Western culture, at all levels, is questioning the appropriate balance of values that should inform our lives. In his recent book On Equilibrium, philosopher John Ralston Saul identifies the dimensions that make a person human. They include common sense, intuition, memory, reason, ethics and imagination. He argues that, considered in isolation, these human qualities may become weaknesses. However, when in equilibrium, these qualities can become positive forces in the lives of individuals and society.
In the world of commerce, there is an increased focus on ideals that transcend the values traditionally related to efficiencies in organizational practices and economic resources (e.g. financial and physical assets). These are often referred to as the tangibles of a business organization. This is not an altogether new development. In the early 1980s, Robert Kaplan introduced a “Balance Scorecard” the four cornerstones of which are customer satisfaction, internal business practices, financial health and employee satisfaction. This was an early introduction of a more balanced perspective, including the valuation of the intangible dimensions of any business organization.
Intangible forces at play
Since ancient times, the recognition of value has been through the exchange of money. Economic theory has held that tangibles such as land, labour and capital (physical assets) are major measures of wealth. Efficiency in terms of production, use of resources and practices has also been a primary value adder. Business success following the industrial revolution has been based on efficiency and economy. Under such a model, what is valued is easily measured and concretely quantifiable. This is the predominant business strategy on which the majority of design organizations are modelled today.
In many ways, however, this model is inadequate in today’s changing economic and social environments. The advent of the knowledge economy places a premium on many forms of non-monetary value, including learning, knowledge, personal and organizational development, relationships and connections. Measurement of value in today’s companies is increasingly based on factors like ideas, people and innovation–valuing intangibles.
Today’s companies and organizations must respond to a wide range of factors including market dynamics, social and environmental issues, political systems, economic policy and technological developments–not just physical objects. In its June, 2000 issue, Forbes magazine published the results of a study of what makes companies valuable in today’s economy. In rank order, the findings included: Innovation, Employee Management, Quality processes, products or services, Environmental performance, Alliances, Brand investment, Technology, Client Satisfaction.
Quantifiable financial and physical assets no longer form the only basis of value. Many companies are recognizing the importance of intangibles, adding customer satisfaction, operational effectiveness, intellectual capital, knowledge, learning and growth metrics to traditional financial measures to provide a more well-rounded assessment of how the firm is performing. Measures of success now include the future potential of a company, its business practices, intellectual property, and people practices.
Research by Cap Gemini Ernst & Young Centre for Business Innovation (CBI), Harvard School of Business and Price Waterhouse-Coopers shows that investment in brand development, training and research and development (R&D) now exceeds total investment in tangible assets (plant, property, equipment). One third of a mature company’s value was attributed to non-financial information or represented by intangible assets. Today, success depends more on innovation, ideas, adaptability, human capital, leadership quality of management, knowledge assets, work team efforts, business processes and creative talent than on a tangible asset base or current traditional revenue stream. Intangibles are the new value drivers in our current economy and increasingly, the means by which companies deliver the value they provide to customers.
Invisible opportunities for architecture
The world is shifting from a capital-based to a knowledge-based economy, placing a higher premium on intellectual assets, including creativity and innovation. An opportunity exists for architects to transcend current business models that are focused solely on economy and efficiency and instead contribute to the creation of models that incorporate the less visible, conventionally marginalized aspects of business practice–the intangible creative dynamics and assets that are unique to the design profession. The net result would be the emergence of a new and sustainable model for architects: one that balances the worth of tangibles and intangibles in business valuation.
Recently, on the Web site of Canada’s national design research and exhibition centre, the Design Exchange, a shift towards valuing intangibles–namely creativity and innovation–was emphasized as key to organizational success. The Web site’s banner read: “the organizations that can develop a culture of creativity and idea generation will be the winners.” Indeed, the essential elements of any healthy and successful organization are increasingly dependent on innovation and ideas. Harvard’s School of Business professor Robert Hayes states “Fifteen years ago companies competed on price, now it’s quality, tomorrow it’s design.” According to Sony’s Norio Ohga, “we assume that all products of our competitors have basically the same technology, price, performance and features. Design is the only thing that differentiates one product from another in the marketplace.”
The limitations of current business models and how they are operationalized in the design profession require critical investigation. Intangibles and their value in the practice of architecture need to be explored. This exploration should include the design of strategies for identifying intangibles, methods for creating and apportioning value to the intangibles, and, approaches for supporting their overall valuation in an architectural practice.
Professional practice models that aim to value design will reveal that there are many different ways to create value. Such design valuation strategies have the potential to offer an expanded view of value and, as a result, offer opportunities for a balance of creativity and commerce. New approaches are needed to broaden what we currently consider to be effective valuation methodologies. Design valuation and the leveraging of intangibles re-focuses us for more rewarding realities. The profession of architecture is in need of frameworks for valuing intangibles and incorporating them with tangible elements to create viable and sustainable business models for architects into the future.
Orest Klufas, OAA, M.Arch, MBA, is in practice with Stantec Architecture in Vancouver. His research into the valuation of design practices formed the basis of an MBA program he completed last fall.