Software
Takeaway: Software enables companies to innovate, enhance efficiencies, deliver unique customer experiences and maintain a competitive edge.
One fun way to think about software as an intangible asset is to imagine it as a "digital wizard" that brings magic to your business.
Imagine your business as a magnificent castle, filled with an expansive library of enchanted books. Each book represents a unique software application or program, and within its pages lies a collection of powerful magic spells.
Both magic spells and software possess extraordinary abilities. Each spell in the library represents a specific solution designed to solve a problem or achieve a desired outcome. When a problem arises, you consult the enchanted library, select the appropriate book and within its pages, you find the precise spell (software). It’s even written down in “code,” just like a magic spell.
Just as magic spells can conjure illusions, create transformations, or bring objects to life, software has the power to automate processes, streamline workflows and unlock new value. Moreover, spells can be combined to boost the effect. In the same way, one piece of software can interact with another piece of software, creating synergistic effects.
The analogy extends even further. Wizards can create and modify spells to suit their needs while software can be tailored to fit pretty much any business or process requirement. And while an enchanted library protects the magic spells, proper maintenance and security are both crucial for protecting your software assets. Think of regular updates, bug fixes and security patches as the dragon perched on the crenelations. The bigger the dragon, the safer the spells (software).
By thinking of software as a collection of magic spells, it is a bit easier to see how software is a hugely important intangible asset. Depending on how it’s used, software has huge potential to provide a serious competitive advantage.
How does software become an intangible asset?
Is software a tangible or intangible asset? That’s a good question and the answer is, both.
In most situations, software is classified as an intangible asset because it cannot be touched (from the Latin “tangere,” meaning “to touch”). However, certain accounting rules allow computer software to be classified as a tangible asset under Property, Plant, and Equipment (PP&E).
From this perspective, if software is used to deliver goods and services, then it can be classified as a tangible asset. Accountants also look at the cost of software to either buy or develop internally. If the cost of one copy of software is more than $100,000, then it is considered tangible. On top of this, if the software is used regularly (daily) and requires routine maintenance and updates, much like equipment, then accountants would probably classify it as a tangible asset.
However, software doesn’t really depreciate over time unlike items of physical nature that go through wear and tear. Conversely, software is still vulnerable to becoming outdated over time.
But from a company's perspective, software can only be an intangible asset since the ideas behind the code cannot be touched and it will be used to achieve business goals, which are intangible. Online services can also be considered intangible assets if they can be separated from the entity that created it. To be valuable, an online service must also be expected to generate future economic benefits for the entity, such as revenue or cost savings.
Another intangible asset dynamic of software is that it can be customised to meet the specific needs of a company or organisation and improve efficiency, productivity and accuracy in ways that off-the-shelf software cannot. And the ability to update and improve the asset, making it a valuable long-term investment, turning it into a new source of revenue for a company, are all characteristics of an asset that could be tangible or intangible. It all depends on how it is used.
What makes software a valuable intangible asset?
Rapid digital transformation has elevated the significance of software in every business – from the smallest to the largest. It has become the backbone of modern businesses, enabling automation, process optimisation and improved efficiency. As organisations rely more on software for their operations, the value of software as an intangible asset continues to rise.
Software also plays a pivotal role in providing a competitive edge. Innovative digital solutions can differentiate businesses by offering customers unique features, enhanced user experiences and improved customer satisfaction.
Unlike physical assets, software can scale much easier. Once developed, software can be replicated and distributed at a relatively low cost and almost zero labour effort. In fact, the post-scarcity copy/paste dynamic inherent to software poses some interesting questions about the true value of software under the labour theory of value.
Furthermore, the software can be easily updated, upgraded and customised to meet market demands and changing user requirements, ensuring that it will remain an important intangible asset for many years to come.
Does proprietary software offer a competitive advantage?
Open-source software is a great resource for most businesses. The open-source community has been diligent and charitable in building solutions for thousands of processes and offering the resulting software for free. However, open-source code can only get a company so far. After all, if everyone is using the same systems, where’s the differentiation or competitive advantage?
Creating a competitive advantage requires a unique solution that cannot be easily replicated. This is where proprietary software comes in. Most of the time, it can be customised to meet specific needs far better even than off-the-shelf software.
The upfront investment for building your own software can be substantial. Not only will it require skilled developers, software engineers and new tools, but there are also ongoing costs for maintenance, bug fixes, feature enhancements and technical support to keep the software up to date. On top of that, there are also intellectual property protection considerations, such as patents or copyrights, that need funding to ensure exclusivity and prevent unauthorised use or replication.
Building your own software will require some financial investment, but it can lead to significant gains in efficiency and new revenue streams should the company choose to sell it or issue licensing fees and subscriptions rather than keep it in-house.
Moreover, proprietary software is one of the best ways to create intangible assets with long-term value. This exclusivity can lead to strategic partnerships, licensing opportunities, or even acquisition offers, further enhancing the ROI.
But there is a lot more work involved with building and maintaining in-house software. Careful planning, effective execution and continuous evaluation are necessary to maximise the ROI on proprietary software development.
How Salesforce built an intangible asset edge
One notable example of a company that dramatically increased its value by building its own software is Salesforce.
Salesforce is a US-based customer relationship management (CRM) platform with a cloud-based software-as-a-service (SaaS) model that gives businesses a flexible and scalable platform for managing customer relationships and sales processes. Its proprietary software offers a range of features, including lead management, opportunity tracking, analytics and automation tools.
The company differentiated itself from traditional on-premises CRM software providers by combining user-friendly interfaces, customisation options and seamless integration with other common business systems, making it highly attractive to companies of all sizes and industries. It was able to effectively monetise its software through subscription-based licensing and recurring revenue models.
Salesforce's software has not only increased its company value, it has also provided immense value to customers. Coupled with a clear focus on continuous innovation, new product development and expanding software offerings (sometimes achieved through buying other software companies and wrapping the outside solution into its own) has cemented Salesforce as a global leader in the CRM market.