Goodwill shunting: Never let go of good old know-how
Without skills to navigate the turmoil ahead of you, no amount of cash will drag you out of the holes of the past
One of the most difficult assets to value in the balance sheet is goodwill. It is more easily recognised by outsiders than valued by accountants. An intangible asset, it is the premium above the fair value of the other assets that come together to manifest the value of an operating entity. Bankers don’t like it and auditors wrestle over how to justify its carrying value, but any acquirer of the company will have to pay for it.
As mysterious as it may be to pin down, it is this premium to the net asset value that identifies the winners from the also-rans. What, after all, is a collection of assets without a vision, leadership, and a plan to put them to work to generate a return greater than the sum of their parts?
Goodwill is a collective noun for many of its constituent parts, incorporating intellectual property, institutional memory and know-how. While the calculations to justify the carrying value of goodwill are usually based on the discounted present value of future free cash flows generated by the tangible assets, it is an asset whose value is founded in the past.
Goodwill is part of procedural memory. An article in a recent edition of Scientific American essentially asked how come it was that we never forget to ride a bicycle, despite the length of time that may have elapsed since we last rode one.
The article explained the different kinds of memory stored in our brains, differentiating between declarative memory, which covers the recall of events and facts, and procedural memory, which relates to acquired skills and performance.
The difference that fascinates me is that memory of events and facts are easily communicated (albeit more easily forgotten), whereas skills are not easily passed on and yet mostly stay with you forever, once acquired. We forget names, we don’t lose skills.
It is how you deal with this know-how that decides the survival, sustainability and future growth prospects of people, companies and countries.
We all have bits of know-how as individuals. We just know what to do in certain given, familiar circumstances. Over time, though, this learned behaviour becomes a skill which can be applied to new encounters. Experience and knowledge can significantly increase the probability of making the right decisions, if trusted and applied.
In business, it is a balanced mixture between the experience of age and the exuberance of youth that stands the best chance of winning. Sure, the old guys must listen to the youngsters, but the youngsters must take guidance from their elders. In this context it is not actual years of age, but relative know-how that must be respected, harvested and deployed.
Having said that, it is the most innovative companies, the disruptors, that trade at the highest premium to tangible asset value – most notably in the high-tech space.
It is critical to listen to the know-how that you hire. No matter how transformative or disruptive your endeavours, know-how will help you avoid pitfalls and show shortcuts.
Applying know-how is never more important than in turnaround situations. If the diagnosis of failure is an easily identified structural flaw or an obvious error (such as selling strategic assets) then these are easier to fix. If, however, the decay of the neglected enterprise, under the incumbent oversight, has been to such an extent that competitors have been allowed to establish a foothold, then industry and market know-how that have obviously been absent are the only effective weapons against them.
You’ll need money, but without the know-how necessary to navigate the turmoil ahead of you no amount of cash will drag you out of the holes of the past – at best you’ll just keep filling them.
The world’s best leaders have surrounded themselves with people with know-how. This is particularly true of political leaders, who win the votes on policy, not specific skills.
Once you find these skills, for goodness’ sake let them get on with doing the job. If you don’t like them, or the direction they’re taking, change them, but never overrule them. Going against know-how is just stupid; going with the absence of know-how doubly so.
No self-respecting captain will steer a ship on a course that he or she knows is the wrong one just because the owner of the fleet says so.
If the ship sinks it’s the captains fault. You can’t take over the bridge if you don’t know what you’re doing.
Mark Barnes is CEO of the Post Office.