1. Exploring the benefits of Measuring Intellectual Capital. The Aimag case study Exploring the benefits of Measuring Intellectual Capital. The Aimag case study Milano, 14 th September 2007 M. Serena Chiucchi m.s.chiucchi@univpm.it University of the Marche Faculty of Economics “G. Fuà” Department of Management and Industrial Organization

2. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 2 It is the system of Intangible Resources INTELLECTUAL CAPITAL INTELLECTUAL CAPITAL HUMAN CAPITAL HUMAN CAPITAL ORGANIZATIONAL CAPITAL ORGANIZATIONAL CAPITAL RELATIONAL CAPITAL RELATIONAL CAPITAL Competences, Know how, … Structured Knowledge (IT, software, databases, procedures, organizational structure and processes, …) Relationships with the stakeholders Many models for measuring and reporting IC have been proposed (DMSTI 2003; Edvinsson 1997; Sveiby 1997; Meritum 2002…) THE RESEARCH FRAMEWORK: THE THEORETICAL BACKGROUND ICMRS are aimed at: improving IC management in order to positively affect company performance disclosing information on IC to improve transparency There is a progressive convergence of the ICMRS towards common features Recently, several leading IC scholars have underlined the need to focus research on the effectiveness of the proposed theories, on the drivers and on the benefits and drawbacks associated with them (Marr et al 2003; RICARDIS 2005; Cuganesan 2005; Mouritsen and Larsen 2006)

3. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 3 THE RESEARCH FRAMEWORK: OBJECTIVE AND METHODOLOGY “Aimag SpA” - Aimag is a multi utility company which manages services related to water supply and maintenance, the use of energy resources, environmental services management and also the management of public lighting. - Aimag is a medium-sized Italian company (northern part of Italy) - The reasons for Aimag to undertake such a project were to identify its most relevant intangible assets, to understand what the company could do in order to improve their quality and quantity and to disclose this hidden value to company stakeholders and so improve its transparency. This research addresses the call for empirical investigation of the effectiveness of ICMRS and analyzes the benefits associated with its design and implementation by proposing a constructive longitudinal case study

4. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 4 The intellectual capital measurement system is action oriented: THE DESIGNED IC MEASUREMENT SYSTEM: STRUCTURAL FEATURES INTANGIBLE RESOURCES (“a potential to create value”) ACTIVITIES that create and develop intangible resources VALUE Activity Effectiveness and Efficiency Indicators i.e.: renewal rate or growth rate of intangible resources such as competences, structured knowledge, relationships with stakeholders, … i.e. EVA, market share, estimated ROE growth trend, income from new business, … The IC MeasurementSystem Intellectual Performance Indicators Overall Performance Indicators

5. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 5 Translation of company strategy into a strategy for creating and developing IC Translation of company strategy into a strategy for creating and developing IC (strategic and organizational analysis) THE IMPLEMENTATION PROCESS (2004-2005): THE DEVELOPMENT PHASE Mapping Intagible RESOURCES  Establishing INDICATORS  Mapping ACTIVITIES  Establishing INDICATORS - Document Analysis – Semi-structured interviews - Focus groups - Analysis of the knowledge creation and transfer process and structured knowledge rating Project team (researchers – project leader and his assistants) Heads of the organizational units PROCESSPROCESS ACTORSACTORS - Personnel surveys: e.g. knowledge of strategic software, software scope, user satisfaction, quality of the workplace relationships, … Internal and external IC reports

6. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 6 THE DEVELOPMENT PHASE (2004-2005) MAPPING CRITICAL INTANGIBLE RESOURCES HUMAN CAPITAL ORGANIZATIONAL CAPITAL RELATIONAL CAPITAL  Competences  - basic  - managerial  - excellent  - ad hoc  Capacity of retention  Quality of the workplace relationships:  - Motivation  - Trust  - Responsibility  - Communication  - Aptitude for teamwork  - Alignment with strategy  - Involvement in decisions  Information system  Software and databases  Strategic software and database  Procedure  Manuals  Product catalogues  Patents  Organizational processes and structure  Relationships with utility customers, water supply and …)  Relationships with the technical municipal officers  Relationships with new service customers  Relationships with non- shareholder municipalities  Relationships with the Local authorities (ATO, AEEG, ARPA, …)  Relationships with other organizations (artisan associations, cooperatives, etc.)  Relationships with suppliers  Relationships with trade unions and associations  Relationships with educational institutions

7. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 7 THE DEVELOPMENT PHASE (2004-2005) INTELLECTUAL PERFORMANCE INDICATORS HUMAN CAPITAL ORGANIZATIONAL CAPITAL RELTIONAL CAPITAL General data - Employees’ average age - Education - Years of seniority - … Competences - Managerial competence level - Years’ experience in excellent competences - Number of people who own excellent competences - Number of people being trained in excellent competences - …. Loyalty - Turnover index broken down by cause - % of newly hired employees - … Workplace relationships - Quality level of the workplace relationships (expressed on a numerical scale of 1 to 5) - … Information system Infrastructure - % of network with CDN, HDSL, wireless, or fiber optics technology - … Software - % of significant IT needs being met - Level of satisfaction - Number of individual/number of official software packages - Average age - Average age of latest version - … Databases and Procedures - Number of databases - Average monthly access rate - Number of procedures for new services - Degree of up-datedness of the total quality procedures - … Organizational structure - Number of new positions created - Number of coordinating positions - Number of working groups - … General data - % newspaper articles with positive, negative or neutral opinion Relationships with utility customers - Average service profit margin - % Service commitment met - Level of satisfaction - … Relationships with new service customers - New services turnover and number - Rate of customer loyalty - … Relationships with technical municipal officers - Level of satisfaction … Relationships with suppliers - Supplier turnover - Average costs per supplier - … Relationships with educational institutions - Number of interns

8. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 8 THE DEVELOPMENT PHASE (2004-2005) ACTIVITIES AND EFFICIENCY INDICATORS ACTIVITIESINDICATORS Training activities (broken down according to objective; for example, managerial, excellent competences, etc.) - Number of hours per capita - Cost per capita - Satisfaction level of learners … On-the-job-training activities for managerial competences - Number of hours per individual in training - Cost per capita Problem solving activities - Frequency of departmental meetings Activities to improve and update software - Number of hours per software and average cost - Average frequency of up-dating Activities to convert individual software packages into official company software - Number of hours to “officialize” software and average cost Activities geared to knowledge structuring (procedures, databases, etc.) - Number of hours to structure procedures/data­bases … - …- …

9. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 9 THE DEVELOPMENT PHASE (2004-2005) THE EXTERNAL INTELLECTUAL CAPITAL REPORT - In 2005 Aimag published its IC Report which contains numbers, descriptions and images referred to its IC - In 2005 Aimag won the Oscar di Bilancio for SMEs with a special mention for the innovation and increase in transparency brought by its IC report - Objectives: to be as transparent as possible allowing all the stakeholders to gain a deeper understanding of the company and of its knowledge management strategy, to become familiar with the company strategy with regard to relationships and with how it intends to improve them, etc.

10. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 10 System consolidation survey repetition, indicator selection- fine-tuning change, search for a concise and effective report format THE IMPLEMENTATION PROCESS (2005-2007) THE CONSOLIDATION AND RE-FOCUSING PHASE Greater autonomy on the part of the company researcher: non participant observer Development of a new managerial tool for measuring the IC of a co-operative partner and of an “ad hoc” IC report specifically addressed to the co-operative partner The company did not publish any other IC Report the company understood the benefits were predominantly related to the use of an ICMRS as a managerial tool

11. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 11 ANALYSIS OF THE CASE FROM A LONGITUDINAL PERSPECTIVE - It becomes real and is given existence within a company through many “forms”: meetings, focus groups, surveys, interviews, managerial tools - It causes changes on company routines and culture the ICMRS IS NOT SIMPLY AN ACCOUNTING PHENOMENON IT IS A MANAGEMENT CHANGE PHENOMENON THE BENEFITS OF THE ICMRS ARE RELATED TO - the design and implementation process - ICMRS use as a managerial control tool - the disclosure of IC information (IC Report) THE ICMRS AT AIMAG EXISTS AND IS IN CONSTANT EVOLUTION, MAGMATIC… THE PROCESS IS SELF-FEEDING

12. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 12 BENEFITS OF THE ADOPTION OF AN ICMRS  Diffusion within the company of an INTELLECTUAL CAPITAL PHILOSOPHY -the ICMRS has increased managerial attention to and care of IC -the ICMRS has promoted greater sharing of strategy and strategy alignment THE BENEFITS RELATED TO THE DESIGN AND IMPLEMENTATION PROCESS  Re-orientation of the company decision making process and different allocation of company resources -More systematic and “rational” information on the efforts and potential results of investing in IC  More rational management of personnel, organization and relationships -By defining objectives, initiatives and indicators for monitoring THE BENEFITS RELATED TO THE USE AS A MANAGERIAL CONTROL TOOL  Evolution of the managerial control system -Besides the ICMRS tools a balanced scorecard has been developed

13. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 13 BENEFITS OF THE ADOPTION OF AN ICMRS - NEW OR HIGHER COMPETENCES (increase in training for employees) - BETTER WORKING ENVIRONMENT (structuring of information that supports jobs & initiatives stimulated by the analysis of the quality of the workplace relationships) - NEW ORGANIZATIONAL CAPITAL (structuring of information, of surveys and the creation of new managerial tools) - DEVELOPMENT OF NEW RELATIONSHIPS (competences analysis  discovery of excellent competences  sale of new product) - STRENGTHENING OF THE EXISTING RELATIONSHIPS (mapping of relational capital  monitoring of new relationships - technical municipal officer, co-operative partner) CREATION OF NEW IC ACTIONS UNDERTAKEN TO IMPROVE THE MANAGEMENT OF EMPLOYEES AND OTHER STAKEHOLDERS TO CREATE VALUE FOR THE COMPANY, CREATED VALUE ALSO FOR THE STAKEHOLDERS

14. Exploring the Benefits of Measuring IC … - M.S. Chiucchi 14 BENEFITS OF THE ADOPTION OF AN ICMRS  Improvement of corporate transparency THE BENEFITS RELATED TO IC DISCLOSURE  Help in managing the relationship with a specific stakeholder: a co-operative partner  Improvement of corporate image and name recognition in Italy THE DISCLOSURE TRADE-OFF IS STILL AN OPEN ISSUE FUTURE RESEARCH - Extend the model to other Italian SMEs - Test its effectiveness and explore its benefits and drawbacks to have greater support for the results obtained