ABSTRACT:
Global interest in the emerging arena of Intellectual Capital was clearly evident at this conference which laid out the basis for the emergence of the intellectual capital movement, the challenges to achieving a commonly accepted framework, and the progress that has been made to date in different organizations.
The conference's message was that this movement is a response to the requirements of the growing numbers of knowledge intensive organizations. These organizations need new, dynamic frameworks allowing both investors and organizational members to determine full value while at the same time nurturing innovation and development.
Initiatives at Skandia, The Mutual Group of Canada, the World Bank, along with the projects being undertaken in Denmark and by the Brookings Institution, were explored as the harbingers of the new frameworks, standards and practices for twenty-first century organizations.
Global interest in the emerging arena of Intellectual Capital was clearly evident at the Measuring and Valuing Intellectual Capital Conference, attended by participants from nineteen countries.
Intellectual Capital assets are the non-financial resources of an organization. Intellectual Capital can be roughly described as comprising Human Capital, Structural Capital, and Relational Capital. Human Capital is the people who go home every night with their knowledge and know-how. Structural Capital is the embedded knowledge that remains at the organization. Relational Capital involves the organization's relationships with its network of customers as well as its network of strategic partners and stakeholders.
Knowledge comprises a larger and larger component of an organization's value in our era of increasingly knowledge-intensive organizations. Yet, that value is not recognized on organizational balance sheets. The resulting gap in reality has led to a movement to acknowledge intellectual capital as real, measurable and significant.
The Intellectual Capital movement is led by two groups of proponents. One group has interests rooted in accounting and financial analysis. The other is those concerned with more successfully navigating the growth and operations of their organizations and, potentially, of cities, regions and countries as well. The concerns of these sets of proponents were reflected in the presentations at the conference.
Understanding the Emerging Knowledge Economy
Steven Denning, Program Director of the World Bank, spearheads its Knowledge Management effort. He emphasized the emergence of the Knowledge Economy, commenting that economists discover the value of knowledge well after the time that knowledge comes onto the scene. For example, the steam engine came on line in 1776 but was not recognized as an economic factor until after 1810. The current knowledge revolution is changing our world in a similar degree and exhibits the same lags in acknowledgement.
In the new "Knowledge Economy" the stock of knowledge is growing exponentially. One particular effect of the "knowledge" dissemination revolution is that it enables cost reduction. An even larger phenomenon is that this exponential growth is fostering unpredictable, revolutionary changes in how organizations are structured and operate.
Denning's World Bank has leveraged these developments to enact its global knowledge sharing strategy. Whole ranges of stakeholders now have access to project development and reviews while simultaneously sharply reducing the cycle time for its report development and project review. This strategy is enabling the World Bank to carry out its mission of becoming a "bridge for all to the world's best development expertise."
The Knowledge Economy
Tom Stewart, Senior Editor of Fortune Magazine, gave his perspective on the growing significance of knowledge management and intellectual capital in global terms as well as specific examples. Stewart remarked that "History" is about the means of managing knowledge. Initially, the dominant mode of behavior was hoarding. During the industrial revolution we moved to collecting and analyzing. We are now moving into in the era of flat, networked organizations.
Stewart said, "It used to be that knowledge helped us to do things more efficiently. What we are increasingly doing now is buying and selling knowledge. There is a ratio of knowledge to physical stuff. For example, an ear of corn is 75% knowledge, and petroleum is 50% knowledge." Stewart's message is that, "In the old world we bought and sold congealed resources. In today's economy we sell congealed knowledge."
Yet, according to Stewart, "accounting systems do a lousy job of accounting for value of knowledge based companies. All the cost of intellectual capital is placed on the books for the year it has occurred. As a result managers are not getting the information they need to manage."
Building Towards a Basis for Measurement and Valuation Reporting
But what needs to be done to acknowledge intellectual capital? "Until we make progress in measurement, talking about intellectual capital is like talking about the weather … The question is, 'How do you convince consumers and investors that intellectual capital matters?'" commented Greg Wurberg, principal administrator for the Organization for Economic Cooperation and Development (OECD).
Wurberg said, "We need incentives and means for managing intellectual capital in enterprises." He then raised the question, "Are markets providing incentives to invest in intellectual capital?" There are certain trends in which government has taken a role in making sure markets function well, specifically in protection of intellectual property and in electronic commerce.
Former SEC Commissioner, Steven Wallman, further explored the issue of how to measure and value intellectual capital. He said there are two sets of issues: Internal: regarding employees and developing intellectual capital, and External: concerning reporting.
Wallman said that current financial reporting is misleading. "Useful information on real drivers of organizations is missing, and what we are reporting on is a diminished share of relevant information." At this point, according to Wallman, "There is no public reporting of information. It is too difficult to have comparability. We need inter-comparability to see if this is worth the effort."
Wallman sees that the next step for legitimization of intellectual capital is the development of inter-temporal and inter-corporal measures, as well as a language of certainty and comparability. To catalyze that effort, Wallman is participating in an initiative led by the Brookings Institution, the NYU Stern School of Business and Skandia Group of Sweden to assess the significance of intangible assets, barriers to its recognition in the US economy and related policy issues.
Managing Intellectual Capital in Organizations
A key reason for measuring intellectual capital is to recognize the range of hidden assets and strategically develop them to achieve organizational ends.
One approach for mapping hidden assets was developed by Karl Erik Svieby, originator of the concept of the Knowledge Organization. In Svieby's approach there are three types of hidden assets: External Structure, Internal Structure and Competence. Svieby pictures the three areas as interlinked circles. His concerns focus on how "Are those circles growing or shrinking" and how knowledge creates interrelationships.
Svieby sees the need to develop an asset monitor to measure value. The monitor is specific to the unique perspective of the organization, since values for intangibles are contextual to each organization. Svieby presents an interesting proposition. He sees the intellectual capital issue as one centered on developing a knowledge-focused strategy. His message is to "See your organization as if it consists of nothing but knowledge and knowledge flows."
Svieby has collaborated with Celemi, a Swedish consulting firm, to develop an organizational simulation called Tango™, which takes participants through the process of mapping their intangible assets and developing a monitoring framework.
Nick Bontis, Director of the Institute for Intellectual Capital Research, discussed two key concepts concerning intellectual capital. He distinguished the intellectual capital "stock" and the organizational learning "flow." The stock is intellectual material that has been formalized, captured and leveraged to create wealth by producing a higher valued asset. The flow is how intellectual capital is disseminated and absorbed. The stock of intellectual capital resources can be wasted if there is not a supporting culture, trust and structure to extend that capital out into the organizational environment.
Bontis also contributed by restating "Customer" capital as "Relational" capital, a more comprehensive category. While relations with customer networks are key to creating intellectual capital, so are the relationships with other strategic partners and other stakeholders.
Bontis tempered the need to first gain favor with the analyst community by pointing out that an intellectual capital audit can be purely for internal use. Even if analysts are not ready for these audits, there is no reason not to start creating them for our own strategic management purposes.
The Handwriting is on the Wall
According to Wendy Bukowitz, the former director of Next Generation Research Knowledge Enterprises Business Unit at Arthur Andersen, the handwriting is on the wall. She discussed her key findings from the Andersen study she led (Knowledge Measurement, Phase Three: Global survey Findings Report - Asia, North America, and Europe).
Bukowitz found that while global opinion differs by degree, the need to measure knowledge for internal management is remarkably consistent. "Whether intellectual capital reporting takes place sooner (five years or less) or later (six years or more), the majority of organizations see it coming. This is more clearly and strongly stated in Europe and Asia than in North America."
Bukowitz made the point that the best way to start an intellectual capital project is to just get started. Identify what you are trying to do, get a toehold and then see what you need to do as you proceed.
Moving Towards National Guidelines For Intellectual Capital
Henrick Jensen, Project Manager (I.C. Accounts) for the Danish Ministry of Business and Industry, discussed his initiative to define a national standard for Intellectual Capital account statements. The project involves a varied group of twenty-three Danish companies, all of whom are committed to publishing IC account statements by 1999. What is common amongst these companies is that they see themselves as competing on knowledge, not products.
Jensen is trying to rapidly develop guidelines in Denmark, which will then be a benchmark to encourage development of "world IC standards." The Danish government sees itself charged to deal with conditions in society and to create a supporting environment for companies to build through innovation.
The political agenda is to motivate change in companies, especially in reference to intangibles, develop methods and guidelines to support such change, and move towards national guidelines. As part of its research effort, the project commissioned a major benchmark study, Intellectual Capital Accounts, which can be downloaded from the internet at www.efs.dk (under Publikationer).
Putting Intellectual Capital In Practice
Leif Edvinsson, Corporate Director of Intellectual Capital for Skandia Assurance has been at the lead of the Intellectual Capital movement for much of this decade. Edvinsson sees that the issue is how we cultivate intellectual capital, not just its measurement. His view is that the issue is about perspective. The focus is not on the past, as is in the case for financial capital, but on the future. Edvinsson's question is: "Is your measurement system blocking you for your future, or is it enabling your future?" What he is referring to is that value creation takes place outside of the domain of the accounting system. "The accounting system at Skandia was holding back the organization, not the organizational structure. Accounting systems had been driving Skandia in the wrong directions, destroying intellectual capital."
Rather than emphasizing the elusive nature of "intangibles", Edvinsson sees "Intellectual Capital" as "one beautiful label for common sense. Intellectual capital's focus is looking for how much potential you have tapped. Are you able to capture the potential? If you don't capture the potential you are destroying shareholder value. IC is about future earnings capture - with a human touch."
Further, Edvinsson views IC as potential, not an object. It is about capabilities and relationships.
Hubert Saint-Onge is responsible for integrating "people development systems" with enabling processes and technology as Senior Vice President for Strategic Capabilities at The Mutual Group of Canada. Saint-Onge was candid in his statement that "Speaking about 'knowledge' and linking it up to performance is a waste of time. What creates value in organizations is changing rapidly. The future of organizations is related to their ability to respond to the organization's changing conditions."
Saint-Onge uses the term "float," which he defined as the difference between the appearance and the adoption of technology. He said we have a clash, in that the time for organizations to adopt has shrunk, but the float for organizations adopting has not. In our era of accelerating change in technology and conditions, the flow of knowledge across the enterprise serves as the basis for accelerated learning. Saint-Onge sees that knowledge leads to organizational learning, which generates knowledge, and that, in turn, leads to the creation of value. We are faced with shrinking windows of opportunity opening, while market challenges are requiring rapid responses.
One of the most striking things at the conference was Saint-Onge's statement that his two key criteria for joining Mutual were its "quotient of collaboration" and their "bandwidth." Having both the openness to collaborate and the technology to support that collaboration leveraged Mutual's ability to more speedily and soundly carry out a recent "due diligence" review during a major acquisition. Collaboration and technology allowed the stock of intellectual capital to grow dynamically and flow as needed throughout the organization, enabling Mutual to have a competitive advantage over other suitors.
Saint-Onge is undertaking its initiative on measurement of intangibles at Mutual, measuring drivers and developing indices. Mutual's managers have bought into this effort on faith, based on Saint-Onge's expectation that its system and interactive databases will successfully be transformed into the desired intellectual capital environment over the next two years.
The conference laid out the basis for the emergence of the intellectual capital movement, the challenges to achieving a commonly accepted framework, and the progress that has been made to date in different organizations. Presentations explicitly or implicitly stated that for an intellectual capital initiative to be successful it must systematically embrace all elements of an organization: i.e., in its living philosophy as an organization, in its knowledge strategy and in its operations. It must resonate in the spirit of its people, be enabled by its structure, and be found in all organizational relationships.
This movement is a response to the requirements of the growing numbers of knowledge intensive organizations. These organizations need new, dynamic frameworks that allow investors and organizational members to determine full value while at the same time nurturing innovation and development.
The experiments with intellectual capital frameworks are beginning to mature, with the work at Skandia, Mutual, the World Bank, in Denmark and by the Brookings Institution becoming the harbingers of the new frameworks, standards and practices for twenty-first century organizations.
Jay Chatzkel is Principal of Progressive Practices, located at 8004 Trevor Place in Vienna, Virginia, USA 22182-4018. He can be contacted at: Phone: (703) 556-4255, Fax: (703) 790-0071, or email: progprac@aol.com