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Management of Intellectual Capital- Part I |
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Knowledge
has become the most important fact of economic life of organizations.
Today the concern of organization along with earning profits and being
economically viable is to retain and exploit the talent of the people who
work in the organization; to gain the loyalty of the customers it serves
and learns from; to estimate and increase the value of its brands,
copyrights, patents and other intellectual capital; to harness the
collective knowledge embodied in its systems, to keep its management
techniques, and history unique to itself. The above-mentioned are vital
assets that are rarely managed and almost never managed skillfully; this
is more true in the Indian context.
Need for Management of Intellectual capital:
With the share of intangible assets increasing in the
total assets of the organization, the traditional system of accounting and
reporting the performance of the firm becomes irrelevant in the present
context. However, most of the firms follow a traditional system of
accounting in their organization where only the tangible assets seem to
play a more dominating role in the value creation process.
Change in Paradigm: Figure 1
However,
there is a constant need for creating awareness and see to it that there
is need that is generated at various levels of the organization to manage
intellectual capital in a strategic manner. This has been mainly the
result of the shift in paradigm from increasing role and importance of
intangibles in every organization. The change in paradigm is given in
Figure 1. It is necessary at this stage to briefly look at the evolution
of this concept as it is relatively new even in the western world. The
Table I gives a brief overview of the same.
Table
I: Evolution of Intellectual Capital Management
Having
discussed the evolution, now it's time to look into the basic
classification of the total assets of the organization. Mainly the value
for any firm whatever may be its basic function originates from its
processes. These may be considered as the total assets of the firm. A part
of the total is always in the form of tangible assets. These are the
physical infrastructure used in operations and the monetary investment
made to start and operate the functions of the organization.
More
important of the assets is that which most of the organizations ignore and
fail to manage. These are in the invisible form and intangible. These
extend from human capital to organizational capital to that of the
relational capital. They are varied and most difficult to assess and
measure though most of the organizations deal with them on a day to day
basis. The basic source of value for the firm is shown in Figure 2.
The relevance of the intellectual capital which is a
wider term than simple knowledge management has emerged from the ever
increasing competition faced by firms from the emerging globalization of
the world economies. The need to differentiate their firm and products
from that of the competitor, to increase the value of the firm, to retain
the existing base of the customers and to enhance the base further are
some of the drivers of the ICM.
Figure 2: Value of a Firm
Meaning
of Intellectual Capital:
Intellectual
capital was defined and classified in several ways by several researchers
since the concept gained importance. Edvinsson defined it as
"Knowledge that can be converted to value"[Edvinsson 1991].
Intellectual capital was the term, which was most used
in the early eighties and gained prominence in the late nineties. However,
Karl-Erik Sveiby first proposed a classification for Intellectual Capital
into three broad areas of intangibles namely Human capital, Structural
capital and Customer capital [Sveiby, 1989]; a classification that was
later modified and extended by replacing customer capital by relational
capital by Dr. Nick Bontis [Nick, 1991].
The International Federation of Accountants (IFAC) offers a slightly
different and broader classification as given below in Table II.
Human
capital
includes all the aspects related to the employees in the organization,
their training, development, their contribution to the organizational
development and also value creation, generation and sustenance. Thus, just
by having a large work force with good qualification and experience does
not amount to being efficient, Value creation Efficiency depends mainly
depends on the contribution of these employees towards value creation of
the organization(Edvinsson, 1997).
The Structural Capital refers to the organizational
structure, its vision, mission, infrastructure, Intellectual property that
the firm owns and the like.
Whereas, Customer or Relational capital is all
about the contribution of the clientele towards the organizational growth-
the amount of revenue generated through large customers, their commitment
levels measured thru repeat business, networking and the like is included
in this classification.
Though there are vast differences and varied opinion among
researchers and pioneers in the area of intellectual capital about the
items that should be included in each and the measurement tools that can
be used by the firms to report these, there is a general consensus on the
broad classification of Intellectual capital.
Having defined and classified the intellectual capital the
next logical question that arises is how is IC going to be measured? We
will answer this question in the next section.
References and Notes: |
Management of IC in your Organization:
The implementation of
the intellectual capital management requires building a model for its
functioning.
There are three different ways of moving ahead to develop a
model
1. Adjusting the conventional methods of accounting to
accommodate the new parameters and variables. Broadly considering the above aspects, the choice of method and model depends
on the following parameters [Steve 2001]. The IC Management Process:
The following aspects should be taken into account before
starting the process of management.
First, corporate strategy is guided by a vision of how a
firm, as a whole, will create value. Thus, both the tangible and intangible will
help in value creation and value realization. It is for the organization to
reinvent and realize the value of incorporating the intangibles in the
mainstream valuation and accounting.
Second, corporate strategy is a system of interdependent parts. Its success
depends not only on the quality of the individual elements but also on how the
elements reinforce one another.
Third, corporate strategy must be consistent with, and capitalize on,
opportunities outside the company.
Fourth, the benefits of corporate membership must be greater
than the costs.
Waiting for the right strategy discovery and then
implementation is not advisable, as there is no one way of arriving at the right
one. One has to get started first to develop any kind of strategy.
In the second step identify the variables that could be
measured.
Then decide on the methods that would be used to value them,
and then the estimation of the actual value is done.
Finally, it is accounted for in the company's annual
financial statement and therefore reported through formal channels to those who
decide the fate of the corporation: stakeholders, regulators and the society at
large.
Implementation of the model developed is more relevant than
the model itself. Therefore, usefulness of the model must be tested before
implementation. Moreover, the model depends on the nature of the industry and
its basic purpose. The IC model for the manufacturing unit is very different
from that of a service oriented industry.
This Table 1 illustrates a few basic differences in approach.
2. Retain traditional accounting and add new measures to account for
Intellectual Capital
3. Abandon old methods completely and have a new method
a. It should be auditable and reliable
b. It should not impose a large measurement overhead
c. It should facilitate strategic and tactical management
d. It should generate the required information to the shareholders
Table 1: Differences in Approach towards ICM
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Service Oriented Industry |
Manufacture / Process Oriented Industry |
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Despite the increasing
recognition of intangible assets within the corporate world, integrating them
with the strategic planning agenda inside a corporation often remains elusive.
Following are some of the common challenges faced by firms in Indian business
environment.
Lack of proper accounting and reporting may result in lack of
understanding by the investors and capital market to value the wealth of the
firm in its truest sense. This may either result in under valuation of the
firm's value or it's over valuation.
Inefficient or no valuation may cause significant damages to the
stakeholders and the company itself. Most companies do not have the knowledge of
what intellectual capital is; leave alone the aspect of managing it.
The solution lies in creating awareness on a large scale on
the opportunities that await for those who manage their intangibles. Awareness
should be concentrated in the areas of components that require measurement and
valuation and a standard format to report the intangibles value.
One ideal case in India is that of Infosys Technologies Ltd.,
which can be considered as an example for best practice in Intellectual Capital
Management (ICM).
Infosys is one of the pioneers in valuation and reporting of
intangibles in India. The annual report of the company incorporates these as an
invaluable asset of the company. The intangible assets of the company are
classified into four major categories – human resources, intellectual property
assets, internal assets and external assets.
Human resources
Human resources represent the collective expertise, innovation, leadership,
entrepreneurship and managerial skills endowed in the employees of an
organization.
Intellectual property assets
Intellectual property assets include know-how, copyrights,
patents, products and tools that are owned by a corporation. These assets are
valued based on their commercial potential. A corporation derives its revenues
from licensing these assets to outside users.
Internal assets
Internal assets are systems, technologies, methodologies,
processes and tools that are specific to an organization. These assets give the
organization a unique advantage over its competitors in the market place. These
assets are not licensed to outsiders. Examples of internal assets include
methodologies for assessing risk, methodologies for managing projects, risk
policies, and communication systems.
External assets
External assets are the market-related intangibles that enhance
the fitness of an organization for succeeding in the market place. Examples are
customer loyalty (reflected by the repeat business of the company) and brand
value.
Thus the company comprehensively encompasses all the aspects of intangibles.
The Intangible asset score sheet which is used at Infosys is
given below in Table 2
Table 2: Intangible Asset Score Sheet at Infosys Ltd. for the year 2002-03
|
Our
Clients |
2002-2003 |
Our
Organization |
2002-2003 |
Our
People |
2002-2003 |
|
Growth/Renewal |
|
IT
investment / value added (%) |
4.31 |
Education
Index of all staff |
44972 |
References:
1. Steve Pike, Anna Rylander, Goran Roos (2001),
"Intellectual Capital Management and Disclosure", in The Strategic
Management of Intellectual Capital and Organizational Knowledge: A selection of
Readings, (ed) Nick Bontis and Chun Wei Choo, Oxford University Press, New
York.
2. Infosys Technologies Ltd., Annual Report 2002-03
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