This action might not be possible to undo. Are you sure you want to continue?
Intellectual Capital Measurement Methods
Evolution of economy has caused important changes in activity of companies on the global market. Nowadays we are observing a growth the importance of intellectual resources as an effective tool for increasing corporate competitiveness. This fact has caused the need to manage companies and to measure their performance in a new way. Measuring Intellectual Capital is essential and very important in order to compare different companies, to estimate their real value or even to control their improvement year by year. Also to improve the way in which companies manage its intellectual resources that generate value and give back some benefits in consequences maximizing advantages for the company. Authors like Kaplan and Norton (1996), Stewart (1997), and Kerssens (1999) use phrases like “If you can’t measure it, you can’t manage it” to justify the search for new Measurement Methods.1 But to measure Intellectual Capital is necessary to determine exactly what the Measurement Methods are, which are the best and which the company should choose to evaluate its assets in proper way. Properly using Intellectual Capital Measurement Methods can cause the creation of competitive advantage and in consequence create development of the whole company at the present day.
The Concept and Classification of Intellectual Capital
Intellectual Capital (IC) are an increasingly important part of running a successful business but defining it is a difficult proposition. Intellectual Capital is a issue which is not determined completely. There is not one definition of Intellectual Capital. Different authors give different interpretation of this concept. Moreover many descriptions of Intellectual Capital are quite specific and created by individual companies for use within a specific industry. Edvinson and Malone describes Intellectual Capital as a knowledge that can be converted into value.2 According to them IC encompasses the applied experience, organizational technology, customer relationships and professional skills that provide the company with a competitive advantage in the market. According to Roos, Pike and Fernstrom (2005) “Intellectual Capital can be define as all nonmonetary and nonphysical resources that are fully or partly controlled by the organization and that contribute to the organization’s value creation”.3 The authors divide Intellectual Capital into three categories based on their economic behavior: relational, organizational and human.Stewart defines Intellectual Capital as intellectual material – knowledge, information, intellectual property, experience that can be put to use to create wealth.4
Jolanta Jurczak, MSc., eng - Ph.D. student at Warsaw University of Technology, Faculty of Production Engineering
1 D. Andriessen, The Financial Value of Intangibles: Searching for the Holy Grail (Paper presented at the 5th World Congress on the Management of Intellectual Capital, January 16–18, 2002), p. 2. 2 L. Edvinsson, M. S. Malone, The Copyright Book: Intellectual Capital, Harper Business 1997, p. 44. 3 G. Roos, S. Pike, L. Fernstrom, Managing Intellectual Capital in Practice, Butterworth-Heinemann, New York 2005, p. 19. 4 N. Bontis, The Copyright Paper: Assessing knowledge Assets: A Review of the Models Used to Measure Intellectual Capital, 2000, p. 2.
ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008
It possess big and complicated structure. In order to measure IC. Steward. s. Detailed structure of IC have been presented in fig. This capital encompasses: intellectual property (patents. The intelligence of the company is built by different elements like: communications intelligence. attitude and intellectual agility all members of the organization and their ability to quick taking decisions. As we can see there are many definition of Intellectual Capital.5 It includes three main elements like: human capital. Relational 5 W. Prentice Hall. Human capital (HC) consists of knowledge capital. Some of them says that Intellectual Capital is a intelligence of a organization or a form nonmaterial property. Another definition given by Bukowitz and Williams present Intellectual Capital in dynamic way as a form nonmaterial assets. Bantam Doubleday Dell Publishing Group. R. Bukowitz. This knowledge can be Intellectual Capital then. Interesting approach to the components of Intellectual Capital present Grudzewski and Hejduk. style of management or software) and market and development capital. It is a kind of investment in systems. The basis of IC is Knowledge which is useful for the company. Most of them present Intellectual Capital as a knowledge capital or capital which derives from knowledge. marketing intelligence. But it’s necessary to notice that not all knowledge constitute the Intellectual Capital. The Knowledge Management Fieldbook. it is necessary to understand the distinguish between the different components of IC. technological intelligence. which is not exactly specified. 6 T. R. database or computer equipment). tangible or intangible) that the organization disposes in creating value needed to gaining competitive advantage in long term . culture and ability to development. financial intelligence. Intellectual Capital. London 2000. New York 1997. Financial Time. copyright. ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 38 . licences. Williams. business processes capital (organizational culture.Intellectual Capital Measurement Methods Bratnicki and Struzyna characterize Intellectual Capital as the sum of knowledge which possess people who creates a community of the company and a practical transformation the knowledge in components.7 Intellectual Capital is a complex concept. which thanks to flows of knowledge can generate a potential to create goods.6 Therefore – basis of previous definition – Intellectual Capital can be described simply as all connected each other Knowledge Resources (material or nonmaterial. Organizational Capital (OC) is dependent on productivity of the organization. In the approach Intellectual Capital can be divided into organizational capital. relational capital and human capital. 223. structural capital (organizational structure. A. if we can process and utilize it for the company good. innovation intelligence. who say that an intelligence of the organization is not a simply sum of intelligence of it employees but it is a result of existing the synergy phenomenon. trademarks). tools and philosophy. social intelligence and ecological intelligence. L. 7 Own definition of Intellectual Capital. organizational intelligence. He has divided Intellectual Capital on components like organizational and social capital and human capital. which decides about the process of flows knowledge. These definitions differ each other in some way but they are not disqualify each other. competence capital. its structural capital. cope with the problems and create good interpersonal relationship. customer capital and organizational capital. All presented definition are correct and right because they include all those factors that are nonfinancial and valuable for a company’s business.
Intellectual Capital Measurement Methods ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 Figure . The Copyright Book: Intellectual Capital. Components of Intellectual Capital 39 Source: own work on the basis of: L. Roos. New York 2005. Fernstrom. Edvinsson. Managing Intellectual Capital in Practice. Butterworth-Heinemann. S. Harper Business 1997 and G. L. S. Malone. M. . Pike.
their experience. Market Capitalization Methods (MCM) – calculate the difference between a company’s market capitalization and its stockholders’ equity as the value of its intellectual capital or intangible assets. These elements combine and interact with each other in unique way to create value. Direct Intellectual Capital Methods (DICM) – estimate the dollar value of intangible assets by identifying its various components. patents. The result is a company ROA that is then compared with its industry average.com/articles/IntangibleMehtods. It can cause a better understanding the concept. 4. they will be aware of size and value intellectual potential. organizational structures. Return on Assets Methods (ROA) average pre-tax earnings of a company and divide them by the average tangible assets of the company. Intellectual Capital structure components are individual for each company. either individually or as an aggregated coefficient. The figure shows that physical infrastructure is also a very important part of intellectual capital of the organization. L. It is value of relationship with customer. such as databases. Than they could choose proper Measurement Methods and proper manage their assets. employees etc. they can be directly evaluated. 3. But if the managers of companies know detailed structure of IC existing in their companies. databases. Scorecard Methods (SC) – identify various components of intangible assets or intellectual capital and indicators and indices are generated and reported in scorecard or 8 http://www. 2. op. Fernstrom. cit. Pike and Fernstrom. and G. There are several group of methods of measuring the Intellectual Capital. Pike. one can derive an estimate of the value of its intangible assets or intellectual capital. trademarks. In the end is necessary to notice that Intellectual Capital includes both created knowledge all the organization and its individual participant. which they possess. and physical networks like intranets. According to Luthy (1998) and Williams (2000) all methods can be divided into four main groups:8 1. The reason for including physical assets into Intellectual Capital assets is that they may have components. Methods Of Measuring The Intellectual Capital The interest on managing the Intellectual Capital has caused the development of different methods of measuring it.sveiby. strategic partners. S. Roos. which can be used in order to evaluate this assets. Companies. which differs a bit from definition by Roos. But they still exist and are basis to create new methods. which learn to measure and manage their Intellectual Capital in a new way can significant improve their performance in a competitive market. servers. Some of these methods were attempts made by different companies for their internal use rather than the development of a universal measuring method. techniques or relationships with stakeholders worked out by the organization. By dividing the above-average earnings by the company’s weighted average cost of capital or an interest rate. The difference is multiplied by the company’s average tangible assets to calculate an average annual earning from intangibles. abilities and innovations and also all the things that support efficiency of work in the organization (computers equipment. licences) but also methods. which are based on specific knowledge and the combination of them is unique to one organization.html. ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 40 . Detailing and describing list of all components of the Intellectual Capital structure is a very difficult task.Intellectual Capital Measurement Methods Capital (RC) concerns connections and relation of the organization with the external environment. Once these components are identified.
Market Capitalization Methods. The methods are also very sensitive to interest rate assumptions. Knowledge Capital Earnings are calculated as the portion of normalized earnings over and above expected earnings attributable to book asset. except that no estimate is made of the dollar value of intangible assets. A system of projected discounted cash flows. these are a means of explaining a financial feature and attributing changes in them to the efficiency in the deployment of intellectual capital resources. Takes the Company’s True Value to be its stock market value and divides it into Tangible Capital+(Realized Intellectual Capital+Intellectual Capital Erosion+SCA (Sustainable Competitive Advantage) The MCM approaches also have an element of rigor in that they rely on financial figures which. With the exception of VIAC. Intellectual capital is measured by calculation of the contribution of human assets held by the company divided by capitalized salary expenditures. are auditable. They attempt real valuations and may appear useful in many situations since they can give crude comparisons between companies The ROA approaches have an element of rigor in that they rely on financial figures which. they give far too little detail for an adequate comparison. Johansson (1997) Stewart (1997) Luthy (1998) Lev (1999) Pulic (1997) Nash (1998) Investor Assigned Market Value (IAMV™) Standfield (1998) ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 41 . then uses his figure as a basis for determining the proportion of return attributable to intangible assets.Intellectual Capital Measurement Methods as graphs. Measures how much and how efficiently intellectual capital and capital employed create value based on the relationship to three major components: capital employed. if not perfect. Calculates the excess return on hard assets. These methodologies avoid direct comparison with market values but link to some of the factors that market makers use in their assessments of companies. Changes in EVA provide an indication of whether the firm’s intellectual capital is productive or not. The difference between AFTF value at the end and the beginning of the period is the value added during the period. are auditable. Return on Assets Methods and Scorecard Methods) have various advantages and disadvantages. Categorization of the IC measurement methodologies with their characteristics Originator and year Methodologies of first publication Economic Value Added (EVA™) Human Resource Costing & Accounting (HRCA) Calculated Intangible Value Knowledge Capital Earnings Value Added Intellectual Coefficient (VAIC™) Accounting for the Future (AFTF) Stewart (1997) Description Characteristics ROA Methodologies Calculated by adjusting the firm’s disclosed profit with charges related to intangibles. Calculates the hidden impact of HR related costs which reduce a firm’s profits. MCM Methodologies Tobin’s q Stewart (1997) The “q” is the ratio of the stock market value of the firm divided by the replacement cost of its assets. They attempt real valuations and may appear useful in many situations since they can give crude comparisons between companies within the same industry. The four main approaches for measuring intangibles (Direct Intellectual Capital Methods. Changes in “q” provide a proxy for measuring effective performance or not of a firm’s intellectual capital. if not perfect. Table. SC methods are similar to DIC methods. However. human capital and structural capital. presented in Table.
4) Technology and explicit knowledge. TVC™ Sullivan (2000) Anderson & McLean (2000) ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 42 . 4) renewal and development. business units. and analysis of up to 164 metric measures (91 intel. DIC Methodologies Technology Broker Brooking Value of intellectual capital of a firm is assessed (1996) based on diagnostic analysis of a firm’s response to twenty questions covering four major components of intellectual capital: Market Assets. Methodology for assessing the value of Intellectual Property. Accounting methodology proposed by KMPG for calculating and allocating value to 5 types of intangibles: 1) Assets and endowments. Similar tential to create a more to HRCA. The methods are more detailed and can be easily applied at any level of an organization. business by: Human Capital and Organization Capital. tion. 3) Collective values and norms. This Structural Capital is also formed fit organizations. comprehensive picture of an organization’s health Intellectual capital is measured through the than financial metrics. SC Methodologies Human Capital Intelligence Sandia Navigator™ Fitz-Enz (1994) Edvinsson and Malone (1997) Sets of human capital indicators are collected SC methods offer the poand benchmarked against a database. The base of the develop of the Technology Broker method is that the market value of a company is the result of the addition of tangible assets and the intellectual capital. government agenand this last one is formed by the Innovation cies.They also measure intellectual capital resources from man. and for environmental and social purposes. and the Process Capital. TVC uses discounted projected cash-flow to reexamine how events affect planned activities. Bontis (1996) A technology factor is calculated based on the patents developed by a firm. little detail for an adequate comparison. Intellectual capital and its performance is measured based on the impact of research development efforts on a series of indices. they give far too ket value and the company’s book value. 2)customer. Their Capital. 3)process. be the difference between the firm’s stock mar. The idea is the Intellectual Capital is formed by the bottom up. Since they do not need to be measured in financial terms. units. 2) Skills & tacit knowledge. Their disadvantages are that they cannot be connected easily to financial results CitationWeighted Patents The Value Explorer™ Andriessen & Tiessen (2000) Intellectual Asset Valuation Total Value Creation. The DIC is intended to be holistic and offer the potential to create a more comprehensive picture of an organization’s health than financial metrics. 5)hu. They measure intellectual capital resources from the bottom up and can therefore be faster and more accurate than ROA and MCM measures with respect to resources. A project initiated by The Canadian Institute of Chartered Accountants. government agencies. such as number of patents and cost of patents to sales turnover. and for environmental and social purposes. they are very useful for not-for-profit organizations. that describe the firm’s patents. They are the addition of the Structural Capital and Human very useful for not-for-proCapital.Intellectual Capital Measurement Methods Market-toBook Value Stewart (1997) Luthy (1998) The value of Intellectual Capital is considered to within the same industry. Intellectual Property Assets and Infrastructure Assets.they can be easily applied lectually based and 73 traditionally metrics) that at any level of an organizacover five components: 1)financial.However. Human-centred Assets. 5) Primary and management processes.
The object is to represent the intangible assets from different perspectives: growth and renewal. They suggest four high level categories as the foundation for discussion in individual cases. and 4) risk reduction / stability. relational and organizational plus the conventional physical and monetary resources. the assistance to the companies to create their own ICIndex. It can be integrated in the management information systems. disadvantages are that the indicators are contextual and the meanings of the resource definitions can vary between each organization and each purpose. to measure four aspects of creating value from intangible assets. This indicators form the base to create and develop a company with knowledge focused strategy. efficiency and stability. Learning. Drivers of value are derived from an extensive literature survey and advanced statistics. They cannot be connected easily to financial results. Metrics are weighted and combined to give a Value Creation Index. Several user-friendly plots are produced including a navigator. Management selects indicators. Commercialization. The develop of measures within these categories is formed by a three stage process: 1. Intellectual capital is broken down into 3 areas: human. the importance of the specific measures varies from one company to another. 3) utilization / efficiency. which makes comparisons very difficult. Sveiby (1997) Intellectual Capital Navigator and Intellectual Capital Index (IC Index™) Roos and others (1997) Value Creation Index Ittner and others (2000) ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 43 . The Intangible Assets Monitor consists on a formal presentation of several relevant indicators for measuring assets according to the company strategy. based on the strategic objectives of the firm. Develop a hierarchy of Intellectual Capital indices All the indices have to be aggregated into a single index that can be used to make comparison over time of the same unit or even compare with other business units. These are all subdivided. Implementation. By: 1) growth. The index is compared and combined with financial data. For the creators of the method. and this is the point in which the experience of the Intellectual Capital Services lies. a conceptual diagram of how the company works in IC terms. 2) renewal. A critical review of existing indicators 2. Indices are defined based on the key resources and resource transformations in the navigator. Development of indicators that represent the flows between different Intellectual Capital categories 3.Intellectual Capital Measurement Methods Value Chain Scoreboard™ Intangible Asset Monitor Lev (2002) A matrix of nonfinancial indicators arranged in three categories according to the cycle of development: Discovery. The purpose of the method is to help managers to visualize growth by measuring the Intellectual Capital. The critical factor for the successful application of the method is the process of creation of the Intellectual Capital Services.
Butterworth-Heinemann. the aim is to allow managers to manage more effectively all resources. S. Can they be use in different companies or institutions all over the world in the same way? ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 44 . p. In my opinion the most suitable method to measure Intellectual Capital efficiency and connected it with value of the organization is VAIC™ created by Pulic and classified in ROA group methods.Intellectual Capital Measurement Methods Balanced Score Card Kaplan and Norton (1996) A company’s performance is measured by indicators covering four major focus perspectives: 1) financial perspective 2) customer perspective. Intellectual Capital Navigator IC-Index™. L. 249–255. 4) learning perspective. useful and secure for all companies. Sveiby’s The Intangible Asset Monitor (IAM). VAIC is different and more detailed. One of the pillars of the Balance Score Card is the assumption that investing and managing intangible assets is more decisive than investing and managing physical and tangible assets. Skandia’s IC Navigator. The most commons are: Economic Value Added (EVA™). Tobin’s Q Ratio. Market Value Added (MVA). It also tries to visualize the intangible assets for the future growth. In the method there are links between the activities of the company. The important issue is whether all of these approaches can be auditable. 3) internal process perspective. Conclusion Nowadays many corporations around the world have found that measuring and managing intellectual capital can provide them with a competitive advantage. The most popular Measurement Methods as well as the most widely used or just the easiness of their applications of all nonfinacial Measurement Methods are: The Balanced Scorecard. Roos. so they only provide a reference. Source: own work on the basis of: http://www.htm. Other methods are not numerical. and G. Marketto-Book ratio. The Technology Broker’s IC Audit.sveiby. The Balance Score Card uses two different types of indicators: – Driver: This indicators determine the result – Output: This indicators are the responsible of showing the results The Balance Score Card remarks the importance of the financial objectives by including performance drivers of these financial objectives. Managing Intellectual Capital in Practice. New York 2005. Most of the presented methods use financial criteria to evaluate the intangible assets and they give only a global value. But in all methods. increasing the performance and competitive position of the company.com/articles/IntangibleMethods. Pike. Fernstrom. Although there are several Intellectual Capital Measurement Methods it must be considered that calculated intangible value is not precise. The indictors are based on the strategic objectives of the firm. the resources used and the financial outcome. require too much information. Most of the methods are difficult to apply. indicators or are not completely described. Its main purpose is to translate an organization’s mission and strategy into comprehensive measures capable to give information of the management system. Calculated Intangible Value. VAIC™.
Fernstrom L. New York 1997..Intellectual Capital Measurement Methods Estimating the value of intellectual capital at the organization is a very difficult proposition. Norton D... S.. 2000... Roos G.weightlesswealth. L. Financial Time. The Copyright Book: Intellectual Capital.. 10. 3. Nevertheless it is important to try managing these assets within companies and seek new. Williams R.. 19. Prentice Hall.. Harvard Business School 1996.sveiby. Intellectual capital: The proven way to establish your company’s real value by measuring its hidden brainpower. Kaplan R. Butterworth-Heinemann. Brooking A. 8. S.. 7. R. The balanced scorecard: Translating strategy into action. Therefore it may not be possible to quantify Intellectual Capital in way that allow us to compare the value of the assets between one company and another. Edvinsson L. Bantam Doubleday Dell Publishing Group.com 1. Intellectual Capital. p.com 2. Intellectual Capital in different companies or institutions can be valued in different ways by different indicators or index. Steward T. http://www. Piatkus 1997. Edvinsson L. better solutions in effective Intellectual Capital measuring area. 2002) from http://www. Malone M. ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 45 . Malone M.. Bontis N. Harper Business 1997. January 16–18. The Copyright Paper: Assessing knowledge Assets: A Review of the Models Used to Measure Intellectual Capital. Bibliography Andriessen D. 5. A. The Financial Value of Intangibles: Searching for the Holy Grail (Paper presented at the 5th World Congress on the Management of Intellectual Capital. Bukowitz W. Summary Enterprise efficiency and competitiveness depend on intellectual resources. The Knowledge Management Fieldbook. New York 2005. Intellectual capital of a company may be used more effectively when identification and measurement of its components are possible. as well as the ability to apply them in the market competition. Intellectual Capital. Managing Intellectual Capital in Practice. 4. http://www..org 11. 6. situation and audience. London 2000.. International Thomson 1998. 9. In my opinion each company must select a method depending on its purpose.. Pike S. In my opinion credible method of measuring intellectual capital resources does not exist..know-net. The article presents a classified and grouped review of different Intellectual Capital Measurement Methods describing them and providing companies with information about a variety of ways and advice how to choose a proper measurement method.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.