Intangible Assets

Relationship capital is an increasingly important resource for businesses in the Internet age

In the Internet economy, a company's success depends less and less on the resources within the corporate walls and more and more on the relationships the company is able to establish with its suppliers and customers. The most effective managers will be adept at marshaling not only the skills and energies of their own employees but also the resources of other companies and even of their customers.

In today's business environment, relationships are becoming assets, just as important as traditional assets such as buildings and factories. The concept of this so-called "relationship capital" is fast gaining credence because of the impact the Internet has on corporate architecture.

The Industrial Way

In the industrial economy, the basic building block of economic activity was the vertically integrated corporation. These companies performed virtually every function in-house, because the cost, risk, and hassle of contracting or partnering with outside companies far outweighed the benefits.

When these companies talked about relationships, they almost always meant within the firm. There were reporting relationships and dotted-line relationships. Project teams had "members" who collaborated closely together. Such relationships were often carefully defined - you were part of the "human resource" with roles, responsibilities, reward systems, and the like. Great thinkers - such as Alfred Sloan, who took General Motors to prominence years ago - developed entire theories of management based on this paradigm.

Sometimes the companies would talk about their relationships with customers or suppliers, but the expression was virtually meaningless. There was a supply chain, but more often than not it was adversarial. Similarly, companies sold products and services to customers - described as creating customer relationships. But car companies, for example, didn't have a relationship with their customers in any significant sense of the term. Automakers did market research to understand customers. They did mass advertising to establish brands. They sold vehicles and repaired them. But few customers would describe this as a relationship.

The Post-Industrial Way

But in the era of the Internet, relationships take on much greater importance. Because the Internet slashes the cost of sharing knowledge, collaborating, and meshing business processes among corporations, companies are now able to focus on their core competencies and partner or outsource to do the rest. In industry after industry, teams of specialized companies working together are proving more supple, innovative, cost-efficient, and profitable than their traditional, vertically integrated competitors. Often, companies are even able to use the Internet to draw their customers into the production process, increasing the value of their goods or services and enhancing customer loyalty.

Phil Olsson, who coordinates venture capital investing for Altamira Financial Services Ltd., relies heavily on the concept of relationship capital in valuing investments in today's economy. Olsson says, "What we call 'assets' are tools for generating cash flows. In the industrial economy, assets were likely to be something one could touch, such as an oil well, or read, such as the right to produce and sell a soft drink. In the digital economy, the bulk of an enterprise's assets will often be the ability to influence the behavior of others - in other words, a web of relationships. This could include favored access to a silicon chip fabricator or credibility with online shoppers. Overlooking such assets in valuing a company is as foolish as ignoring the reserves of a resource company."

Rate This Article Rating: 1 (best) 2 3 4 5 (worst) Comments: Optional e-mail address:

I've recently worked with Tom Siebel - the founder of Siebel Systems Inc. - which is one of the fastest growing companies in the United States. Its revenues soared more than 1,400 percent in just three years, from $118 million in 1997 to $1.8 billion last year. The relatively small core company creates software products and orchestrates a team of more than 750 consulting companies, technology providers, implementers, suppliers, and vendors to take its products to the global marketplace. Says Tom Siebel: "We only have 8,000 people on our payroll, but more than 30,000 people work for us. The models for business success today are not hermetically sealed firms but dynamically evolving networks of cooperating actors."

This is a new and formidable challenge for managers. Partnering or outsourcing in itself is no guarantee of success. The business press constantly chronicles partnerships that begin optimistically and with great fanfare but subsequently collapse because the companies involved - each often very good at what it does - simply are unable to function together. In and of themselves, relationships (like other intangible assets) have no intrinsic value. There are good ones and bad ones.

In the new business environment, the ability to accumulate and gain leveraged returns on relationship capital plays a key role in driving business performance and shareholder value.

Don Tapscott [dtapscott@digital4sight.com] is president of New Paradigm Learning Corp. and coauthor of Digital Capital (Harvard Business School Press, 2000).