Management of Intellectual Capital- Part I


By

Dr. G Bharathi Kamath
(Ph.D. from Osmania University, Hyderabad)
Asst. Professor - Economics
ICFAI Business School
Nirlon Complex, Goregaon (East), Mumbai
 


Introduction:

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

Year

Event

Person(s)/ Organization(s)

1987-89

Books about knowledge assets and "the invisible balance sheet".

Karl- Erik Sveiby, Debra Amidon and Charles Handy.

1991

World's first Director of Intellectual Capital at Skandia.

Leif Edvinsson.

 

First cover story on IC in Fortune.

Thomas A. Stewart.

1993

IC Navigator and the prototype first IC Report.

Skandia.

1994

2nd cover story on IC in Fortune.

Thomas A. Stewart.

1995

Balance Score Card concept expanded.

Kaplan and Nortan.

 

First public IC Report.

Skandia.

1996

First IC of Nations report.

C. Stenfelt.

1997

World's first Ph.D. disputation on IC.

Dr. Nick Bontis.

1998

First large academic IC conference.

Dr. Nick Bontis.

 

First IC accounting conference.

Professor Baruch Lev.

1999

Measurement project on IC.

EU.

2000

First guidelines of IC accounting.

Government of Denmark.

2001

First major report on Intangible Assets.

HLEG/EU.

 

Report "The Unseen Wealth".

Brookings Institute.

 

World's first professorship on IC.

University of Lund: Leif Edvinsson.

Since 2001

Major research work all across the world gets concentrated in this major area. Various case studies, reports, papers, analysis, journals start appearing every day on these issues.

A minimum of 300-450 major works across the globe published on or around the concept of Intellectual capital.


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.

Table II: Classification of Intellectual Capital, IFAC (1998)

Human Capital

*
Know-how
* Education
* Vocational qualification
* Work related knowledge
* Occupational assessments
* Work related competencies
* Entrepreneurial Úlan, innovativeness, pro-active and reactive abilities, changeability's

Relational (Customer) Capital

*
Brands
* Customers
* Customer loyalty
* Company names
* Backlog orders
* Distribution channels
* Business collaborations
* Licensing agreements
* Favorable contracts
* Franchising agreements

Organizational (Structural) Capital

Intellectual Property

*
Patents
* Copyrights
* Design rights
* Trade secrets
* Trademarks
* Service marks

Infrastructure assets

*
Management philosophy
* Corporate culture
* Management processes
* Information systems
* Networking systems
* Financial relations

                Source: ICS, Research Reports.

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:

1. Edvinsson (1991), the first Director of the Skandia Corporation, USA

2. Edvinsson, L. and Malone, M., (1997), Capital Intellectual, New York: Harper

3. Dr. Nick Bontis, Director, Institute for Intellectual Capital Research, expanded the term to include the whole gamut of external relationships an organization shares - with vendors, partners and stakeholders

4. Sveiby Karl-Erik (1989), The Invisible Balance Sheet, New York
 


Dr. G Bharathi Kamath
(Ph.D. from Osmania University, Hyderabad)
Asst. Professor - Economics
ICFAI Business School
Nirlon Complex, Goregaon (East), Mumbai
 

Source: E-mail July 7, 2006

     

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