man walking
Photo by Volkan Olmez on Unsplash

Demonstrating good design is good business

Most would assume a company’s value is based on physical and financial assets. Nope. Recent research found tangible assets account for just over 30 percent of the value of the average US company. Nearly 70 percent of an organisation’s assets are the value-add of human ingenuity. That includes creating products, services and experiences that customers want.

That is great news for designers because that’s what we do…

 

It was 1973 when IBM’s Thomas J. Watson Jr. said “good design is good business”.

So that makes it 45 years of design practitioners trying to prove to the business and financial world, that Mr Watson’s knew what he was talking about.

*Gawd. *

A recent article written by Jonathan Knowles Do You Speak Finance? Design and Business Value^ set out to prove good design is good business by using the balance sheets of 5,000 US companies that have grown through mergers and acquisitions (M&As).

A bit of background.

Knowles uses M&As as the basis of his research because the value of a company is documented in its purchase price.

(In the US, an accounting practice called Purchase Price Allocation (PPA) makes those buying a company report the purchase price in their financial statements. They must also specify the nature and scale of the value of the intellectual property acquired.)

The ratio does differ by industry segment. For example a manufacturing plant will have more tangible assets than a media company, but the ratio doesn’t vary widely.

Similarly, the ratio varies from country to country. Companies in countries with a strong emphasis in manufacturing (China, South Korea, Japan, Hong Kong and Thailand) record a higher value in tangible assets. For example South Korea at nearly 69% compared to Sweden at 25.4%. Interestingly, Australian companies are reported as having just over 50 percent in tangible assets.

Intellectual property.

So, just under 30 percent of the purchase price is attributed to tangible assets.

Just over 30 percent is deemed intellectual property.

Knowles uses five categories for intellectual property:

  • Technology: patents, trade secrets (think KFC) and databases
  • Contract-based: use rights (like miners), operating rights (service agreements) and lease agreements
  • Artistic-related: plays, musicals, ballets, literary works, musical compositions, pictures and video
  • Customer-related: contracts, lists, market research, and
  • Marketing-related: trademarks, mastheads, internet domain names.

Again, good news for designers because we add value to intellectual property.

And the balance?

The remaining value after tangible assets and intellectual property is ‘goodwill’.

Goodwill should bring a smile to any design practitioner. It’s the quality of a company’s relationship with their customers and employees, plus their reputation with other stakeholders.

That involves the work of many design fields including service designers, UX, UI, industrial and graphic.

asset illio

There is a problem Huston.

While Knowles research from over 5,000 US M&As revealed tangible, intellectual and relationship assets make up the total value of a company, relationship assets are not legally owned by a company, so they don’t/can’t appear on an official balance sheet.

This is where it gets complicated.

A company grown from M&As does show the intellectual property assets they have acquired on their balance sheet, however companies that have grown organically will not (apart from a few, specific software development cases). That makes comparing balance sheets a problem. It’s unreliable to compare companies that have grown organically to those that have grown through acquisition.

Fun fact: many of the ‘big brands’ have a mix of intellectual property assets. Proctor & Gamble doesn’t show a value for Tide or Pampers (both homegrown brands), but does for Gillette (acquired). Similarly Diageo includes the value for Smirnoff and Johnnie Walker but not for Baileys.

Categorising value simply.

Knowles simplifies assets into four categories. He separates tangible assets into two segments, current and fixed; then adds intellectual property and relationship assets.

Current and fixed will appear on a balance sheet.

Intellectual property may appear on a balance sheet.

Relationship assets will not appear as long as a resource has to be ‘legally owned and controlled’ to qualify as an asset. That said, they are valuable, economic assets because they represent the core of a business: customers, employees and reputation. Without these activities conducted at an appropriate level, there is no asset.

Change is in the wind.

It is possible qualifications needed for assets will be expanded in the future.

Much has previously been done in triple bottom line reporting, and now most companies report on sustainability. It makes sense future balance sheets may include these and other categories such as social and environmental resources.

Summary

Sure this research is from the US and its root is in big business but the results clearly demonstrate that design isn’t a cost centre but an investment that contributes to the real value of an organisation.

What the research does show is how difficult it is to measure the value of design to business. Any research needs rigor and accountability to be accepted.

But it is obvious that design adds value and we think the more mature the design (the more sophisticated the use of design, as in design thinking, customer journey mapping, empathy mapping) the more design adds value.

The premise has been tested by the US Design Management Institute and published in their annual Design Value Index.

Similarly, the UK Design Council’s Design Index is research on the use and value of design.

This year the DBC is adapting those models to conduct similar Australian-based research. Initially we’re working with ten studios and their clients to build a benchmark model.

Stay tuned for results. They will be released later in the year.

 

^published in dmi:review Vol 28,Issue 4

Got a question? Please feel free to email me.

 

Want more information like this? Subscribe to get weekly Design Business Review articles, Australia’s only online design management magazine. It’s professional development information written specifically for Australian designers by Australian designers.

Carol Mackay


Carol’s design expertise is in making the complex simple. Her skill is in packaging complicated content into bite-sized chunks of information to be easily understood and digested. 2018 is a big year for Carol. Thirty-three years after founding Mackay Branson design, she is moving from client-focused projects to use her skills with the Design Business Council, and The Design Business School.

Currently Carol is co-writing a new program for the The Design Business School. The Design Studio Management Program is aimed at designers, design graduates and existing design studio managers to help them develop skills to fast track their career path. It is due for release late February 2018. Contact Carol for more information.