KNOWLEDGE MANAGEMENT (KM) Session # 18

IC vs. Traditional Measures Traditional IC Tangible Intangible Events Process Past only + Future Cost Value Cash Non-financial Periodic Ongoing Statutory Management

GAAP Unmanaged GAAP Managed Rs. 5M GAAP Managed Rs. 50M ThenNow Rs. 45M Intangible Value Weaknesses in GAAP for IC Accounting For Sale SOLD

Intellectual Capital Model Customer Capital Structural Capital Human Capital IC

Intellectual Capital Components Human Attitude Competencies Education Knowledge Skills Structural Copyright Corporate culture Design rights Financial relations Information technology infrastructure Management process Service marks Trade secrets Trademarks Customer Brand Company name Customers Distribution channels Franchise agreements License agreements Loyalty

Models of IC measurement (Sveiby, 2001) Citation-weighted patents Technology broker Calculated intangible value Inclusive valuation methodology IC Measurement Knowledge capital earnings Human resource costing and accounting Economic value added Market to Book Value Investor assigned market value Tobin’s Q Accounting for the future Total value creation Intellectual asset valuation Value explorer Value chain scoreboard Skandia Navigator Human Capital Intelligence Balanced Scorecard Intangible Asset Monitor IC index

Three commonly cited multiple variable Models

Financial capital Human capital Customer capital Process capital Intellectual propertyIntangible assets Market value Intellectual capital Structural capital Organizational capital Innovation capital The Skandia value scheme (Edvinsson, 1997)

Human capital For example: knowledge; skills; capacity for innovation; ability to execute tasks; organisational values, culture & philosophy Not owned by the organisation, volatile. Structural capital For example, hardware; software; databases; organisational structure; patents; trademarks Owned by the organisation, can be traded Intellectual capital For example, applied experience, organisational technology, customer relationships that give competitive advantage + = Skandia: forms of capital

Skandia Navigator Reporting Model’s Areas of Focus Finance Customers Humans Processes Renewal and Development

The Skandia Navigator FINANCIAL FOCUS CUSTOMER FOCUS PROCESS FOCUS HUMAN FOCUS RENEWAL/DEVELOPMENT FOCUS OPERATING ENVIRONMENT Source: SKANDIA AFS

Skandia (Edvinsson & Malone) interest in IC: purpose identify and enhance visibility and measurability of intangible and soft assets improve knowledge transparency and knowledge technology use cultivate and channel IC through professional development and IT networking add value to operations through recycling knowledge, increased communication, transfer of skills and applied experience

Illuminating Indicators (1) Use meaningful metrics by sub-category: –lead/lag; output/outcome; stability/growth; Different types: –absolute, ratios, percentages, Customer measures –satisfaction: but of what? –relationships: length / depth –learning: competency stretching

Illuminating Indicators (2) Human capital –skills/experience; qualifications... and growth –demographic profile; turnover Organizational/structural –investment in IT –process quality Intellectual property –brands, trademarks, patents etc. (value, revenues)

Strengths of the Skandia approach The taxonomy for measurement encouraged others to look beyond traditional measures of organisational value. Recognition of role of customer capital: assess customers by type, duration of relationship, role, level of support and success (soft assets). Coverage of organisational structure and processes. Good for benchmarking - especially internally. Stimulates renewal.

Criticisms of the Skandia approach “Value” not expressed in monetary form. Degree of familiarity with value of organisational assets required. Difficulty in translating values into comparative measures. Snap shot approach. Some structural capital measurement criteria make assumptions which may not be the case, e.g. actual use of computers.

Measure of Intellectual Capital Financial 1. Total assets ($) 2. Total assets/employee($) 3. Revenues/total assets (%) 4. Profits/total assets (%) 5. Revenues resulting from new business operations ($) 6. Profits resulting from new business operations ($) 7. Revenues/employee ($) 8. Customer time/employee attendance (%) 9. Profits/employee ($) 10. Lost Business revenues compared to market average (%) 11. Revenues from new customers/total revenues (%) 12. Market value ($) 13. Return on net asset value (%) 14. Return on net assets resulting from new business operations ($) 15. Value added/employee ($) 16. Value added/IT employees ($) 17. Investments in IT ($)

Measure of Intellectual Capital Customer 1. Market share (%) 2. Number of customer (#) 3. Annual sales/customer ($) 4. Customer lost (#) 5. Average duration of customer relationship (#) 6. Average customer size ($) 7. Customer rating (%) 8. Customer visits to the company (#) 9. Days visiting customer (#) 10. Customers/employee (#) 11. Field salespeople (#) 12. Field sales management (#) 13. Average time from customer contact to sales response (#) 14. Sales closed/sales contacts (%) 15. Satisfied customer index (%) 16. IT investment/salesperson ($) 17. IT investment/service and support employee ($) 18. Support expense/customer ($) 19. Service expense / customer / year ($) 20. Service expense / customer / contact ($)

Measure of Intellectual Capital Human 1. Leadership index (#) 2. Motivation index (#) 3. Empowerment index (#) 4. Number of employee (#) 5. Employee turnover (%) 6. Average employee years of service with, company (#) 7. Number of manager (#) 8. Number of women managers(#) 9. Average age of employees (#) 10. Share of employees less than 40 years old (%) 11. Time in training (days/year) (#) 12. Number of directors (#) 13. Number of women directors (#) 14. Number of full-time or permanent employees (#) 15. Average age of full-time or permanent employee (#) 16. Average years with company of full- time or permanent employees (#) 17. Annual turnover of full-time permanent employees (#) 18. Per capita annual cost of training, communication, and support programs for full-time permanent employees ($) 19. Full-time or permanent employees who spend less than 50% of work hours at a corporate facility (#) 20. Percentage of full-time permanent employees (%) 21. Per capita annual cost of training, communication, and support programs($) 22. Number of full-time temporary employees (#) 23. Average years with company of full-time temporary employees (#) 24. Per capita annual cost of training and support programs for full-time temporary employees ($) 25. Number of part-time employees or non-full -time contractors (#), average duration of contract (#) 26. Company managers with advanced degrees: business (%), science and engineering (%) arts (%)

Measure of Intellectual Capital Process 1. Administrative expense/total revenues (%) 2. Cost for administrative error / management revenues (%) 3. Processing time, out payments (#) 4. Contracts filed without error (#) 5. Function points/employee- month (#) 6. PCs/employee (#) 7. Laptops/employee (#) 8. Administrative expense/employee ($) 9. IT expense/employee ($) 10. IT expense/administrative expense(%) 11. Administrative expense/gross premium (%) 12. IT capacity (#) 13. Change in IT inventory ($) 14. Corporate quality goal (#) 15. Corporate performance/quality goal (%) 16. Discontinued IT inventory/IT inventory (%) 17. Orphan IT inventory/ IT inventory (%) 18. IT capacity/employee (#) 19. IT performance/employee (#)

Measure of Intellectual Capital Renewal and Development 1. Competence development expense/ employee ($) 2. Satisfied employee index (#) 3. Marketing expenses/customer ($) 4. Share of training hours (%) 5. Share of development hours (%) 6. Employee’s view (empowerment index) (#) 7. R & D expense/administrative expense (%) 8. Training expense/employee ($) 9. Training expense/administrative expense (%) 10. Business development expense/ administrative expense (%) 11. Share of employees below age 40 (%) 12. IT development expense/IT expense (%) 13. IT expenses on training/IT expense (%) 14. R&D resources/total resources (%) 15. Customer base (#) 16. Average customer age (#) 17. Average customer education (#) 18. Average customer income ($) 19. Average customer duration with company (months) (#) 20. Training investment/customer ($) 21. Direct communications to customer/years (#) 22. Non-product-related expense/customer/years ($) 23. New market development investment ($) 24. Industry development investment ($) 25. Value of EDI system ($) 26. Upgrades to EDI system ($) 27. Capacity of EDI system (#) 28. Ratio of new products (less than 2 years old) to full company catalog (%) 29. Ratio of new product (less than 2 years old) to product family (%) 30. R & D invested in basic research (%) 31. R & D invested in product design (%) 32. R & D invested in processes (%) 33. Investment in new product support and training ($) 34. Average age of company patents (#) 35. Patents pending (#)