Graham Lean

A creative business devises a product which becomes highly successful for its client, and therefore both parties are satisfied? Sadly not. The client is delighted because its choice of supplier turned out to be a great investment, but the creative agency is frustrated because it’s more than likely that it was paid a cost-plus fee that bore little relation to the ultimate success of the client’s product. So why isn’t some of the value of that success paid back to the creative agency that came up with the idea?

The most obvious problem is that before the creative product is used in the market, nobody can tell how successful it will be. But another issue is that client companies very often lack the tools and experience to value the creative services or products they buy. Given that the value of most modern businesses greatly exceeds the value of the sum of their physical or tangible assets, this is a serious shortcoming. Nowadays most of a company’s value consists of intangible assets, so it is worth identifying what these are.

The obvious things come to mind straight away – Goodwill, Brands, Trademarks, Copyrights, Patents etc. But there are a number of other assets that are just as valuable, and certainly even harder to value, such as reputation, contacts, experience in the market, operating systems, networks, relationships, a supply chain, and knowledge, all of which are a form of capital.

One of the main things a creative service business sells, and what its clients buy into, is its knowledge. This knowledge includes an understanding of its client’s needs, competitive positioning, and branding strategy; its client’s industry and how it operates; its client’s culture; methodologies – or how it thinks up and produces its creative services; its creative knowledge – knowing what will work; and its “tacit” knowledge – the qualifications, experience, cultural awareness, sophistication, persuasions and opinions of its staff.

Given this powerful package, what does the client receive from its purchase? The service or product is likely to be something original, novel, innovative, iconographic, and even cool, which can create or enhance a brand image, and which may also solve a more complex problem. And the impact of deploying this product is measurable, either through increased sales or market share, greater brand awareness, search engine references, website hits, or new customers. If it can be measured, it can be valued.

So what actually happens when a creative product, knowledge or ideas are transferred between companies, between a creative business and its client? While in the client’s accounts a cost is recorded, in fact an investment has been made and value is transferred. And the value (and therefore the price) of any physical or intangible asset transferred between two companies should be based on the use that is made of it by the acquiring company in a new area of application. This value can be estimated from the additional profits (or other benefits) that the new use will create.

What is therefore the most appropriate way to measure the income stream (and therefore value) that is associated with the intangible creative asset in its new use? One solution is for creative service companies to encourage their clients to think more in terms of investing in a stream of future value rather than just buying a product priced on a time cost and (where possible) a premium based on their past reputation.