In thinking about reputation, however, it is important to flip the perspective and see your company through the eyes of your people and your partners. As contributors to the knowledge factory, they are also stakeholders in its success. What do they think of the organization? Does it seem sustainable? Is it a place they want to be or to do business with?

There are countless factors influencing that judgment by your employees and stakeholders. For your employees, it’s about being a good place to work, about compensation and growth. For your customers, it’s about your product, your service, your pricing and how you stand up against the competition. For both, it’s about the quality of your structural capital, the amount of collective knowledge in your system, how you use what you know to create value.

Increasingly, it’s also about how you behave as a corporate citizen. Your environmental footprint, your social contributions, your fairness and transparency. The perspective that’s important here is the perspective of the employee and the stakeholder. It’s about what they think, not what you think. And whether what they think is enough of an incentive to stay connected to you.

There are also new categories of relationship capital that must be mentioned. These include stakeholders such as investors, bankers, neighbors, markets, and even society as a whole. Investors are interested in your financial results and your capacity to continue to produce results in the future. Bankers have a direct interest in the continuing success and viability of your business. Neighbors include the communities that live and work near your facilities or are affected by your product or services. Markets include your competitors and participants in markets related to yours. Society as a whole includes stakeholders that are interested in legal, environmental and systemic consequences of your organization’s actions. Each of these has varied interests. And any one of them can withdraw their support if they believe their interests are not being served.

What holds the whole thing together? Your reputation. Being a good (or good enough) employer. Being a good (or good enough) partner. Your stakeholders collectively create your reputation and they will make their stay-or-leave decisions based on that same reputation. That means that your reputation is your license to earn money in the future. Last year’s earnings tell you the financial bottom line but they don’t tell you whether you are in a good position for a repeat performance. For this, reputation is a much stronger indicator. As the sum total of your company’s value, your reputation will be set through the consensus of your stakeholders. And ultimately, your reputation becomes a leading indicator of your financial earnings. Which is more than enough reason for anyone (even those who view “shareholder value” as measured by short-term stock swings) to pay attention to intangibles and reputation.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

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The power instantly increases if you give the same quiz to a sampling of your employees, your customers, your partners and your investors. Who knows you better than these stakeholders? We have always used this approach for strategic projects and recently started using it to help lenders and investors get a deeper understanding of our clients’ businesses. We’d be happy to send you a sample if it would be of interest to you.

Of course, if you want to ignore your intangible capital, you can always take the Accent Quiz. In 13 questions, it will accurately determine where you’re from in the U.S. and where you learned to speak. Of course, you won’t learn anything about what you need to be successful in business these days, but this is an amusing way to kill 10 minutes.

Creating the quiz actually turned out to be harder than you would think, but we finally have a simple (we hope) and free (for sure) tool that can be used to determine your level of proficiency with intangible capital.  The idea is to introduce you to the basics of what it takes to make the most of your intangible capital, improve the value of your business and tell a more complete story in order to raise debt or equity.

Why bother? Well, today 80% of the value of the average company is intangible. And it’s painfully clear that U.S. companies are not making most of their intangible capital. This means that they are sitting on a pool of valuable, but under-used, knowledge that could be put to work for future innovation.

If you are a C-level executive of a company, or if you’d like to be one but don’t know enough about intangible capital to get there, take this simple 22-question IC.IQ quiz. It’s actually fun and shouldn’t take more than 5 minutes. You can print out the results page after you have taken it and learn how well-prepared you, and your company, are to survive and (hopefully) thrive in the coming decade.

At this breakfast meeting at Babson College, Chris Mellen, author ofValuation in M&A will address issues in valuation facing selling owners.

Most owners and managers operate their businesses without ever knowing what their company is worth, how much more a strategic buyer would pay to acquire it, what factors affect the company’s stock valueand whether they would be better off selling or exiting in some other fashion.  This session will discuss the metrics needed to maximize our clients’ companies’ value, how we can help them determine their return on investment in their company as part of their overall investment strategy and how value depends on the many exit options available to business owners.

1. Getting Paid for Tasks
2. Getting Paid for Time
3. Getting Paid for Value
4. Getting Paid for Solutions

1. Getting Paid for Tasks

The first way to get paid for a service is by the task. This is how a bicycle delivery guy gets paid—there is a fee for each package delivered. Your dry cleaner gets paid for each article of clothing. Doctors get paid by the procedure. Now, many service businesses have been around for years. We fully expect people to argue this point with us. You probably buy our argument that doctors are knowledge workers. But what makes a delivery guy a knowledge worker? You may think that you are paying him because you don’t want to do it yourself. And that’s true. But the good ones get repeat business because they know how to manage their time and use the fastest routes to zip around town. 

What would you think if the delivery guy worked for UPS or Fedex? The knowledge component of their businesses is even more obvious. Everyone in their delivery chain has scanners so that it backed up by an automated system that tracks the progress of your shipment as it makes its way across the country or across the world. These automated processes are a key part of what you are buying when you purchase from these companies.

Same thing with dry cleaners. Twenty years ago, we took our cleaning to a man in our neighborhood that had a manual ticket system, washed the shirts himself and would turn them around in three to four days. When he retired, we went down the block to a more typical company. All their tickets are automated so they can look up our order by last name and have the automated hanging system stop at our order. They can turn clothes around in one day and have a list of all the clothes that we have dropped off so we don’t need to keep track of all the tickets. We still are just getting clothes cleaned but the automation is part of the value add of this vendor.

2. Getting Paid for Time

Some services do not break down into simple units like procedures, packages or pieces of clothing. That’s why many services are priced around the amount of time your employee spends performing the task. This is a common pricing mechanism in construction, home and office care, consulting and professional services like those supplied by lawyers and accountants. In all these cases, the underlying unit of exchange is the employee’s time. Sometimes, the practice is to charge for a variable amount of time during each engagement. However, it is also common to offer a fixed fee to provide the service that may be adjusted if the original assumptions about the job conditions or description change.

This category has an interesting mix—manual laborers with what would seem to be a low knowledge component and what appears to be the highest-value knowledge workers: lawyers, accountants, and consultants. With manual laborers, you are essentially charging your customers for time or expertise with a specific kind of physical task. The major knowledge opportunities in this kind of business are around the processes to plan, monitor, bill—that is, to manage the movement of workers and the monitoring of their work.
Ironically, many professionals are not much different than any other hourly worker. In fact, the only thing that separates the business models of professionals getting paid by the hour from manual workers is the content and price of the service (sorry but it’s true). Lawyers, accountants, and many consultants rarely leverage their knowledge into repeatable processes, which, you will learn later in this book, are the holy grail of the knowledge economy because they offer huge opportunities for financial leverage. They cannot imagine that some of what goes on inside their heads could be standardized and even productized. They are happy because they make a good living being paid directly for “customized” knowledge provided to the customer’s order.

3. Getting Paid for Value

More complex problems lend themselves to getting paid for the value of the solution. Some professionals use value-based fixed pricing to increase the return on their time. In this model, the starting point is the expected result of the project: what is the economic benefit of the solution? Then, a fixed price that is anywhere from 5 to 10% of the expected return is set as the fee. This works for small firms where the risk/reward balance of this approach can be managed.

Another way to get paid for value is to leverage knowledge into more scalable forms. This trend has already begun on lower-end problems. Standard contracts and even widgets to produce contracts based on a questionnaire are available on the Internet. Software has replaced a lot of the work of bookkeepers and enables many people to fill out their own income tax forms. More and more assessment tools are delivered via Internet portals. In India, the Aravind Eye Care System is able to treat millions of cataract patients each year at a low cost (the service is free to many) because the have standardized the processes associated with surgery and run their hospitals 24 hours a day.

Many highly compensated professionals—accountants, consultants, lawyers and doctors among them—will insist that all their work is designed specifically for each individual client. This is true and will always be true—to an extent. The same technology that has been disrupting the low end of the accounting and legal fields will continue to push into their mainstream business. We also believe that there will be huge opportunities in the area of consulting. As you will see in the next sections of this book, the dominant information and management paradigms used today were developed during the industrial era. The shift to a knowledge economy is invisible in accounting systems and in the priorities of many management teams. Many, many of these gaps are filled today on an ad hoc basis by consultants of many kinds. The highest-end firms, such as McKinsey, will probably keep their hold the longest on individualized solutions.

However, the real opportunity will lie in the creation of repeatable, auditable information systems that provide the same degree of information as a specialized study at a fraction of the cost. The IC Rating tool we use is a case in point. It provides an audit of the full portfolio of knowledge intangibles in an organization. This kind of review, using a comprehensive but standardized review process, provides a complete review of a company worthy of a large custom consulting project at a fraction of the price.

In a way, the work of professionals is being industrialized in a pattern not that different from the industrialization of production in past centuries. Many “craftsmen” will be disrupted on the low end. But opportunities will continue to exist on the high end and for the creation of high-quality, scalable offerings.

4. Getting Paid for Solutions

The final way to get paid for services is the solution sale. Here, you get paid to just be there and to ensure that something does (or does not) happen. Examples are security systems, copy systems, and so-called “designer doctors” who collect a retainer for being on call to their patients.  With a security system, for example, you are paying for some equipment in your building and electronic monitoring services that ensure follow up to any risks that are detected. Today over 70% of Xerox’s revenues come from multi-year contracts for consulting, technical services, and financing.  They are selling their customers continuous, seamless internal printing capabilities. Do they sell equipment? You bet. But the equipment has almost become the “razor” in the business—the anchor of the relationship with the real revenue coming over time with the services contracts providing the continuing “razor-blade” income.

The most scalable form of the service-based sale of knowledge is software. It is common today to think of software as a physical product, the recorded code. But software is really a service, an automated form of problem solving for its users. The traditional way of pricing software today focuses on selling the software “package” as a product. Under this model, improvements to the software are often sold as upgrades and new releases. The focus was on the software as a product. The model here is Microsoft, which has been able to charge for a new license each time its users have switched hardware and/or charge for each new generation of its product, through several generations of Windows including Vista and, now, Windows 7.

There is a new trend emerging in software that is shifting this focus and creating a new business model called, “software as a service.” This model was made famous by Salesforce.com but is becoming more common throughout the software industry. Here, the software usually resides on the Internet and emphasis is on providing a consistent service to a company. Service is sold by the month or year. Upgrades and fixes to the software happen in the background. Changes and improvements get rolled out to clients without any need to upgrade the software on the client computer. Over time, customers of this software model may end up paying as much as the license fee for a packaged software. But the value proposition is different and the level of service should be higher over time.

A great example of using software as a way of operationalizing knowledge and making it scalable is a company called Hubspot based in the Boston area where we live. This company has created a platform for what they call “in-bound” marketing—the creation of business leads through blogging and social media. This software automates a lot of the things that good bloggers do: search engine optimization, landing pages, tracking other bloggers in your space (so you can comment), content management, analytics, and lead management. Most bloggers just post and wait for something to happen. Effective bloggers cobble together a number of data sources and platforms (most of them free) to get juice out of their content. But this can be time-consuming and the information is spread across a number of platforms. HubSpot automates a lot of these processes and adds functions that help shape your blog posts for maximum visibility. They can charge for their product because they save bloggers time and increase the marketing yield of their work.

Even if you do not sell software, you need to think about the shift in the software industry. Because, going back to Paul Romer’s argument, it is possible to see all knowledge products as software, that is, packaged knowledge that automates the solution to a problem. As mentioned above, solutions sales are the most scalable business models for direct knowledge sales.

From Intangible Capital: Putting Knowledge to Work in the 21st Century Organization

• What are your unique differentiators?
• Where do you have a competitive advantage?
• What is your reputation?
• How are your people regarded?
• Is your offering, be it a service or product, modern or distinct enough to be a “must-have”? How vulnerable is it to new offerings or new technology?

Granted, every company will have different points to emphasize in the selling process: better flavors, more attractive fashions, a superior finish, faster service, healthier ingredients. The key is to really understand each and every way in which your company leads the competition and to sell these together as the value of your brand.

If you can learn how to sell value, showing ROI and highlighting benefits, you will feel less pressure to compete on price alone. Sure it’s a poker game, but the more of these you win, the sturdier a foundation you can build for the rest of the company.

Case in point: A long-time client of mine recently faced such price pressure from a larger competitor. But instead of buckling, she took the time to size up her company’s offering against the less expensive competitor. What was her firm providing their customers that the lower priced competitor did not, which allowed her firm to command a higher price?

• A more personal experience: Her staffers know the company’s people and systems well and enjoy working with them. The competitor does not track past experience and has no frame of reference when the company has a problem.
• A more comprehensive product: Her product includes a monitoring service and quick responsiveness when a problem arises. The competitor only offers a service when something goes wrong and does not anticipate problems.
• A proven track record: Her company has a good reputation of attending to problems promptly and reliably. The competitor does not enjoy the same reputation.

Instead of competing on price alone, my client retained the business and held firm on price by taking the time to understand what differentiated her product and service from the lower-priced competition. Once you know the added value that your business offers, you can begin to focus your marketing message so that your clients will also see the value added.

So how do you identify those areas where you enjoy a competitive advantage?

• Buying data about competitors and customers—from any one of the many companies that make this their business.
• Developing your own data—you can survey clients and market experts or use your customer service communications to gather new information about changing markets. Think about your website, your phone centers, or any other point of outside contact.
• Finding ways to look beyond your present markets—participate in industry gatherings, attend presentations, and read as much as possible, always with an eye to how this could affect your business. For more on this idea, see the Industry Spotlight below.
• Engaging in strategic conversations—we are big believers in talking with people outside the company as a way of sensing an industry’s direction, new developments, and others’ impressions of your strengths and weaknesses. These conversations also flatter the people with whom you conduct them, prompting them to become closer strategic partners. For more on this approach, read Issue 13 of Trekking.

After receiving data from all these sources, many companies set up distribution networks internally to share the information. This may be done via dashboards, where statistics are involved (e.g., semi-conductor chip prices), or with intranets and blogs to share feedback. Whatever way you choose, the best way to start is to keep it simple—just take on a few small projects that have a direct impact on business units and take it from there.

In our teaching and speaking, we often use a presentation that shows the “cone of silence” used in the 1960’s television show Get Smart. Without external information, you and your management team are limited to your own ideas. Lift the cone, open the windows, and let the fresh external information refresh your thinking.

- Michael Oleksak   2006

The second book, Winning, is based on his years of answering questions from audiences on speaking tours since his retirement. Again, he imparts wisdom from his years at GE, including his strong views on leadership, the roles of management, and the value (and perils) of candor in the workplace. He also comments on the influences of recent business trends, such as off-shoring and outsourcing, in a question and answer period at the book’s end.

In his chapter on strategy, Welch writes, “When you think strategy, think about de-commoditizing. Try desperately to make products and services distinctive and customers stick to you like glue. Think about innovation, technology, internal processes, service add-ons, whatever makes you unique.”

Both books are dry but rich with lessons and insight. For more information visit www.jackwelchwinning.com and www.straightfromthegut.com.