The growing importance of intangibles over tangibles continues. Data, IP, R&D, software, and brand are increasingly more likely to be the source of value for organizations than the discs on which data and software reside, steel, plant, equipment and machinery.
A report from Carlyle: Global Insights When the Future Arrives Early, reports on the growing investment in intangibles over tangibles and the shift in contribution to value and growth. Modern economies have been driven by tangible assets since inception. Just think of the factors of production: people, process and technology. Investing in plows, pencils and production lines, drove growth and productivity. While people and process have always existed, it was the application of capital to hardware that produced the greatest return. And capital (should) move freely toward assets with the greatest investment return.
In the 1970s computing become a major new factor. Numerous innovations took place as work shifted from manual to computed process. At the time raw compute power was still far more valuable than the unique processes being computed: a firms’ chart of accounts look pretty much like their competitors. With Moore’s Law in hand the growth of investment in computing hardware started to take place.
But then something happened. At some point in the growth of available compute, new kinds of software emerged representing new ideas and new processes. This software could be altered more quickly than hardware could be re-configured. Software became easy to alter and so business processes were able to evolve more rapidly. Innovation and productivity were becoming driven more by software than hardware. Both hardware and software continued to be invested in but of the two, software investment grew faster.
Much later, perhaps starting in the early 2000’s, yet another shift took place. Software was clearly more important than compute for business process innovation and value, but the actual data on which the software was applied become differentiated too. Sometimes it was the data itself if it was rivalrous (could not be used by others) so it was unique. Sometimes it was the combination of data (if non-rivalrous, or public) and process, represented by IP such as new business models. This period we all know now as digital business. Either way another form of intangible investment became a new source of enterprise value.
The Carlyle report charts this shift in investment and its contrition to enterprise value of S&P 500 organizations. Before 1985 tangible investment was larger than intangibles. After that period the balance shifted. That trend continued unabated and by 2018 intangible investment is 7 times that of tangible investment for those S&P 500 firms; that intangible investment representing over 80% of S&P enterprise value.
I have been fascinated by this shift, being an economist by education and now working in IT by trade. More interestingly for me is that I have a most rewarding job where I am paid to help diffuse ideas and IP across the world. We at Gartner look for new, innovative, thought provoking, even counter intuitive ideas, that we can capture and package up as research and apply it as advice. It is most rewarding to watch and see firms break out of their past with new ideas.
This next week will be an important one for us all. I, like many other of our team, will be online talking to attendees of our virtual IT Symposium. In the next week we will all spend our time trying to solve business problems and share ideas. It will be a tiring week, but it will be a rewarding one. I hope we get the chance to talk!
See you there!