In a previous article, I wrote about the four types of intellectual capital within a firm. They are:1. Know-what - having knowledge about something;

2. Know-how - being able to apply the knowledge to real- life situations;

3. Know-why - understanding how things work and the interrelationship of various elements of a system; and,

4. Care-why - the motivation and adaptability for success.

Firms must ultimately operate at Levels Three and Four to be successful. Both of these levels exhibit a high degree of motivation and creativity. And without Level Four, a professional services firm often falls behind its competitors and ultimately fails to adapt to a rapidly changing marketplace.

Tom Stewart, in an article from June 1991, "Brain Power - How Intellectual Capital Is Becoming America's Most Valuable Asset," defines intellectual capital as: "The sum of everything everybody in your company knows that gives you a competitive edge in the marketplace."

Hence the challenge for most CPA firms today is determining how best to capture that knowledge from individual practitioners' heads so that it becomes available to everyone in the firm. In short, how can you maximize and retain the firm's intellectual capital?

Your intangible assets?

Just because you won't find the intangible assets on the typical balance sheet, that does not mean they don't exist. Let's look at three types of intangible assets in which you should be investing.

1. First, think of your firm's internal structure, which consists of the systems and processes, computer programs and so forth that the firm has created. These include client delivery processes and administrative systems.

While generally these are created by the owners and employees, they are owned by the firm. A firm or any organization can be defined as the sum of its people and its internal structure. That's why no two firms are ever exactly alike. They all have different people and different internal structures.

Now, ask yourself what strategic goals you have each year that address the improvement of the firm's internal structure, and how much you budget each year for systems improvement.

In every firm, there are countless procedures and systems that can be addressed. It won't be hard to find some in your firm.

2. Second, individual competence is your owners' and employees' ability to act in various situations. While individual competence includes an individual's education, prior work experience, personal values and communication skills, it also includes, in a CPA firm setting, skills around client development and client management, business development, firm management, technical expertise and work quality.

Unfortunately, competence is only owned by the person who possesses it. It does not belong to the firm as such. When an individual leaves the firm, the competence walks out the door with her.

Not only do you want to continually increase the competence of your people, you want to make your work environment conducive to their staying at the firm. Building personal competence while having high turnover does nothing for the value of the firm or for the service to clients.

Now ask yourself what specific goals you have to improve competence in the firm, and what specific goals you have to retain competent personnel.

3. The third type of intangible asset is the firm's external structure. This consists of relationships with clients, referral sources and the community at large. Brand name, reputation, the firm's showcase clients and the firm's image would also be included.

Relationships with clients are always in a dynamic and fluid state. The same with a firm's reputation. It only takes one high-profile mishap to severely damage a firm's reputation and image. Relationships and image are based on how well the firm solves client problems and the consistency of its service.

Now ask yourself what procedures you have in place to ensure that client issues are being addressed, and how your firm ensures consistency in client service delivery.

It is unfortunate that firm leaders do not spend more time building individual competence and internal and external structure. Rather, they continue to direct excessive energy to generating revenue.

Just turn our traditional operating model upside down. If firms invested more in the three intangible assets listed above, they would generate more revenue and, even more important, more income.

August J. Aquila, Ph.D, is the co-author of Client at the Core: Marketing and Managing Today's Professional Services Firm (Wiley 2004). He assists firms in the areas of mergers and acquisitions, strategic planning, and succession. Reach him at The Growth Partnership, or (952) 930-1295.

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