Chapter 3 / intellectual capital 71
numeration, as every measure deemed relevant is turned into the official measurement system (Eccles and Nohria 1992).
The second approach is to develop measures whose potential benefits outweigh the expense or difficulty of data collection. The rationale is to keep things simple and to avoid information overload by developing a few measures to help managers gauge the state of affairs. This approach runs the risk of being too superficial as it does not tell a manager why an outcome may have occurred and how to incorporate the lessons learnt into the system.
The third approach to human resource performance is the use of benchmarking.
This involves a comparison of selected performance indicators with other firms in the same industry. It can help managers to establish whether certain human resource prac- tices are within or outside a given norm in a particular sector so that they can take appropriate action. The most common form of human resource benchmarking is salary surveys. Benchmarking does have its limitations. There can be a difficulty in find- ing standard and acceptable indicators and a reluctance within companies to divulge sensitive information. It can be a time-consuming and expensive process and may pro- mote a culture of imitating competitors’ practices rather than encouraging innovative
‘leading-edge’ practices. Also, the data collected does not provide the highly prized (qualitative) information of the processes that enabled certain outcomes to occur.
Clearly the same issues are likely to be apparent if a common benchmarking framework for intellectual capital is developed. At the current time, a number of frameworks for intellectual capital have been forwarded but none has been universally accepted.
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● Does it add value to the customers?
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● Can it offer potential for the future?
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● How can one interpret it during a recession?
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● Does it provide a unique competitive advantage?
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● Is it sustainable over some years?
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● Is it firmly anchored within the organisation?
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● Does it engender a proactive transformative approach?
In 1992 Robert Kaplan and David Norton (1992) developed the first approach to intellectual capital that took into account a number of perspectives apart from the traditional financial one. They suggested that a ‘balanced scorecard’ that included a customer perspective, a financial perspective, an internal business perspective and an innovation and learning perspective was likely to provide senior managers with a fast single report on organisational performance. This approach has become popular, as shown in Figure 3.3, since it provides management with extra internal indicators to establish cause-and-effect relationships and examine performance drivers. However, it is less appropriate for external reporting.
Critical thinking and reflection
Using the balanced scorecard approach, how would you go about measuring the less tangible dimensions such as the ‘internal business process’ perspective in your organisation? what do you see as potential difficulties in comparing these measures historically? in your opinion, how realistic is the use of the balanced scorecard to report performance across an industry? what are the pitfalls of an industry benchmarking exercise in this area?
Innovation and learning perspective
Financial perspective
Vision and stategy
Internal business process perspective Customer
perspective
Figure 3.3 The balanced scorecard (from kaplan and norton 1992)
Chapter 3 / intellectual capital 73 In 1993, Leif Edvinsson reported the ‘hidden’ intellectual assets of Skandia AFS as a supplement to the annual report. It was the first time that the term ‘intellectual capital’
was used rather than the accounting term ‘intangible assets’ (Edvinsson and Malone 1997). Using the intellectual capital framework shown in Figure 3.4, Skandia went on to develop the ‘Skandia Navigator’ for managing intellectual capital. The aim of managing these invisible assets was to create further sustainable value for the organisation. The intellectual capital reports published subsequently in the accounts provided concrete display of different indicators of intellectual capital:
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● financial focus;
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● customer focus;
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● human focus;
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● process focus;
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● renewal and development focus.
Dow Chemical was another pioneering company to measure intellectual capital at this time and its efforts were based on a similar framework forwarded by Petrash (1996).
The dotted lines between the three major forms of intellectual capital (see Figure 3.4) depict the dynamic management of these assets. Dow Chemical collaborated with Skandia and based its definition of intellectual capital on this simple formula:
Intellectual capital = human capital + organisation capital + customer capital
There has been a growing trend towards developing a single index for intellectual capital rather than reporting a multitude of differing indicators. Roos et al. (1997) found Skandia used 24 different indicators to measure intellectual capital. They pro- posed grouping the different indicators together into an ‘intellectual capital’ index.
Such an index would encourage managers to discuss any areas that were uncertain and enable benchmarking to occur.
Lowendahl (1997) provides an alternative perspective of intangible assets based on com- petence and relational resources, as shown in Figure 3.4. He further divides these entities into individual or collective resources depending on their specific focus. Competence is the ability of the individual or firm to do things. In contrast, relational resources are based on the reputation, client loyalty and reputation of the firm or individual.
As shown in Figure 3.4, Sullivan (1998) develops a model primarily based on human capital. He defines human capital as the capabilities of employees, contractors and sup- pliers to solve customer problems. This capability is based on collective experience, know how and skills of employees. The human capital is supported by structural capital such as computers, information systems and physical buildings. Effective management of the human capital is likely to lead to increased intellectual assets and intellectual property. Another similar framework is proposed by Annie Brooking (1996) based on four aspects of intellectual capital: market assets (such as brands, customers, dis- tribution channels and backlog), human-centred assets (problem-solving abilities), intellectual property assets (such as patents, trademarks and copyrights) and infrastruc- ture assets (such as culture, processes, databases and communication systems).
Human capital
Value
Organisational capital
Customer capital
IC framework by Petrash (1996)
Human capital Structural capital
Customer capital Organisational capital
Innovation capital Process capital Intellectual
capital
IC framework by Edvinsson and Malone (1997)
IC framework by Lowendahl (1997) Competence
Relational
Individual
Collective
Reputation Relationships Intangible
assets
Individual
Collective
Loyalty Databases Procedures Technology Knowledge Aptitudes Skills
The market The
systems
The people
IC framework by the Danish Confederation of Trade Unions (1999)
Market assets
Human-centred assets
Intellectual
capital Intellectual property
assets Infrastructure assets IC framework by Brooking (1996) Intellectual
assets Documents
Drawings Programs
Data Inventions
Processes
Intellectual property
Patents Copyrights Trademarks Trade secrets Human
capital Experience Know how
Skills Creativity
IC framework by Sullivan (1998)
Figure 3.4 Sample of varying intellectual capital frameworks
Chapter 3 / intellectual capital 75 In comparing the different frameworks forwarded, one needs to be mindful of the assumptions underlying them. For instance, is the goal of the measurement framework (such as Sullivan) to enable managers to extract value from the know how of human capital and possibly lead to higher profits? Or is the goal focused on value creation which is concerned with the creation of knowledge through managing training and development, developing relationships and managing organisational culture?