The Face of the Intangible Economy

lumbergh

In my industry, small firms are going extinct. It’s crystal clear in the reinsurance broker world but the same thing, I think, is happening to all links in the insurance risk chain from agents to reinsurers. Why?

I’m looking forward to an upcoming podcast conversation where I’ll try to make some progress on that question and in advance I’ve been brushing up on all kinds of literature. This year a key book came out, *Capitalism Without Capital* which has interesting things to say about the rise of the intangible economy.

What I love about this book is that it refers to data that is available to download, so I did! My question: how have firms actually been changing over the last 20 years?

The big three intangible categories were R&D, software and something called “organizational capital”. All are growing in the amount of ‘capital’ they represent in firms of all industries though R&D is growing more slowly than overall capital growth (so its share is declining) and software much more quickly.

No big surprises so far and much of the commentary I’ve read on this topic tends to focus the mind’s eye on R&D and software when drawing up interpretations of what is going on. But what on earth is organizational capital? It’s growing at about the same rate as the overall capital growth so its share is constant. Oh, and it’s the biggest (in the UK*)!

intan_graph_net

To find its definition you need to dig into the source material, specifically this paper by Carol Corrado, where she describes two components of “organizational capital” (I’ve transcribed the description below in a giant quote):

    1. an external component, being money paid to management consultants; and,
    2. an internal component, being the proportion of payroll paid to management.

I haven’t been able to find a breakdown of the internal vs external component. I used the UK data above because it was easier to get the nominal data as a check. This doesn’t include any judgmental adjustments for how much of the spending creates a persistent asset (obviously much time is wasted and some time from managers for example will be spent on things that aren’t necessarily related to intangible assets).

So, compared to fifteen years ago the average firm today spends a ton more money on software, a lot more money on consultants and management and somewhat more on R&D. 

That makes sense to me. More thoughts to come in the podcast.. stay tuned!

Appendix:

*The US data has much more R&D and much more mineral exploration than the UK, the latter of which I think distorts things a bit. Organizational capital is about 15% of the US figures and its share is rising quite fast.

the giant quote from Corrado:

Investments in organizational change and development have both own account and purchased components. The own-account component is represented
by the value of executive time spent on improving the effectiveness of business organizations—that is, the time spent on developing business models and corporate cultures. The purchased component is represented by management consultant fees. The purchased component is estimated using the SAS annual revenues from the management consulting services industry, which rose substantially in the 1990s, from $27 billion at the start of the decade to more than $80 billion during 1998–2000 (table 1.3, line 9a).

The own-account portion is estimated as a proportion of the cost and number of persons employed in executive occupations, which rose very rapidly in the 1990s. Given that executive median pay exceeds the median pay for other employees, the fraction of total private payroll spent on executives and managers is substantial, almost 22 percent in 2000 (Nakamura 2001). Applying the executive and manager payroll share to total private business-sector compensation yields an estimate for managerial and executive costs of nearly $900 billion per year in the 1998–2000 period.

If just one-fifth of management time is spent on organizational innovation, then businesses devoted more than $200 billion per year to improving the effectiveness of their organizations during 1998–2000 (table 1.3, line 9b). This figure is highly sensitive, of course, to the admittedly arbitrary choice of one-fifth as the fraction of time managers spend on investing in organizational development and change; as a result, our estimate for this component ranges from $105 billion (based on a one-tenth fraction) to nearly $350 billion (which assumes one-third). Adding in the $80 billion annual expense for management consulting (described above), our point estimate of total spending on organizational change and development is nearly $300 billion per year from 1998 to 2000.

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