" Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted".

--Albert Einstein

Origin of the ICM movement

In the past few decades, management thinkers have devised concepts for organizational excellence that were mainly based on ' managing resource efficiency'. In this revolution of sorts, managing an organization's intellectual capital has seen rise in the past decade. It is common knowledge that today the growth drivers of business are not the conventional factors of production but more influential than those the intangible assets and resources of a company. It is those invisible attributes that a company enjoys which makes it more profitable, more efficient and more successful.

Managing these intangible factors is difficult. There has been quite an amount of research in the field since 1990 when the term "intellectual capital" was first coined and it has contributed to an increased awareness and importance given to these assets in the corporate sector. Still companies are grappling with the idea of measuring and consequently managing these.

Like with most successful management concept in the 20th century, the curiosity towards Intellectual capital was first aroused with a study by Hiroyuki Itarni. Later the credit of carrying forward the Intellectual Capital movement goes to many great thinkers and management gurus like Karl-Erik Sveiby (the author of the world's first book on 'Knowledge Management'), Brian Hall, Thomas Stewart, Edvinsson (the man who coined the term 'Intellectual Capital').

Nomenclature & Definition

Intellectual capital has defined by Brooking as "...the term given to the combined intangible assets which enable the company to function" or more simply by Edvinsson (the man behind Skandia Navigator) as "knowledge that can be converted to value".

Intellectual capital is often, indifferently also referred to by various other terms such as intangibles, intellectual assets, (sometimes limited to) human capital, organizational knowledge etc. However, while the term 'intangibles' can be considered to be equivalent in scope to intellectual capital, other terms vary in scope and focus.

Components of intellectual capital

Karl-Erik Sveiby in his 1989 book titled "The Invisible Balance Sheet" first proposed a classification for Intellectual Capital into three broad areas of intangibles namely Human capital, Structural capital and Customer capital - a classification that was later modified and extended by replacing customer capital by relational capital.

Human Capital - Structural Capital - Customer Capital

Human capital signifies the individual and collective experience, knowledge, competencies and skills of the manpower in an organization.

Structural capital comprises of the intangible infrastructure that exists in an organization. This includes the organization's processes, manuals and policies, software, trademarks, patents etc.

Customer capital includes the relationship dynamics that an organization enjoys with its customers. This includes customer loyalty index, satisfaction levels, repeat business. Customer capital was separately shown in the structure to indicate the valuable role that customer relationships play in an organization's life.

However, as mentioned above customer capital as a classification was later extended and renamed as 'Relational capital' by Dr. Nick Bontis, Director, Institute for Intellectual Capital Research to include the whole gamut of external relationships an organization shares - with vendors, partners, stakeholders.

It should be mentioned here that human capital as a part of intellectual capital faced some objections as casting itself as an asset of an organization. This was due to the awareness that the 'human capital' is never owned by the organization; only 'rented' for its benefit. Nevertheless the importance of human forces and their impact on organizations performance today is unanimously agreed upon.

What gets measured gets managed!

With knowledge now almost universally recognized as the primary factor of productivity and efficiency, ICM is practiced in many organizations in some way or the other. Companies realize the importance of Intellectual capital forces affecting their performance. However the very nature of these assets make them difficult to measure/ quantify much less. To help organizations measure their intellectual capital, certain measurement models and methods have been put forth. This helps the companies manage their intellectual resources and work towards optimizing the intellectual capital mix.

For measuring intellectual capital, there have been research on two categories of techniques - a global method of calculation where the whole gamut of an organization's intellectual capital assets are given a value and the individual asset approach.

An example of the global method is the 'MV (market value) to BV (book value)' technique where the market value of an organization determined by the external business environment is compared with the book value of the firm as shown in its books. The difference between the two is assigned as the intellectual capital value of the firm. As is obvious, the method is not practical or feasible to use - 1) because it does not help the organization ascertain which assets are performing better than the rest and where the organization should focus its energies and 2) the very market value of the company is determined by factors like the stock market, general economy health and perceptions, government etc - most of which either unrelated to the organization's working and/or are totally out of control for the business.

Another category of measurement models follow the individual components: asset by asset method. Here assets can be identified and measured individually and with relation to the whole organization. The relevance and feasibility of this approach to measuring Intellectual Capital (or in case components of Intellectual Capital) have led to the development of measurement models the more popular of which are given below:

1)The Skandia Navigator:
Contributed to the ICM revolution by Edvinsson & Malone of Skandia, a Swedish insurance company. This company was the first to come out with a Intellectual Capital statement with its annual report. The Navigator has 4 'areas of focus' -
a) The customer focus
b) The process focus
c) The renewal & development focus and most importantly (and this is indeed shown at the center)
d) The human focus.

The model also takes into account the financial focus that is denoted by the financial health and capital of the company thereby including both tangible as well as intangible forces of capital together. Skandia navigator is based on the same framework as that of the Balanced Scorecard.

Some more known models are:
2)The Balanced Scorecard by Kaplan & Norton

3)The Brooking "Dream Ticket" Approach (this is more of an intellectual capital auditing methodology)

4)Intelligent Asset Monitor by Karl-Erik Sveiby

Intellectual Capital Report

The measurement and calculation culminates into an Intellectual Capital Report, a statement of the intellectual capital of an organization. Organizations are answerable to their stakeholders - their customers, employees, partners who place their time, money and trust in it. With traditional factors of production and growth drivers no more as relevant as the people competency levels and business processes, they need a vehical to display their 'actual value' and an ICR provides this opportunity. An ICR helps an organization manage its competencies and help in its knowledge management initiatives while serving as an effective tool for building relationships with employees (they know the value of the company they are working with), shareholders (they know their money is made good use of) and other stakeholders (they understand the organization's commitment to creating value for them).

Why report separately?

Stakeholders need to be assured that their investment are being handled well enough to give them expected payoff in future and traditional accounting statements do little to give them this information in context of intellectual capital. Traditional accounting standards find it difficult to account for several intangible activities and resources of a company even if they happen to be the organization's USP in the market. As mentioned above investments to intellectual capital are seen merely as costs thus denying the company to project the expected benefits from the investments in future (something that would help the company gain trust and confidence of the stakeholders). Hence a different statement in terms of an ICR.

Components

An ICR basically consists of 3 components –
a) vision of the organization and the values that it seeks to follow; the strategic objectives, competencies, critical intangibles or 'dream tickets' (intangible assets that a company cannot do without to achieve its objectives)
b) a summary of the intellectual capital (intangible assets, intellectual resources, intangible activities) and the efforts undertaken by the organization to nurture the IC.
c) 'indicators' or parameters that quantify the intellectual capital. Indicators provide measurable quotients for the audience of the ICR to correctly estimate the value of an organization's intellectual capital and its expected potential and payoff.
Following is an example of intangibles and respective indicators. The type of the indicators is shown as either NFI (Non-financial indicators) and FI (Financial Indicators)

Source: Meritum Guidelines for Intellectual Capital Management

The Navigator incorporates a total of about 30 key indicators in the various areas, which are monitored internally on a yearly basis. The key indicators for customer focus include number of accounts, number of brokers and number of lost customers. The key indicators for process focus include number of accounts per employee and administrative costs per employee. The key indicators for human focus include personnel turnover, proportion of managers, proportion of female managers and training and/or education costs per employee. The key indicators for development/renewal focus include satisfied employee index, marketing expense/customer, share of training hours.

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