In my first article from the ‘Brands in the Boardroom’ series, I advocated that, within the higher layers of organizations, more attention should be paid to the business side of brand management. I’ve shared some tips on how brand managers can be heard in the boardroom, by focusing more on the ‘logic’ of branding instead of only the ‘magic’ (creative) behind the brand. For Boards to make decisions on what, where, and how much to invest in the brand, it is key to allow the financial side of branding to prevail at the boardroom table. That’s why, in this second article, I would like to dive deeper into financial engineering for brands.
Defining your brand’s value
It was in the ‘80s that Interbrand founder John Murphy started working on the concept of brand valuation. Similar to putting a value on companies as a whole, the idea was to put a value on a company’s brand. This move had been good for their design and naming business at the time as it increased the credibility of Interbrand as a firm — a smart initiative! Nowadays, we have standards for brand valuation, laid down in ISO10668 (2011), and companies that offer brand valuations are marketing firms like Interbrand (Omnicom), Brand Finance (independent), and Kantar Millward Brown (WPP), accompanied by the Big Four accounting businesses.
For more than a decade, these three marketing firms have published the brand values and strengths of the biggest companies in the world, which makes great PR and headlines following every publication. Certainly, the business of brand valuation has been highly supportive of the PR of these firms, and also of the brand industry.
First and foremost, the focus on brand valuation has led to the recognition that brands make up a substantial part of the intangible value of companies. According to Brand Finance (2017), around 20% of the market capitalization of the top 500 companies consists of brand value. That’s huge, so all the more reason to take a closer look. Also, I can see among the clients we support, that achieving a top 100 or top 25 ranking in these lists has become an important objective for their Board.
Brand valuation — a myth?
Despite the efforts to harmonize the methodology for brand valuation, the outcome of the values is very different most of the time. That’s why there has been a lot of debate on how solid the methodology for brand valuation is; or in other words, how credible. Mark Ritson is among the critics and has been very vocal on this topic.
However, if we look at the valuation of companies on the stock markets, we see exactly the same variations in value. It is totally common for equity analysts to form different opinions on a stock (buy, hold, or sell). When ten analysts offer their opinion, two may say ‘buy’, three might say ‘hold’, and five advising ‘sell’. This is not different from what happens in brand valuation. Part of the valuation process is the methodology, and this is dependent on how you interpret future outlooks and how you combine these to form an opinion. Hence to me, the disparity in values will always exist and not go away. This is beside the point. The point is that the recognition of the brand as an intangible asset has massive value and should be treated and governed as such. Moreover, since 2005, listed companies are obliged to disclose the brand value of acquired companies in their balance sheet, provided that they decide to keep that brand, just like Microsoft did with LinkedIn (you can read more about that in a previous article I wrote.)
Licensing the corporate brand externally to drive growth
Much is written on product-brand licensing, yet hardly anything is written or published on corporate-brand licensing. So, let me have a stab at the relevance of corporate-brand licensing. First of all, a corporate brand is a highly valuable intangible asset; it helps a company differentiate itself among various stakeholder groups. Also bear in mind the 20% value of a company’s market cap that brand represents when applied to some of the largest companies in the world. Secondly, the moment you can license something, it means it has a value to someone else (the licensee), who’s willing to pay a percentage of revenue to use that asset. So, all put together, the asset that you’ve invested in represents a value to a business, rather than it being seen as a cost. This paradigm change, looking at the brand as a value creator rather than a cost is what this is all about.
So, all put together, the asset that you’ve invested in represents a value to a business, rather than it being seen as a cost.
Ultimately, quite a few multinationals (like Shell and Orange, for example) have put their corporate brand in a separate entity. As a result, whereas they used to have a group head of brand, that person now carries the title CEO of the brand company. Also, this person has a responsibility for a quite profitable P&L. They charge royalty fees for the use of the corporate brand to the licensees. What’s very interesting about this is that this system can be deployed for internal as well as external brand licensing. Vodafone and Orange are known to be active in quite a few markets around the world with their brand. Technically, this has been shaped up by their brand companies (the licensor) entering into license agreements with local telecom operators (the licensees). One can imagine that this may be a quite profitable business. A key element for Boards to be interested in the subject is that brand licensing can be used to enter new markets, through an asset-light strategy. Equally, upon leaving (i.e., divesting from) a market and granting a license to the buyer, one can use this as a defensive exit strategy.
Internal licensing of your corporate brand: Become friends with your head of tax!
Again, hardly anything is published on internal brand licensing; it’s mostly unknown in the global brand management community. However, if you would ask the tax directors of international companies, they’ll all be aware of the phenomenon. For them, the internal royalty charge for the use of the corporate brand is part of the transfer-pricing system. For financial and tax professionals, the transfer-pricing policies deal with the pricing mechanisms that companies apply internally, to charge for products and services between group countries across different geographies. The obligation to do this results from the tax mechanism; that revenues and costs in each jurisdiction have to be allocated appropriately. For brands, this means that an internal charge (there are more ways to go about this) is obligatory, and not voluntary.
I’ve seen, over the years, that brand managers and CCOs that are responsible for the brand are mostly unaware of this mechanism — they simply don’t know that it exists. It’s not a matter of understanding the process, that’s for the heads of tax and finance, but it is a matter of knowing the existence of such a process, to enable you to approach your head of tax to learn how they go about it. They will be happy to tell you how the internal charge works and, more importantly, on what brand value it’s been based! The beauty here is that, if you take the brand value that’s been used for the transfer-pricing charge (internal for tax) and compare this with the brand values that the brand valuation firms publish, you’ll have a great bandwidth of real value that your brand represents. This will greatly increase the relevance of your internal conversations about the real value of the brand and, accordingly, the investment budgets you require to drive that value.
Benefits of internal, corporate-brand licensing
When looking at the internal use of corporate-brand licensing, the advantages are evident:
- Central governance and control of the companies’ most valuable intangible asset: the brand.
- Obtaining an understanding of the internal valuation of the brand, from the heads of tax and finance.
- Changing the paradigm around accounting for the brand — shifting from cost to profit, which generates value.
- Legal contracts between a licensor and licensees ensure and enable discussions at arm’s length about the rights and obligations of both parties. This governance is quite a contrast to a central brand management function that governs the brand in a larger organization, without having a clear mandate, which often leads to a lot of discussions triaging and negotiations as a consequence — all leading to a less orchestrated brand experience.
- Great preparation and governance to begin deploying corporate brand licensing with external parties, either in adjacent geographies or to extend the current use of the brand across other categories.
Orchestrating brand governance
Apart from these valuable, financial engineering considerations, there’s an even better reason to look at increasing governance for corporate brands: The changing paradigm on how to manage brands to be fit for the future. Whereas ‘brand’ used to be ‘simple’ corporate identities, consisting of simple elements like a logo, color, font, and possibly tagline, it has now become an omnichannel and omnipresent brand experience. Managing or policing that has become impossible and ‘orchestration’ of that experience is the new way to go. This is all food for thought for my next piece: How to orchestrate brand governance!
Please let me know your thoughts or considerations, I’m always up for a good discussion.
Part 3 of the series: Brands in the Boardroom III: The Future of Brand Management
Cover image source: stevepb