sum total of corporate assets (or tangible assets) that can be measured through 500-year-old accounting rules and practices. However, the rules that govern market value have clearly changed.

Many pundits have argued that with the rise of the "information age", knowledge became the most valuable corporate assets. However, as knowledge rose in importance, the ability to measure and account for its value proved elusive. Nonetheless, knowledge and other "invisible" or "intangible" assets heavily influence the value-creating process. As such, the last ten to 15 years have seen the rise of intellectual capital - company components such as trademarks, patents, copyrights and even the tacit knowledge of employees - as the key determinant of market value. Today, it is quite common for companies to be valued at more than the sum of their net, or book assets, precisely because of these intangible components. Interestingly, even with recent stock market downturns, in the market capitalization of the S&P 500, for example, for every US $1 of tangible assets (constituting book value), approximately US $3-$5 of assets go uncounted for (i.e. assets that do not show up on the balance sheet).

In terms of market-to-book ratio gaps, we can highlight examples from the past and the present. In 1986, Merck had the biggest gap: its book assets covered just 12.3 per cent of its market value; in 1996, Coca-Cola's book assets were only 4 per cent of its value, whereas the same figure for Microsoft was 6 per cent; in 2001, even depressed Internet leader Cisco Systems' book assets cover only 25 per cent of its market value, while stalwart GE has book assets covering 10 per cent of its market value. The examples go on and on. At the same time, some companies are trading below book value, which might suggest the existence of "intangible liabilities" (Harvey and Lusch, 1999). Interestingly, market capitalization has now widely become an important corporate objective, both to drive perceptions of economic success and to help firms achieve their strategic goals. Market capitalization is used as a metric for corporate performance, not just current performance, but more importantly, future expectations. And the future expectations mantra doesn't just apply to US-based firms.

In Europe, for example, if the average market capitalization of the Eurostoxx50 is divided by current earnings per share (value of current performance) and residual value (value of growth expectations), an interesting trend becomes apparent: the proportion of the average Eurostoxx50 company's market capitalization tied to market expectations of future growth soared from 26 per cent in 1995 to 70 per cent in 1999 (Ludwig et aL, 2000). One can deduce from this trend that building future expectations of growth is becoming more important and relevant for active value management, and we argue that managing and maximizing intangible assets is the key driver of these future growth expectations. However, few firms have systematically begun this process. Ernst & Young consultants Cambell and Knoess (2000), in a recent industry white paper, reveal the following:

Tangible assets amount to just a fraction of the value of the S&P 500 companies. In fact, less than 25 per cent of their market capitalization is backed by cash flows to be derived over the next five years, even though most of these companies admit their planning horizon is far shorter than that. More than 75 per cent of their value must be derived from cash flows far into the future, for which most cannot specify business plans or management goals, not to mention budgets or operational plans.

Logically, it stands to reason that firms must tie strategic energy and vision, allocation of resources and operational objectives to their intangible assets in order to drive future growth expectations. But just where do future growth expectations - and sustained market value - come from?

In a study of 1,854 companies over a ten-year period, Bain Consulting found that only companies generating sustained revenue and net income growth could reliably create shareholder, or market, value (Zook, 2001). Only 13 per cent of the companies studied were able to achieve meaningful, sustainable (market) value over the ten-year period. Where did the revenue growth and earnings come from? What generated future growth expectations? According to the Bain study, revenue growth and earnings came from businesses that focused on growing their profitable, core businesses while subsequently driving that competitive advantage into areas adjacent to the core. The assumption we can draw from Bain's study is that firms create net future expectations by maximizing their core capabilities, over time, while leveraging adjacent market opportunities for sustainable revenue and income growth.

In measuring a firm's ability to build and sustain value creation, one could certainly point to a firm's ability to leverage its core capabilities over a long period of time, to a firm's ability to innovate around products or services, or to a firm's competitive position in its industry. One could even point to a firm's ability to move quickly in constantly changing markets. We believe, however, that revenue growth and earnings ultimately come from customers, not products or services, or even core business capabilities. Furthermore, we believe that a value-driven ecosystem of employees, suppliers and partners is the "core", sustainable business asset necessary to capture customers and their lifetime value - and to generate net future opportunities that will sustain revenue and net income growth. But these assets are not tangible; they are intangible.

Ultimately, revenue and net income growth come from a firm's relationships customer, employee, supplier and partner relationships that affect the firm's ability to maximize and grow those customers. While intellectual capital, or intangible assets, such as trademarks, patents and copyrights may improve the probability of future growth expectations, customers still choose whether to buy a firm's products and services. The value of relationships, including customers, employees, suppliers and partners, is the key predictor of a firm's net future expectations.

While quick to pounce on companies that miss financial targets (as has been the norm lately), the capital markets view and value any public company by its expected future opportunities (although many would argue that the time horizon is getting shorter and shorter). And given our premise that premium valuation in the market comes from intangible asset value - the primary driver of any company's future value according to Lev (2001), Philip Bardes professor of accounting and finance at the Stem School of Business, New York University - the recent market volatility should not distract the responsible company from focusing on long-term value creation, regardless of whether the company might have taken a recent 30-plus per cent hit in its market capitalization.

Certainly, "short-term" effects can be derived from intangible assets and, namely, relationship assets:

* quarterly revenue growth;

* better profitability; and

* improved earnings per share.

But the dominant value source from relationship assets comes from the projected long-term benefits or net future opportunities, which necessitates not only proven, consistent short-term results, but also perceived and forecasted net future opportunities. The question is now begged:

* What constitutes these expected or anticipated net future benefits?

* Is it revenue growth?

* Cost reductions?

* Product or service innovations?

The latter, for example, may be a great and real source of net future opportunities and revenue growth, providing there are:

* employees to design;

* market and service them;

* suppliers to provide the components to help build them;

* partners to help sell them; and

* ultimately customers to buy them.

Market valuation is a tricky animal. Given recent market volatility, one would have to wonder how any firm could first stabilize, and then consistently grow, its market value. However, as in the past, the capital markets are concerned with future opportunities. The question is:

* What ultimately can be best leveraged to produce net future opportunities. Is it property?

* Is it plant and equipment?

* Is it manufacturing capacity?

The reality is that competitive survival and success will depend on smart intangible investments in the twenty-first century. Economic slowdowns and capital market declines do not change these fundamentals. In order to maximize net future opportunities, firms would be wise to focus on the most important of intangible assets, their relationship assets. Maximizing and managing relationship assets - the new rules of value creation - are essential for a firm's performance in a new economic era.

Relationship assets and the four new rules of value creation

Firms do not exist in isolation. Strategies are first created to identify attractive market segments to enter, customers to target and products or services that need developed and sold to generate revenue and profit. Suppliers are a necessary component of the value chain to build a product or service. Employees are needed to tackle a whole host of issues including:

* managing organizational efficiency;

* deploying and maintaining all types of information technology;

* providing research and development expertise;

* acting as marketing and selling agents;

* providing customer service; and even

* providing general and administrative support.

Partners are needed to distribute and sell, or are leveraged to outsource and manage components of a firm's business. And, of course, customers are needed to purchase (initially and repeatedly) the product or service - either directly or indirectly - that the firm offers. What becomes easily apparent is that the firm's success is ultimately derived from relationships, both internal and external. To manage the turbulent waters effectively as we enter a new century on a note of uncertainty, we must understand that relationship assets are the most valuable store of any firm's capital. A new order of management rules, or at least an enlightened focus on existing ones, is in order.

Rule number 1: value creation starts with valuing your customers

The last ten years have seen dramatic research defining the true economic value of customer relationships on a firm - economic value that ultimately affects performance and market value. Quality management guru and author K.R. Bhote (1996) summarizes this research:

* Finding new customers costs five to seven more times than retaining current customers.

* Reducing customer defection by 5 per cent can increase profit between 30 and 85 per cent.

* Increasing customer retention by 2 per cent equals cutting operating expenses by 10 per cent.

Furthermore, Bhote (1996) uncovers the following sobering facts about customer relationships:

* Of customers who say they are "satisfied" 15 to 40 per cent defect from a company each year.

* Of dissatisfied customers 98 per cent never complain; they just switch to other competitors.

* "Totally satisfied" customers are six times more likely than "satisfied" customers to repurchase a company's products over a span of one to two years.

Clearly, maximizing cash flows from customer assets involves both expanding the amount of revenue garnered per customer and minimizing the costs associated with developing and maintaining the relationships. Cost and revenue factors must be appropriately associated with customer assets, just as they are with traditional, tangible assets.

Cost/revenue factors

As we move into the twenty-first century, the ability to abstract critical understanding from customer data will be essential in establishing baseline and benchmark learning and knowledge. Interestingly, in their 1997 book Customer Connections, consultants and authors Wayland and Cole discovered that the vast majority (greater than 70 per cent) of Fortune 1,000 firms have not identified their most valuable customer relationships. These firms and others that do not understand or recognize their most valuable customer relationships are vulnerable to lost financial and market rewards.

The groundbreaking research of Reichheld and Sasser (1990) sheds light on the financial impact of customer relationships. The gist of their work, originally researched and published in the late 1980s and early 1990s, is that each of a firm's customers has an associated economic value. There are associated costs to acquire, to maintain the relationship with and to lose a customer. What Reichheld and Sasser (1990) found was that, across industries, a firm loses money acquiring a customer and does not see a financial return until later years, sometimes as many as two to three years. This finding poses a few interesting insights.

First, the firm should focus considerable effort on finding and acquiring the right customer base - a customer base with the highest propensity or probability of loyalty to the firm. Second, a firm must maintain relationships with the right customer base over time and accelerate their purchasing frequency to generate profits (it costs five to seven times more to acquire than retain). Third, a firm must focus keen attention on reducing customer defection rates (a 5 per cent reduction in defection rates can increase profits by as much as 85 per cent); and, fourth, retention and loyalty are key predictors of operational success (a 2 per cent increase in retention rates can cut operating expenses by 10 per cent). Although much of the research discussed here is ten years old, Reichheld, in a recent Harvard Business Review article, found strikingly similar results for today's e-commerce based firms (Reichheld and Schefter, 2000). To achieve the loyalty effect, firms must learn and apply the mathematics and economics behind the measurement and management of their customer assets.

Customer satisfaction factors

Survey after survey reveals that most businesses - most CEOs - are placing significant attention on customer satisfaction today. In fact, a Juran Institute study found the following: a full 90 per cent of the top managers in the study were convinced that maximizing customer satisfaction maximizes profitability and market share (Bhote, 1996). Interestingly, the study also found that fewer than 30 per cent of managers were confident their customer satisfaction efforts added economic value, and fewer than 2 per cent were able to measure a bottom-line improvement from documented increases in levels of customer satisfaction.

Contrary to common logic, customer satisfaction does not necessarily equate to loyal or profitable customers. The reality is merely "satisfied" implies the customer is sitting at the point of indifference. That is, the customer is just breaking even, and not receiving any value from the relationship. The statistics discussed earlier bear out that as much as 40 per cent of satisfied customers defect from businesses every year. Thus, defections can significantly impact the bottom line.

Interestingly, the correlation between customer satisfaction and customer loyalty is very weak. A high customer satisfaction rating is no predictor of customer loyalty. In the appliance industry, for example, a study found that a high customer satisfaction rating of more than 90 per cent was achieved by almost all manufacturers; however, the corresponding loyalty rating barely reached 50 per cent, even among the best firms (Bhote, 1996). By contrast, there is a very strong correlation between customer loyalty, as measured by retention rates, and a firm's profitability.

Today's driving mantra of customer satisfaction must be tempered strongly with the firm's ability to retain and create loyalty among the right set of customers. While generating superior customer satisfaction may be important to drive customer retention and loyalty, it cannot be viewed as the single determinant. The point here is that customers should be valued as strategic assets, whether or not they show up on the balance sheet. Managing for customer loyalty will return great rewards, namely long-lasting relationships where value exchange is high on both sides and resultant market value creation is assured.

Rule number 2: treat your employees as value-creating assets; manage them with this In mind

Each relationship that constitutes a firm's relationship assets has an associated cash flow and value creation output. Employees are no different. Today, closer attention must be paid and economic models applied to the measurement and prediction of the value of revenue streams associated with employee assets.

To be sure, a firm's employees constitute one of its most critical assets. In the 1999 edition of PricewaterhouseCooper's annual report, Inside the Mind of the CEO, CEOs from 19 countries in Asia, Europe, Latin America and North America discussed a multitude of competitive, technological and management issues. However, when asked to describe the key asset to competitive advantage in the next ten years as compared to the present, the number-one response was the same: outstanding people. Here are a few of the comments from the 1999 report (PricewaterhouseCooper, 1999, p. 17):

Managing people in a modern way will be most important - stimulating and empowering them to act on their own. Another key challenge will be making correct decisions in a shorter time frame (CEO from Argentina).

People will always be people. However, despite how much technology changes, people will remain the most important asset (CEO from France).

Not much will change. People will be the principal challenge for management - as they have been for the last three thousand years (CEO from the USA).

Given the multitude of assets necessary to drive a firm's economic value, one key asset remains the same: people. A firm's employees will continue to remain fundamental to economic growth. However, in a recent PricewaterhouseCoopers (1998) survey of 428 CEOs, the lack of skilled workers is the number-one constraint to growth. Additionally, in a recent edition of Management Review, the results of a Deloitte & Touche survey of 400 top executives revealed that two out of three respondents believe attracting and retaining qualified workers will become increasingly difficult by 2005, as compared to today (Comeau-Kirschner, 1998). Employees do have significant impact on a firm's outcome, especially the firm's market value. How a business finds, develops and retains them is a fundamental management challenge for competing in an era where intangible assets, such as employees, constitute the majority of a firm's value.

Finally, firms must pay closer attention to the economic value of its employees within the context of their relationship assets. While the associated economic value of customers is becoming refined through newer economic models and analysis tools, employee value, outside of pure sales professionals, is proving more elusive to measure. However, a recent report found that companies with employee turnover of 10 per cent or less have as much as a 10 per cent customer retention rate advantage over a company with employee turnover of 15 per cent or more (Comeau-Kirschner, 1998). This difference is a clear, measurable bottom-line advantage when taken in context of customer retention and operating expense reductions. Additionally, it is estimated that over US $1 trillion in market capitalization is being lost in four high turnover industries due to stock price and operating earnings reductions from the costs associated with employee turnover (Sibson & Company, 2000).

Thus, employees do impact cash flows, both positively and negatively. Predictive models must be explored and leveraged to create scenarios and to calculate future cash flow outcomes from employees. Relationship asset-focused firms will develop the appropriate programs and processes to ensure employees will ultimately generate positive economic value in order to positively affect a firm's performance.

Rule number 3: don't forget about your suppliers; they are critical assets, too As firms create products and services and engage customers in mutually beneficial exchanges of value, suppliers are playing an increasingly important role. In fact, Prahalad (Prahalad and Ramaswamy, 2000), entrepreneur and professor at the University of Michigan Business School claims that, as firms incorporate the customer experience into their business models, the "co-opting of customer competence" relies heavily on the supply chain. We believe that in the extraction of value from relationship assets, suppliers do indeed play a dynamic role in creating corporate worth and growth and are a key determinant of a firm's performance and ultimately market valuation. Careful attention and measurement must be given to this component of the value chain.

A firm's supply chain is a network of facilities that aims to have the right products/services in the right quantities at the right moment, all at minimal cost. Historically, many firms have viewed the dynamics of this complex system as being out of their control, or simply as the cost of doing business. Many firms not fortunate enough to participate in EDI networks have found the task of creating effective and efficient supply chains difficult. Manual processes such as locating the appropriate supplies through a stack of catalogs or by calling around to several suppliers were "standard" processes that seriously impacted efficiency and time-to-market capabilities. Large inventory builds, capital outlays for warehouses, and ultimately write-downs of unsold inventories have more than impacted profitability of many a firm with inefficient supply chains supply chains where real-time or just-in-time information sharing and decision making based on actual demand have been nonexistent.

Today, the Internet is acting as a great "aggregator" of supply chains. With the ability to create electronic supply-chain processes and real-time delivery of information, and the ability to review and contract with suppliers from anywhere in the world - all nearly instantaneously - many firms now find themselves on equal billing with the largely closed environment of the EDI-based supply chains of the past. Additionally, information-based supply chains - largely driven by the Internet - are chiefly responsible for mass customization, real-time demand forecasting and decreased production and inventory costs, all aspects of the supply chain that a company such as Dell Computer has enjoyed - and exploited for years.

Dell Computer, among many other firms, not only has been exploiting effective supply-chain management for years, but also is realizing considerable financial returns in the process. Supply chains must be managed not just to create efficiency or to reduce costs, but to achieve growth and maximum market value. By example, supply chains that are efficiently managed and automated can have a rather dramatic impact on a firm's performance, as the following numbers describe (Teagarden, 2000):

* inventory turns doubled;

* inventory levels reduced by as much as 50 per cent;

* stock outs reduced nine fold;

* On-time deliveries increased by as much as 40 per cent;

* cycle times decreased by as much as 27 per cent overall;

* supply chain costs reduced by as much as 20 per cent; and

* revenue increases by as much as 17 per cent.

Additionally, one leading supply-chain software maker claims, through implementations of their software, to have created over US $7.6 billion in customer value in 1999, either through growth or cost savings (Miller-Williams Inc. and i2 Technologies, 1999). They further claim they will add US $50 billion of value through growth and savings for their customers by the year 2005 (Miller-Williams Inc. and i2 Technologies, 1999).

In the end, supply chains, regardless of the technological form they take, are increasingly becoming a competitive differentiator and, thus, one of a firm's most important assets. Proper focus and management are in order to exploit the value of this asset. According to supply-chain analyst and Newton (2000, p. e6) with AMR Research:

Companies are no longer competing so much on their products as on their supply chains.

Rule number 4: partners are more important than ever; manage your partners as valuable assets

For many industries today, sources of revenue as well as the ability to craft and execute strategy come through means other than the firm itself. Forward-thinking firms recognize that the economic ecosystem "contract" is the tie that binds their success in the marketplace. As such, value from the various partner relationships must be evaluated with the same rigor as other relationship assets. Although many firms have a variety of partnerships, we believe they can fundamentally be divided into two distinct categories:

1 alliance partners; and

2 distribution/indirect channel partners.

Alliance partners

The ability to leverage alliance partners is no longer a "nice to have" proposition, but rather a strategic imperative today. In fact, in the last two years alone, more than 20,000 alliance partnerships were formed worldwide, more than half of which were formed between competitors. Furthermore, the typical large company manages 30 or more alliances, which account for anywhere from 6 to 15 per cent of its market value (Kalmbach and Roussel, 1999). Why the sudden explosion of alliance creation? One factor may be due to the tremendous time constraints and financial pressures imposed on firms as they seek to maximize competitiveness with limited resources. Another driving factor may be the expensive failure of many acquisitions over the last several years. In either case, many firms are continuously looking at new ways of generating growth at a fraction of the cost of going it alone. Alliance partnerships are proving to be not only a good vehicle to achieve the growth goal, but also an extremely important corporate asset.

Alliance partners typically constitute relationships between firms focused on filling single and multiple gap deficiencies, creating integrated products and/or services or forming a breakout offering. Joint partnerships might also leverage R&D capabilities as a means of sharing costs or creating proprietary technology or standards. In an era of increasing speed, creating alliance partnerships can also serve as a means of getting to market faster, ahead of competitors.

Distribution/indirect channel partners Many firms rely heavily on distribution and indirect channel partners. Indeed, some sectors of the economy, for example, high-tech and drugs, sell as much as 60 to 70 per cent - even 100 per cent - of their product through indirect channels. Delivering the right product or service, at the right time, at the right place and at the right cost may require multiple sales channels, especially for firms competing in global markets. Indeed, for firms to compete in such markets, both direct and indirect selling are necessary. Therefore, the channel partner, while in some respects under threat via the Internet, is still a viable and thriving component of a firm's relationship assets. Managing channel partners for market value creation is tricky at best. However, partnerships, whether they are in the form of alliance partners, channel partners or both, do significantly enhance a firm's ability to create value in the market and, thus, its financial performance.

Recent research from a leader in partnership strategies, Booz-Allen & Hamilton, reveals the powerful financial implications of creating and successfully managing partnerships:

* Strategic partnerships have consistently produced a return on investment of nearly 17 per cent among the top 2,000 companies in the world for nearly a decade. This is 50 per cent more than the average return on investment the companies produced overall.

* The 25 companies most active in partnerships achieved a 17.2 per cent return on equity - 40 per cent more than the average return on equity of the Fortune 500. The 25 companies least active in alliances lagged the Fortune 500, with an average return on equity of only 10.1 per cent (Harbison et al., 2000).

Furthermore, firms that successfully integrate and manage partnerships enjoy higher profitability on their alliances. Successful partnerships see 20 per cent profitability, as compared to only 11 per cent for the less successful companies. Revenue generation from high-success alliances equates to 21 per cent of a firm's overall sales, as compared to 14 per cent of low-success partnerships. Those numbers will rise to 35 per cent and 24 per cent, respectively, by 2004 (Harbison et al., 2000). Given the financial performance of successful partnership companies, most firms would be wise to replicate companies that fall into this category. However, research from KPMG suggests that as many as 70 per cent of all partnerships fail to achieve stated goals (Murphy and Kok, 2000).

As firms seek to close ever-complicated strategic gaps, they increasingly embrace partnerships to achieve their goals. But what constitutes a successful partnership if up to 70 per cent fail? Determining partnership success is complicated at best because many partnerships do not establish measurable goals - nor do they actively measure the outcomes of the partnership. Rather, they simply take an ad-hoc approach to creating and managing partnerships with little to no consideration of quantifiable, bottom-line benefits.

Perhaps the best way to determine success is through understanding why partnerships fail. According to KPMG, firms identify, select and engage in partnerships through a variety of "hard" and "soft" reasons. Hard selection criteria are based on rational, objective reasons such as market position, complementary skills, financial strength and geographic reach. Soft selection criteria are based more on intangible aspects such as commitment, chemistry and trust. KPMG's research suggests that in the 70 per cent of strategic partnership failures, 30 per cent of the reasons are attributed to the hard issues of complementary skills and market position, and 70 per cent to the soft issues of chemistry, commitment and culture (Murphy and Kok, 2000). So relationship issues, rather than structural issues, are perhaps the largest determinant of partnership failure today.

Partnership success, while generating significant financial and market rewards when it works, is still proving elusive for the majority of firms. Careful partner selection, coupled with the ongoing management and the nurturing of trust throughout the lifecycle of the partnership, is critically important to ensure optimal performance. Firms seeking to generate positive value from partnerships would do well to carefully determine their full impact within the overall scope of their relationship assets, and then select, manage, measure and learn from their partnerships appropriately.

The value creation and management rules of the new century focus squarely on relationships. The value of the firm's relationships - the relationships with customers, employees, suppliers and partners - constitute its most valuable assets. In an era of intense competition, price battles, daunting human resource issues, globalization, product and service commoditization and near technology overkill, once the smoke has cleared, businesses are left with the relationships they acquire, build and maintain. The value of relationships is what firms must stand on. And understanding the value of these relationships and how to maximize that value will determine the winners and losers in the twenty-first century. Developing an efficient, leveragable framework for measurement and management of a firm's relationships is, therefore, paramount in the quest for maximizing market value.

Intangible assets: measurement and management

Intangible assets, by their very nature, are hard to quantify and measure. The reality is worldwide-adopted accounting principles, developed 500 years ago, are used by nearly every business enterprise today to value and account for assets, namely assets that are tangible. And these principles and rules, enforced by government-regulating bodies, say little or nothing about accounting for or valuing intangible assets, beyond the accounting for goodwill in merger and acquisition transactions. That being said, there are efforts focused at the university, private and even governmental levels on creating standardized practices to measure, account for and report intangible assets, especially in Europe and the USA. However, the best guess consensus is that we are many years away from realizing standardized, broad-based intangible asset accounting practices. In the meantime, businesses of all types are left to their own creativity in how they measure and ultimately manage their intangible assets. Fortunately, there are a few guiding principles that have been put forth by both academicians and practitioners over the last few years.

Measurement

As with many assets, there can be multiple ways to measure their value. Unfortunately, intangible assets pose difficulty in even finding a single method to measure - with accuracy and confidence - their real value. There are no standards in place, at least at the discrete, component level. There is no hard-defined science behind valuation and measurement techniques. However, there are a few valuation "equations" that managers and executives can leverage to begin to measure the value of these hidden assets. A few major methods are listed below:

* Market-to-book ratios. This ratio is perhaps the most widely used ratio today to determine the value, or worth, of public companies. The measurement itself is rather simple: price share x total number of share outstanding = market value. Subtract book value (i.e. book assets) from the market value number and you have either a positive or negative number, indicating the value of intangible assets or possibly, intangible liabilities. The market-to-book ratio would be considered a market-based approach.

* Tobin's Q. Developed by Nobel prizewinning economist James Tobin, the Tobin q compares the market value of an asset with its replacement cost. Tobin developed this calculation as a way to predict corporate investment decisions independent of any macroeconomic factors such as interest rates. Summing up the equation, if q is less than 1 (i.e. if an asset is worth less than the cost of replacing it), then it is unlikely that a company will buy more assets of that kind. In the reverse, if an asset is worth more than its replacement cost, a company will likely invest in similar assets. While Tobin's q was not developed as a measurement of intangible assets, it is a good one. Tobin's q would be considered a cost-based approach.

* Cash flow. This approach basically looks at the income producing capability of the asset (including an intangible asset) to be valued. The future economic benefits are equated to the present value of the net cash flows anticipated to be derived from ownership of the asset. The calculation of the present value of the cash flows is derived by utilizing an appropriate discount value of the factor, which will of course be different at each company. Cash flow would be considered an income-based approach.

* Calculated intangible value (CIA. Created by NCI Research and the Kellogg School of Business at Northwestern University. The CIV, in essence, compares the average return on assets of a company versus that of the industry. The CIV doesn't measure market value, but rather measures a company's ability to use its intangible assets to outperform other companies in its industry. The CIV would be considered an asset-leverage approach.

The reality is, since most businesses don't even know what intangible assets they have, the ability to accurately measure their value is most difficult, especially at the individual asset level. As intangible assets, and particularly relationship assets, continue to take center stage in the minds of companies and even governmental institutions concerned with creating accounting standards for these assets, broader and more refined measurements will be developed.

Management

The old adage "If you can't measure it, you can't management it" rings especially true with intangible assets. For hundreds of years we have measured and managed tangible assets, but the focus on measuring and managing intangible assets has just begun. By example, Celemi, a knowledge management services firm based in Sweden, offers practical steps in the management (and measurement) of intangible assets.

Celemi uses what it calls an intangible asset monitor (TAM), developed by author and knowledge management consultant Dr Karl Erik Sveiby. The IAM not only provides a system of measurement, but a system of management of intangible assets as well. Celemi has been using this system since 1995. The company uses the LAM to monitor three overall intangible asset categories:

1 customers (external structure);

2 people (competence); and

3 organization (internal structure).

Under each of the interdependent categories, Celemi tracks three key areas:

1 growth/renewal;

2 efficiency; and

3 stability.

Each has its own set of specific performance indicators. An excerpt from Celemi's (2000) 1999 annual report, shown in Figure 1, reflects how the company monitors its intangible assets.

Celemi has developed a color-coding system in order to help them monitor the overall performance of their intangible assets. Cells that are colored green (grey in Figure 1) are an indicator that the measurement is equal to or greater than their strategic plan target. Red (black in Figure 1) cells indicate values less than 80 per cent of target. Yellow (white in Figure 1) cells indicated values in between.

At first glance, this system may appear to be purely a measurement and performance indicator tool. However, Celemi clearly uses their IAM as a management tool as well. First of all, the tool allows Celemi to understand how well they are positioned for the future; it acts as a lead indicator. This allows Celemi management to understand better where resources need to be allocated and managed to improve effectiveness. Second, the IAM allows Celemi leaders to ensure the company is growing in line with its strategic plan and to be alerted to untapped potential in the way they are developing and managing their business. Lastly, the IAM allows Celemi not only to set overall strategic goals for the global business, but enables global managers to set their own goals based on marketplace differences - and to manage their businesses appropriately. Ultimately, Celemi's IAM serves as a framework to develop, measure and manage their intangible assets (in accord with their tangible assets) in order to create and deliver positive future opportunities.

Summary

In this article, we have examined the changing value equation for firms competing in the global marketplace. Where once tangible assets were managed and controlled to create value, intangible assets, and specifically relationship assets, are now a key determinant of a firm's market value and its future opportunities. The question can now be asked: what do relationship assets have to do with future opportunities? The answer is simple: everything. One could argue that the financial results discussed herein, which speak for themselves, reflect past performance and short-term opportunity. This argument is shortsighted. Clearly, management must decide where to invest limited capital. Allocation of resources must balance short-term gain with long-term growth. The firm's strategic decisions must focus on value creation for future opportunities. Relationship assets drive net future opportunities. In summary, here's how:

* Customer assets. Customer retention and loyalty drive repeat business that enables future revenue streams and lower sales and marketing costs, translating into revenue and profitability growth over time, thus increasing the probability of a firm's net future opportunities.

* Employee assets. Employees, like other assets, create or destroy market value. High employee retention rates lead to higher customer retention rates, which lead to higher revenue and net income growth, which, in turn, lead to higher net future opportunities. Conversely, high employee turnover leads to market capitalization destruction, due to stock price and operating earnings reductions from the costs associated with that turnover, thus eliminating future expectations of value creation.

* Supplier assets. Automated and efficiently managed supplier relationships lead to better forecasting, which leads to higher inventory turns and, thus, reduced inventory levels, which ultimately leads to reduced carrying costs. This efficiency ultimately translates into consistently reduced operating costs, higher revenue and net income growth over time. Capital markets value the future expectation of revenue and net income growth, which can be achieved directly through effective supply-chain management, translating into higher stock prices and market capitalization.

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* Partner assets. Effectively leveraged partnerships, including alliance and channel partners, have shown to increase revenue growth while improving profitability. Like customers or even employees, retention of the most valuable partners will position a firm well to create future revenue streams as well as consistently improved profits.

Market capitalizations are expectations of future earnings, or the cumulative total of the value created from a firm's customer, employee, supplier and partner relationships. Present and future success in increasingly competitive and volatile marketplaces will be based less on the strategic allocation and management of physical and financial resources and more on the strategic management and leverage of intangible assets, namely relationship assets.

In the end, the fundamental driver of today's new economy, which probably began about 25 years ago (not five years ago like many pundits would claim), is the customer. Today, with global competition, a growing amount of overcapacity exists in nearly every industry - whether it be manufacturing or services. More and more businesses are chasing a finite number of customers. Where once customers had limited choice, now they have virtually unlimited choice - and access to comparative information - about the goods and services they care to purchase. This "knowledge" forces any business to create the most value-add capabilities possible and compelling differentiation in order to capture, and to keep, customers. But having a good product or service at a competitive price is not enough. Outstanding employees, efficient suppliers and supply chains, and trusted partners are critical to create competitive differentiation and long-term survival. These assets are the most valuable and goals should be established to leverage and manage them most effectively.

Finally, while many would strongly argue that the foremost goal of any company is to deliver shareholder returns, management beware: the length of the time a stock is held may not be as long as you think. For example, in the USA, the longevity champ is General Electric, where shares stay in the same hands an average of 3.5 years. For Microsoft, the average is 3.5 months and for Yahoo! Inc., it is 3.5 days (Fingar and Aronica, 2001). Be careful how much time, energy and resources are focused squarely on satisfying shareholders (which can lead to an over emphasis on short-term efforts) when literally, they may own your stock one day and sell the next. Customers are the top priority. Companies may wish to provide a good return to shareholders, but without consistently satisfied, paying customers, there will be no returns period. Focusing strategies and management attention on leveraging intangible assets, specifically relationship assets, not only will produce financial success in the short run but will also help companies to weather the storms of the long run. The returns will follow.