intellectual capital: define, understand and capture it

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Intellectual Capital:-Define It-Understand It-Capture It

Mary AdamsPresident

Intellectual Capital Advisors

Association for Consulting ExpertiseFriday, September 18, 2009

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Interesting company?

• Many decades in business• Growth and profits over the years• Great people• Tough 2009 but will be OK• Industry has good outlook• Opportunities for innovation

�Good client, investment, employer?

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Co’s main production facility

• Today is the company’s key competitive advantage

• Started as experiment in 1980’s• Mostly internally-built components• Customized for this business• Never kept track (still don’t) of cost to

build, maintain or operate

�What do you think now?

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Economic value is increasingly intangible

Research: Ned Davis

Components of

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Market Premium

Intangible Book Value

Tangible Book Value

Components of S&P 500® Market Capitalization

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

S&P 500 Market Cap ($ billions)

Market Premium

Intangible Book Value

Tangible Book Value

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This change touches all sectors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Energy

Materials

Industrials

Consumer Discretionary

Consumer Staples

Health Care

Financials

Telecommunications Services

Information Technology

Utilities

Intangible Value as a % of Total Market Capitalization by Sector

1975

2005

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The clearest answers come from the field of intellectual capital

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Value is created when IC elements are combined in a system

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Human Capital

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+ Structural Capital

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+ Relationship Capital

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+ more Structural Capital (that generates revenue)

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+ more Relationship Capital

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This “knowledge factory”grossed $22+ billion in 2008

From: You Can Grow Like Google on YouTube

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Every business has a knowledge factory

Medical

Device Co.

Specialty

Contractor

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Implications for management

Unit or Project

Corp

Division

Knowledge Era:Collaboration/

Innovation

Industrial Era:Hierarchy/

Strategic Control

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Management dualities

Networks �� Org charts

Orchestration �� Command/control

Innovation �� Strategy

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Accounting dualities

Investment �� Capital expenditure

Assessment �� Balance sheet

Indicators �� Income statement

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Implications for consultants

1. A lot of consulting involves helping companies see intangibles ad hoc

�Increase your intangibles skill set

2. A lot of consultants have weak structural capital

�Find the leverage in your firm’s intangibles

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“Technology and especially the internet can really help you be lazy. Find the leverage in the world, so you can be more lazy!” - Larry Page

Intangibles battle cry

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Resources

• Slides will be posted on my blog:www.smartercompaniesblog.com

• Bibliography/discussion:www.icknowledgecenter.com

• Worksheet for knowledge factory:http://tinyurl.com/you-can-grow-like-google

Mary Adams, 781-729-9650adams@i-capitaladvisors.comTwitter: maryadamsica

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Additional Detail

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The org is now a network

Elizabeth Reuthe, and Verna Allee, “Knowledge Management: Move the Case Model From a Snapshot to a Story,” Health Forum Journal, May/June 1999

Value Networks:

Content of connections

Social Networks:

Patterns of connections

Dietmar Offenhuber, Judith Donath, MIT Media Lab, “Comment Flow: Visualizing Communication Along Network Path, 2008

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I-Capex* ($1 trillion/year)

• Intellectual capital expenditures are expensed under today’s accounting

• Should be tracked in a management report• Cost is actually the most concrete piece of

data available about intangibles• Internally, will help with better decisions• Externally, will help tell corporate story

* the new capital expenditure

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IC assessment*

• Like a 360-degree review of the knowledge factory

• Review is by stakeholders (both internal and external)

• Asks whether it is working well today, outlook and risk

• Used for strategy, reporting, M&A* the new balance sheet

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IC Rating assessment output

AAAAAABBBBBBCCCCCCD

-

R

RR

RRRA R

BB RRA

BBB

RBBBBBB

Brand

IP Processes Management Employees CustomersNetwork

Intellectual Capital

Relational Structural Capital

Business Recipe Organizational

Structural CapitalHuman Capital

BBB BBB RRBBB BBB RR

BBRBB

BBBB RRBBBRBBB BBB RBBB BBB -BB BBB

BBRBB BBB

BBRBB BBB

BBB BBB R

AA

BBB A RBBB A R

RBBB

B

RBBB BBB RBBB BBB

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Performance management*

• Uses non-financial indicators • Examples: headcount, customer

demographics, IP mapping, process metrics

• Bottom up for learning• Top down for management and

reporting—key performance indicators (KPI’s)

* the new income statement

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Triangulate intangible performance

Graphic from: http://amath.colorado.edu/outreach/demos/hshi/2000Sum/TaT.html

Cost

Assessment

Indicators