Business man in suit looking at cloud with falling moneyIntangibles have come to dominate corporate value. Land, labor and capital are declining in importance. Fast growing companies rely on business models, designs, patents, intellectual property and relationships more than bricks and mortar.

This changes the importance of business advisory services in two important ways. First, this makes external business advisors a critical risk in the knowledge value chain of a business. Slave labor or toxic materials in a physical supply chain can compromise the effectiveness, safety or acceptability of an end product or service. Similarly, a lack of quality, ethics or discipline in the generation and communication of data, information and knowledge by advisors can compromise a company’s value.

Consider how important ethics has become in its impact on knowledge generated or communicated by a consultant, lawyer, or accountant. Suppose an analytic approach was not well thought through, perhaps because the advisor wasn’t fully qualified or did not seek out other opinions on alternatives. Data collected for analysis were incomplete, obtained from a source with which the advisor has a financial relationship or not validated after collection. The model used was well known but did not consider the latest research or common applications. Finally, the information was presented and accepted without a rigorous risk analysis and comparison of alternatives.

This practice is all too common in business advisory services. Its acceptance is based on the past when the impact of this scenario presented far less risk than it does now. When an IT company can be disrupted in a matter of months because of an internal deficiency in data, assumptions, business model, or advisor recommendation, business owners are wise to place more attention on an expanded view of knowledge management.

Second, knowledge management now means more than the traditional creation and use of formal knowledge as a commodity or tool. Intangible value can also be created or destroyed by “invisible knowledge,” the formal and tacit knowledge used to design and run processes, manage staff, and make managerial decisions (some of which comes from advisors). Just because this knowledge is not visible on the balance sheet of a company does not mean it has no value or leverage in creating or destroying value.

Given their impact on the intangible value of a company, external business advice and internal “invisible knowledge” need to be treated as the significant third party risks to company value they are. For a good treatment of how intangible value is being created and managed in companies, see Intangible Capital, by Mary Adams and Michael Oleksak.