Management of Intellectual Capital - Part II


By

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


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.
2. Retain traditional accounting and add new measures to account for Intellectual Capital
3. Abandon old methods completely and have a new method

Broadly considering the above aspects, the choice of method and model depends on the following parameters [Steve 2001].

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

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.

Table 1: Differences in Approach towards ICM

Service Oriented Industry

Manufacture / Process Oriented Industry

  • Relative stress on human capital
  • Relative stress on organizational / structural capital
  • Relational and customer capital comes next in priority
  • Human capital comes next in priority
  • Very little use of physical resource (tangible assets) and organizational capital
  • Very little use of relational capital
  • People centric organization
  • Process centric organization
  • Reputation, relation and brand value very important for growth and to sustain advantage in the competitive environment
  • Quality, standardization and cost plays more important role in growth and to sustain advantage in the competitive environment
  • Most of investment goes towards training and development of human capital
  • Most of investment goes towards innovation of new products and process to reduce cost

Challenges and Opportunities:

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.

  • Often there is a fundamental lack of awareness of the nature (or even the existence) of intangible assets, and thus a failure to recognize the value and opportunity of managing them.
  • Knowledge and ideas throughout organizations remain un-captured and un-developed.
  • Tangible asset management paradigms and managerial competencies vary from firm to firm.
  • The functional management of strategic assets is done whereas strategic management of intellectual capital is neglected.
  • There is a lack of intangible asset leadership

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
(External Structure)

2002-2003

Our Organization
(Internal Structure)

2002-2003

Our People
(Competence)

2002-2003

Growth/Renewal

Revenue growth over previous year (%)

Percentage of revenue from image enhancing clients

Percentage of revenue from exports

No. of new clients added during the year

Efficiency

Sales / Client in Rs. Lakhs

Stability

Repeat–business revenue/total revenue (%)

Sales from the top clients / total revenue (%)

Sales from the largest 5 clients / total revenue (%)

Sales from the 10 largest clients / total revenue (%)

Million dollar clients (Nos.)

5 million dollar clients (Nos.)

10 million dollar clients (Nos.)

20 million dollar clients (Nos.)

30 million dollar clients (Nos.)

40 million dollar clients (Nos.)


39

56


98

92



1050



92

5.823.4


37.3


115




41

16

9

3

2

IT investment / value added (%)

R & D / value added (%)

Total investment in organization / value added (%)

Average proportion of support staff (%)

Sales per support staff (in Rs. Lakhs)

Average age of support staff (in years)

4.31


0.47


7.20



8.9


316


32.1

Education Index of all staff

Value added per software engineer (in Rs. Lakhs)

Value added per employee (in Rs. Lakhs)

Average age of all employees (in years)

44972


26.06



23.73



26.60


Source: Infosys Annual Report

Thus, it can be concluded that one model may not suit everyone's needs, therefore it requires customization as per the specific requirement of the organization.

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
 


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 11, 2006

     

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