Intellectual Capital: Measuring the Immeasurable? (CIMA Research)

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Intellectual Capital Measuring the Immeasurable? Anthony Wall, Robert Kirk and Gary Martin University of Ulster AMSTERDAM OXFORD

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• LONDON • NEW YORK • SAN FRANCISCO • SINGAPORE SYDNEY • TOKYO

BOSTON

PARIS

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HEIDELBERG

SAN DIEGO

CIMA Publishing is an imprint of Elsevier

Acknowledgements The authors would like to thank the Chartered Institute of Management Accountants for providing the funding for this project and also certain individuals within the Institute for their valuable support and guidance. We would also like to thank all the Irish companies that took part in the survey, particularly those whose representatives were willing to interrupt their busy working schedules in order to take part in the telephone interviews. In addition, we would like to thank the anonymous reviewers whose various comments were extremely helpful. We are also grateful for all the support provided by the various sections and academic departments of the University of Ulster. Finally, we would like to thank Mary McAlinden, a Master’s student at the University, who assisted with the initial work for the original and follow-up postal surveys.

CIMA Publishing An imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP 200 Wheeler Road, Burlington, MA 01803 First published 2004 Copyright © 2004, Elsevier Ltd. All rights reserved No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publisher Permissions may be sought directly from Elsevier’s Science and Technology Rights Department in Oxford, UK: phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333; e-mail: [email protected]. You may also complete your request on-line via the Elsevier homepage (http://www.elsevier.com), by selecting ‘Customer Support’ and then ‘Obtaining Permissions’

British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0 7506 6171 2 For information on all CIMA Publishing publications visit our website at www.cimapublishing.com Printed and bound in Great Britain

Contents Executive Summary Abbreviations 1

The Background to the Problem 1.1 1.2 1.3

2

The Accountant and the New Economy

Measuring Intellectual Capital 3.1 3.2

3.3

3.4

3.5

4

Introduction The new economy Soft assets v. hard assets What is intellectual capital? The role of the accountant in the new economy Conclusions

Introduction A value on intangible assets 3.2.1 The balanced scorecard 3.2.2 The value added approach 3.2.3 The value creation index Juggling with the figures 3.3.1 Market or value-based approach 3.3.2 Tobin’s q 3.3.3 Calculated intangible value 3.3.4 Matching assets to earnings – the Baruch Lev method Human capital 3.4.1 The asset value of skills method 3.4.2 Human resource accounting 3.4.3 Value-added intellectual capital coefficient Conclusions

Individual Organisational Approaches 4.1

Introduction

ix 1 3 4 8 11 13 13 14 15 18 22 23 25 25 25 26 28 29 29 30 31 31 32 32 33 34 35 37 39

Contents

2.1 2.2 2.3 2.4 2.5 2.6

3

Introduction Research strategy Report structure

vii

iii

4.2 4.3 4.4 4.5 4.6 4.7

Contents

4.8

5

Problems with Measuring Intellectual Capital 5.1 5.2 5.3 5.4

iv

6

Introduction Problem areas Towards a generic model for measuring intellectual capital Conclusions

Survey of Irish Companies 6.1 6.2 6.3 6.4 6.5

7

The Skandia Navigator Ericsson’s Cockpit Communicator Celemi’s Intangible Assets Monitor Ramboll’s Holistic Company model Bates Gruppen CompanyIQ measurement system Other approaches 4.7.1 Dow Chemical 4.7.2 IBM 4.7.3 CIBC 4.7.4 Ernst and Young 4.7.5 The Royal Bank of Canada Conclusions

Introduction Background Analysis of the questionnaire Qualitative findings Conclusions

Conclusions 7.1 7.2 7.3 7.4

7.5

51 53 53 55 56 57 59 59 60 69 74

Introduction Summary of results Comparison with other Irish research Comparison with other countries 7.4.1 United Kingdom 7.4.2 Australia 7.4.3 USA and Canada 7.4.4 Other European countries 7.4.5 The Nordic nations A future research agenda

75 77 77 79 80 80 81 81 82 82 83

Sector breakdown of surveyed companies

87 89

Appendices 1

39 41 42 43 44 46 46 47 47 47 48 48

2 3 4 5 6 7

The Value Creation Index How to calculate CIV The Baruch Lev method The Asset Value of Skills method Intellectual capital report – Skandia Real Estate The CompanyIQ Measurement system

References Index

90 92 94 95 96 97 99 107

Contents

v

This Page Intentionally Left Blank

Executive Summary This report investigates how companies throughout Ireland are measuring their intellectual capital assets and how their efforts compare with those of the leading exponents of intellectual capital, such as the Swedish companies Skandia and Celemi. Having outlined the rationale for the research, the report details the methods used for a survey of twenty-eight Irish companies, describing why companies were selected, as well as the process used and any potential shortcomings.

The survey shows that although Irish companies are familiar with the term intellectual capital, recognise the importance of its various elements and already measure a large number of these, there is no overall intellectual capital management strategy in the majority of the companies. Many of the measurements and practices appear to be taking place in isolation and do not feed into an overall evaluation or long-term assessment of organisational competitiveness. It is evident that Irish companies are lagging behind those of certain nations, particularly the Nordic countries, USA and Canada yet are probably at a similar stage of recognising, measuring and developing intellectual capital as companies in the rest of the developed world.

Executive summary

Definition is given to exactly what is meant by the term intellectual capital, its growing importance in the new economy and the role of the management accountant in this area. Various methods of measuring intellectual capital are then outlined, including generic methods such as The Balanced Scorecard and those used by individual organisations such as Skandia’s Navigator. Having discussed some of the potential problems of measuring intellectual capital and proposed a generic measurement model, a full analysis of the survey findings is presented.

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Abbreviations

MIS MSEK NI NPV NYU OFR PIMS PC R&D ROA ROCE ROE

Administration Assurance and Financial Services Accounting Standards Board Asset Utilisation Ratio Business Process Re-engineering Balanced Scorecard Chief Executive Officer Canadian Imperial Bank of Commerce Direct Intellectual Capital European Foundation for Quality Management Earnings per Share European Union Economic Value Added Financial Accounting Standards Board Financial Reporting Standard Financial Times Stock Exchange Index Generally Accepted Accounting Principles International Business Machines Corporation Intellectual Capital Management Industrial Development Board of Northern Ireland International Federation of Accountants Intelligence Quotient Information Technology Key Performance Indicator Measuring Intangibles to Understand and Improve Innovation Management Management Information Systems Swedish Krona (millions) Northern Ireland Net Present Value New York University Operating and Financial Review Profit Impact of Market Strategy Personal Computer Research and Development Return on Assets Return on Capital Employed Return on Equity

Abbreviations

Admin. AFS ASB AUR BPR BSC CEO CIBC DIC EFQM EPS EU EVA FASB FRS FTSE GAAP IBM ICM IDB IFAC IQ IT KPI MERITUM

ix

Abbreviations

ROI RoI SEC SEK SOP SOPs TQM UNIC

x

Return on Investment Republic of Ireland Securities and Exchange Commission Swedish Krona Statement of Principles Standard Operating Procedures Total Quality Management Universal Networking Intellectual Capital

1 The Background to the Problem


1.1 Introduction

The market value of leading companies continues to be far higher than the value of their tangible assets and this has led to calls for intellectual capital, as opposed to intellectual property, to be included on balance sheets to give a more accurate impression of company value. Microsoft is often quoted as a company with a market value that is well in excess of its net asset value. In 1997 it had a market value of US$87 billion while its physical assets were only worth US$10 billion (Tapsell, 1998), and there are many others including Coca-Cola, Intel, General Electric and Exxon. Although, as will be seen later, the difference between the two values does not exactly equate to the value of the intellectual capital assets, it is a strong indicator that they exist and according to Seetharaman, Bin Zaini Sooria and Saravanan (2002): The greatest challenge facing the accounting profession is understanding the huge difference between its balance sheet and market valuation. This gap represents the core value of the company. Furthermore as the world moves away from an industrial to a service and knowledge-based economy, and dot.coms (internet based companies) continue to operate, an increasing number of organisations will depend on intellectual capital assets to add value to their services, as opposed to physical assets such as machinery. Despite a widespread recognition that there is a new economy and that we are now in an information age, there is still no acceptable way of measuring intellectual capital, despite a large number of proposals. While this report does not focus on the financial accounting issue of whether intellectual capital assets should appear on financial statements, the issue of measurement is still important. Without a method of capturing these softer assets, measuring and monitoring them to see if there are annual improvements, there is always the danger that they

Intellectual Capital – Measuring the Immeasurable?

As the new millennium gets underway, the accounting system that has seen only evolutionary change since its conception in 1494 (Pacioli) no longer seems relevant. If the role of the accountant is to record, measure and report the assets of a company, how can they fulfil this role if they ignore what is nowadays a company’s most valuable asset, intellectual capital – the intangible assets of skill, knowledge and information?

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may be ignored and thereby companies will not be effectively using their various resources, both tangible and intangible, to add value. This task is one that can be undertaken by the management accountant so that they are not only accounting for intangible assets, but also playing a leading role in intellectual capital management (ICM).

1.2 Research strategy One of the primary aims of the research was to try and summarise the burgeoning literature on intellectual capital. The first articles and books appeared in the early 1990s and since then have continued to grow as have the number of project teams, on both a national and international scale, attempting to come up with an acceptable method of measuring intellectual capital. Examples of major projects include the European Measuring Intangibles to Understand and Improve Innovation Management project (MERITUM, completed in 2001), the work undertaken by Upton on behalf of the Financial Accounting Standards Board (FASB, 2001) and the report issued by the International Federation of Accountants (IFAC, 1998). A great variety of sources were used in order to get a broad perspective of both the business and academic attitude towards intellectual capital, however, the literature review consists mainly of articles, as these tended to be more up to date at the time of publication, and generally focus on the period from 1994 onwards. The secondary aim of this report was to try and assess whether organisations in Ireland (both in Northern Ireland and the Republic of Ireland) have recognised the importance of intellectual capital and are measuring the various elements. The findings of a survey undertaken to achieve this aim were then compared with progress in other parts of the world, namely Scandinavia, North America and Australia, where similar research has taken place. Two notable pieces of research regarding how Irish companies deal with intellectual capital have been carried out to date. Brennan’s (2001) focus was mainly on the reporting of intellectual capital and dealt only with companies based in the Republic of Ireland (RoI). The survey, which was actually carried out in 1999, found that although Irish companies had substantial intellectual capital assets, these were rarely referred to in annual reports. Writing with Connell (2000), Brennan compared these findings with other empirical work carried

out in Denmark, Sweden, Austria, The Netherlands, Spain, Canada and Australia. When it comes to the measuring and reporting of intellectual capital their summary of this research highlights how far ahead the Nordic nations are compared to the rest of the world. Intellectual Capital – Measuring the Immeasurable?

The other research was conducted by O’Donnell, O’Regan, Coates, Kennedy, Keary and Berkery (2003) as part of a programme undertaken by the University of Limerick, the Irish Management Institute and the University of Maryland. It involved the collection of detailed and extensive perceptual data from chief executive officers (CEOs), top management team members and core employees in indigenous RoI firms operating in the knowledge economy, e.g. software and telecommunications. Following interviews with fifty CEOs from this sector it emerged that they felt that almost two-thirds of their company value is attributable to intellectual capital. Furthermore, 50 per cent of this intangible value derives directly from the people employed in these knowledge-intensive firms. Both pieces of research are explored further in Chapter 7.

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For the purpose of this project 73 companies were surveyed. Sixty-two (85 per cent) of these were from RoI and the remaining eleven (15 per cent) from Northern Ireland (NI). The method used was postal questionnaire. Initially only thirteen replies were received so the mail-out was repeated. From this, a further twelve replies were received. In order to ensure that there was as full a representation as possible from technology and telecommunications companies, five organisations were approached for a third time, again using the original questionnaire, and from this more targeted approach, three more replies were received. All companies chosen were either quoted on the London or Irish Stock Exchanges. The reason for the bias towards RoI companies was due to there being a larger number of quoted companies in this country. At the time there were no Irish dot.coms quoted on either exchange, thus they did not form part of the survey. Out of the 28 usable responses 26 came from RoI (93 per cent) and only 2 (7 per cent) from NI. A full breakdown of organisational sectors is listed in Appendix 1 together with a sector breakdown of responding companies. The questionnaire consisted of seventeen closed questions. The first question was concerned with the actual recognition of intellectual capital, i.e. were personnel familiar with the term. The next factor that needed to be established was whether there was a specific person or working party within the company responsible for intellectual capital.


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If nobody was actually dedicated to this task, respondents were asked which person within an organisation they thought should be made accountable. The questionnaire then sought to ascertain the importance of information, and other assets associated with intellectual capital such as the expertise of the workforce and market intelligence. Respondents then indicated whether they were measuring any of the various elements that make up the three branches of intellectual capital, namely human, customer and organisational capital. More emphasis was given to two elements of organisational capital, namely manuals of standard operating procedures and databases; the reason being that one would expect the majority of organisations to have both of these established, regardless of whether they were aware of intellectual capital or not. The questionnaire also examined methods of evaluation, i.e. was the organisation using a well-known method such as the Balanced Scorecard or their own in-house method. Finally, respondents were asked if there was any intention within the organisation to incorporate information on intellectual capital within their annual reports, and, if so, where precisely in the report it would go. Where companies stated that they either had personnel dedicated to intellectual capital or used an evaluation system that appeared to be original, they were automatically selected for a more in-depth personal interview. These interviews had a semi-structured format in that a set of more open questions than those used in the questionnaire had been prepared; thereby the respondents were given ample opportunity to expand on any particular area. Nine companies were selected for these second stage telephone interviews with eight giving their consent. As Denscombe (1998) notes, questionnaires supply standardised answers, given that respondents are all posed the same question. The great strength of this characteristic is the ability to collect data that is unlikely to be contaminated by variations in the wording of the questions or the manner in which the question is asked, as there is little scope for the data to be affected by ‘interpersonal factors’. Postal questionnaires are useful in that they permit wide geographical contact, however, they are also problematic as they have a generally low response rate and, as Denscombe states, they offer little opportunity to check the truthfulness of the answers given. He views this as principally being a consequence of the remoteness of the technique. However, despite these problems, it is an appropriate method to investigate the issues at hand.

The use of closed or forced-choice questions tends to counteract some of the problems highlighted above. They are defined by De Vaus (2002) as ones in which a number of alternative answers are provided from which respondents select one or more of the answers. While he remarks that a major problem with these types of questions is that they can create false opinions (either through not providing respondents with an exhaustive enough list of alternatives to choose from, or by leading people to opt for ‘acceptable’ answers, he does nevertheless opine that there are a number of distinct advantages in using ‘well-developed’ forced-choice questions. These he sees as being that they: ◆ can counteract against a lack of motivation on the part of respondents to participate as they are quick to complete; ◆ are easier to code, and hence analyse, when compared with open formats; ◆ offer the advantage of not discriminating against less talkative and less articulate respondents. While the research questionnaire instrument used in the project predominantly used closed question formats, the inclusion of a number of initial open questions and asking respondents to provide other alternatives to closed format choices, if appropriate, did allow for participants to formulate their own responses in certain circumstances, allowing for somewhat deeper, albeit limited, analysis. Although only 28 usable questionnaires were received, which was a 38 per cent response rate, the respondents covered a broad spectrum


The comprehension by respondents of certain questions may have been inhibited by an insufficient understanding on their part of technical terms, such as intellectual capital management (ICM). Steps were taken by the researchers to simplify the process as much as possible to minimise this risk. However, this may have been the case with the first question where respondents were asked if they were familiar with the term intellectual capital. One respondent stated that they were not although the company was quite clearly practising ICM. Incorrect information could have been provided as there is a lack of control over who fills in the questionnaire. Efforts were made to direct the survey to key personnel but the task may have been passed to someone in the company who is not fully informed on the organisation’s strategy on intellectual capital.

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of sectors (see Appendix 1), with only the electricity supply and mining and extraction sectors not being represented Furthermore, there were good responses from companies working in ‘new economy’ industries, i.e. technology, telecommunication and pharmaceutical and biotechnology sectors. However, the response from NI was not as representative as that from RoI. In absolute terms, 28 companies may appear to be a very small sample when compared with the number of private companies operating all over Ireland; but, in relative terms, i.e. when compared with the number of companies quoted on the Irish Stock Exchange (the sampling frame), the sample is far more representative. Even though 28 questionnaires were usable in that they all contained useful data, some respondents chose not to answer certain questions, missed them out by accident or, less likely, had no answers to them. For example, when it came to asking what elements of intellectual capital organisations were currently measuring, one company indicated that it did not measure any of them. Given that this company is in the banking and finance sector it is extremely unlikely that it would not be measuring some of the elements listed (see Tables 6.2, 6.3 and 6.4) or any others that it was free to record. On other occasions respondents may have simply overlooked the options offered in a question, which may have led to inconsistencies, e.g. a company measuring one element yet not measuring another interdependent element, thereby distorting the overall picture. The respondents who preferred to keep their companies anonymous caused a final problem. Although three anonymous questionnaires were fully completed and contained some interesting information, it was not possible to include them in the sector analysis. Furthermore, one of these organisations used its own in-house criteria for evaluating intellectual capital and had a person dedicated to this function. It would, therefore, have been beneficial to discover more about the system it used and the exact role played by the relevant member of staff, but obviously this was not feasible.

1.3 Report structure Initially, the background to the problem is examined in a little more detail and the role of the accountant in the new economy highlighted. Intellectual capital is defined and some of the elements that make

The report then moves to the results of the survey. Chapter 6, having briefly looked at the state of the economy in both NI and RoI, presents and analyses the findings from the questionnaire and discusses the conclusions drawn from the in-depth interviews. In Chapter 7 the state of intellectual capital recognition in Ireland is compared with that in other countries. Comparisons are also made with research that has already been conducted in RoI. The report concludes by suggesting further areas of research.


up the three main categories, human, customer and organisational identified. The report then turns to the work that has been done in this field to date. Chapter 3 looks to some of the individual suggestions, both those that are used in practice, for example the Balanced Scorecard, and other, more theoretical ideas. The suggestions are outlined and some of the advantages and disadvantages discussed. Chapter 4 focuses on specific company practices, the leading practitioners of which come from the Nordic nations. Some of these are commercially available, such as Ericsson’s Cockpit Communicator, while others could be adapted from the information provided by the company concerned. The well-known Skandia Navigator is the best example of the latter. A great deal of work on intellectual capital has also taken place in North America and, therefore, examples of good practice from several companies are described. In Chapter 5 some of the problems of measuring intellectual capital are highlighted, although the chapter concludes by stating that these must be overcome in order for the performance of an organisation’s main revenue generating capabilities to be monitored.

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2 The Accountant and the New Economy


2.1 Introduction

◆ have difficulty in handling ambiguous situations; ◆ are practical thinkers who prefer to work with clear, well-defined instructions – though some evidence of change has been found of late (Schloemer and Schloemer, 1997). In light of such personality traits, it would suggest that accountants prefer to work with hard, tangible assets that, while often problematic, are easier to value. They are, therefore, ignoring the softer, more intangible assets that, although difficult to measure with any accuracy, will become increasingly important to organisations (see section 2.2). This chapter explores these changes and makes some clear distinctions between the hard and soft assets before attempting to define intellectual capital. Several examples of the elements that make up the three categories of intellectual capital are given before the role of the accountant in the new economy is outlined.

2.2 The new economy It is difficult to pinpoint exactly when the new economy or information age began, indeed, there are some that feel that there have been several new economies and information ages throughout history. Furthermore, the term new economy means different things to different people, although Van Reenen (2001) provides a constructive summing up of the general consensus. He states that the new economy is characterised by the importance of information and communication technologies. These include computer hardware, software and peripherals, as well as communications and related equipment, which would include the Internet. Moreover, the economic principles that have


Over the past 30 years there have been major changes in the global economy with the gradual decline of the industrial sector and substantial increases in the number of companies working in the service sector and using knowledge as their primary source of competitive advantage. Despite this phenomenon there has not been a concurrent realignment of the way the accountancy profession goes about its business. As Granleese and Barrett (1993) note, with regard to the literature that has been built up in relation to the personality traits of accountants, the stereotype strand has found, among other things, that they:

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guided policy-making and investment choices in the past are largely redundant and rapid technological change has altered the ground rules.

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What is clear is that since the 1970s, there has been a definite shift into a post-industrial era. Economies are no longer dominated by industrial machinery but are more concerned with exploiting the information technology available to ensure that business entities retain a competitive edge over their rivals. This has been particularly evident in both Ireland and the United Kingdom (UK) where there has been a steady decline in the number of workers engaged in traditional industries such as shipbuilding and mining, and a huge increase in those working in service industries such as banking and telecommunications. The arrival of the new millennium heralded a large increase in the number of dot.coms, the vast majority of which possessed comparatively few tangible fixed assets. Despite the recent lack of confidence in this sector there is little doubt that this type of organisation is here to stay and will increasingly rely on employee skills and know-how rather than the more traditional factors of production. The modern organisation therefore operates using three types of capital: physical (plant and equipment), financial (cash and investments) and intellectual, with the latter continuing to grow rapidly in importance.

2.3 Soft assets v. hard assets According to May (1997): The old world was obsessed with counting stuff – nuclear warheads, battleships, armoured divisions, military personnel, durable goods, purchases and machine tool orders. The networked economy is driven not by what you can count, but on what you know. The traditional reliance on hard assets has been replaced with a new premium on soft ones. Therefore, the hard assets, i.e. those that tend to appear on balance sheets, such as plant and machinery are now deemed to be less important than assets such as employee and customer satisfaction, distribution networks, ideas generated by employees and corporate culture. Recent estimates suggest that 50-90 per cent of the value created by firms comes not from the management of traditional physical assets, but from the management of intellectual capital (Hope and Hope, 1998). During the industrial age the converse would have been true.

Intellectual capital is not scarce, it is cheap to reproduce, can be in many places at the same time and, with use, actually improves rather than wears out.


Lev (see Chapter 3) uses the economist’s terms of ‘rival’ and ‘non-rival assets’ (Bernhut, 2001). Physical assets are rival assets, because if an operator is using a piece of equipment nobody else can use it at the same time. On the other hand, intangible assets are non-rival assets in that the use of an intangible asset does not prevent it from being used simultaneously by others. Lev gives the example of the Eureka system set up by the Xerox company, which allows employees to share information and has led to increases in employee productivity. Arthur (1996) makes the distinction by pointing out that traditional hard assets are subject to diminishing returns, while those used in the newer, knowledge-based industries enjoy increasing returns. In other words, while tangible fixed assets depreciate, knowledge can be harnessed and used repeatedly thereby increasingly adding value to a firm without ever losing any itself. Bradley (1997) sums up the situation:

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2.4 What is intellectual capital? One of the earliest writers on the subject was Tom Stewart who, in 1994, highlighted the importance of these assets and also acknowledged ‘the difficulty of measuring and managing the chief ingredient of the new economy: intellectual capital, the intangible assets of skill, knowledge and information’. However, by that time several leading companies were already working at ways of measuring and managing intellectual capital. These included CIBC, The Dow Chemical Company (Dow Chemical) and Skandia AFS, a subsidiary of the Skandia Group. Larry Prusak of Ernst & Young defined intellectual capital as: Intellectual material that has been formalised, captured and leveraged to produce a higher-valued asset. (Stewart, 1994) It is sometimes confused with intellectual property. However: Intellectual property is legally defined and assigns property rights to such things as patents, trademarks and copyrights.


These assets are the only forms of intellectual capital that are regularly recognised for accounting purposes. However, accounting conventions based on historical costs often understate their value. (Dzinkowski, 2000)

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Intellectual property therefore is much narrower in definition than intellectual capital. Intellectual capital is generally identified (Dzinkowski 2000, Atrill 1998, Lynn 1998a) as being made up of elements that fall into three categories: ◆ human capital – skills, abilities, knowledge, know-how; ◆ customer (or relational) capital – customer satisfaction, customer loyalty, supplier relationships; ◆ organisational (or structural) capital – culture, intellectual property, manufacturing processes. The elements of all three categories interact and thereby add value to the organisation. A more comprehensive list of what makes up intellectual capital can be seen in Table 2.1 below. Table 2.1: The components of intellectual capital Human capital

Customer capital

Organisational capital

Knowledge

Customer relationships

Information

Skills (e.g. problem solving)

Customer retention

R&D

Competences

Customer satisfaction

Patents

Expertise

Favourable contracts

Copyrights

Motivation

Reputation

Trademarks

Innovation

Brand image

Licenses

Entrepreneurial spirit

Sales channels

Processes

Leadership qualities

Distribution channels

BPR

Adaptability

Supplier relationships

Manual of SOPs

Intellectual agility

Business collaborations

Best practices

Values

Franchising agreements

Databases

Employee satisfaction

Market intelligence

IT systems

Employee turnover

Networking systems

Vocational qualifications

MIS

Education

Management philosophy

Training

Corporate culture

Dzinkowski (2000) states that the intellectual capital of an organisation has the following properties: ◆ It can be fixed as in the case of a patent, or flexible as in the case of human capabilities. ◆ It can be both the input and output of a value creation process, that is, intellectual capital is knowledge converted into value, or the end product of a knowledge transformation.

Human capital

Organisational (structural) capital Value

Customer (relational) capital

Depicts knowledge flow

Figure 2.1: The value platform Source: Petrash (1996). ‘Dow’s journey to a knowledge value management culture’, European Management Journal, reproduced with permission.

An interesting point is also made by Edvinsson (1997): A key role of leadership is the transformation of human capital into structural (organisational) capital. Furthermore,


One of the earliest intellectual capital frameworks, the ‘value platform’, as illustrated in Figure 2.1, was developed by a number of financial executives from the aforementioned group of companies which included Skandia AFS, CIBC, and Dow Chemical. The model recognises three main types of intellectual capital and argues that human capital acts as the building block from which one can construct the organisational capital of the firm and that both human and organisational capital then go on to interact and create customer capital. At the centre of the three forms of capital lies the value created by the interaction of these three components – the more they interact, the greater the value created.

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human capital cannot be owned, it can only be rented. Structural capital can, from a shareholder’s point of view, be owned and traded. Therefore, human capital is much more volatile, and structural capital can be used as a leverage for financial corporate growth. He also states that organisational and customer capital are the components of intellectual capital that are left when the staff go home. Knight (1999) provides a useful summary with what he calls the ‘virtuous cycle’: As investments are made in human capital, more competent and capable people develop better structural capital for an organisation. Improved human capital and structural capital go on to create more productive external (customer) capital through the delivery of better products and services to highvalue customers, resulting in better financial performance. The cycle can then begin its upward spiral into further organisational value and growth, as the more successful the company, the higher the calibre of staff – the creators, traders and users of knowledge – they can attract due to the better rewards and prospects on offer.

2.5 The role of the accountant in the new economy The changes outlined above have important implications for accountants as the new economy has changed the emphasis from the measurement and management of traditional, physical assets to that of softer, intangible assets. It could be argued that unless all of an organisation’s assets appear in the financial statements, shareholders are not being given the full picture and, therefore, are not aware of all the elements contributing to the overall market value of the company. However, financial accountants face a number of difficulties in trying to achieve this. For one thing, there are some intellectual assets that organisations cannot control. Employees, for example, are free to leave a company at any time taking their skills with them and customers can change their allegiance for a variety of reasons. Yet under the existing accounting framework (ASB, 1999) an asset may only be recorded on the balance sheet if it could result in the reporting entity obtaining ‘rights or other access to future economic benefits controlled by the entity as a result of past transactions or events’. Although in

The underlying criticism was that current SEC requirements fail to encourage, much less require, companies to report the value of key intangible assets on their balance sheets’. (Barlas, 2000) Lev believes that, to date, ‘accounting hasn’t kept pace with the rise of intangibles’ (Gross, 2001). Accounting is always slower to react than the market, which responds immediately to new company initiatives. He goes on to state that ‘what’s required is new accounting, a new measurement system, which should be instituted internally within organisations’. Roslender (2000) argues that the dispute about whether intellectual capital should appear on the balance sheet is too limited and that there is ‘a broader strategic management significance’ to consider that requires a management accounting perspective. He feels that: A creative, highly educated and highly motivated workforce that is loyal to its employers, and reasonably confident about its longer term career prospects and job security, is precisely the type of workforce that is likely to command a high asset value in the capital market. However there is far less to be gained by attempting to put people on the balance sheet than by identifying the most effective means of providing relevant information in support of promoting continued employee development. Therefore ‘exploring the realms of softer accounting numbers, or nonfinancial performance metrics’ is now the challenge for accountants. This does not mean that information regarding intellectual capital should not appear elsewhere in the annual report. Skandia devote several pages of its annual report to this subject and, according to Lynn (1998a), 42 other Swedish companies provided similar information in their 1996 reports. This would leave the balance sheet to:


some cases the restrictions imposed by this definition can be overcome, there will always be major problems in placing a firm financial value on intellectual capital assets. However, what does appear to be clear is the call, from a number of quarters, to better adapt accounting measurement systems to reflect the new reality. In the United States of America (USA), leaders of the accounting community told a senate banking subcommittee that a new accounting model for the new economy was needed:

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Remain a record of the amounts invested in the company, with the difference between the firm’s value and the invested capital being the market value added (Booth, 1998)

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Rutledge (1997) goes further: Balance sheets were never intended to measure the value of a company, and they are not used for that purpose by serious investors. At best, balance sheet measures give an investor a rough idea of the value that can be realized by killing a company, breaking it up, and selling it in pieces, and then only after careful scrutiny. The value of a business as a going concern is determined by its (future) cash flows or profits, not by its assets. If the notion of intellectual assets appearing on financial statements is set aside, there are still a number of challenges left for the management accountant. Having classified, identified and used some method to measure intellectual capital it will be the role of the management accountant to ensure that management is aware of how best to use these assets to their optimum levels of efficiency, thereby adding value to the organisation. According to Booth (1998) this means: ◆ understanding the transfers of intellectual capital between categories (e.g. human to organisational) and how a business may be managed to increase the overall sum of intellectual capital; ◆ making the link between acceleration of intellectual capital and financial performance. Dzinkowski (1999) argues that one of the key factors in the success of companies that have benefited from managing intellectual capital is the breaking of ‘knowledge silos’. Successful companies have managed to create an environment where knowledge is shared throughout the organisation and not hoarded because of departmental rivalries. Lynn (1999), having looked at two companies each from Canada, USA and Sweden, felt that organisational and national culture played a major role in the creation of knowledge silos. She found that although the organisations from the former two nations were managing intellectual capital effectively, their competitive attitudes and unwillingness to share information differed from the two Swedish companies, where knowledge transference was commonplace. Therefore, accountants need to ensure that this transfer of knowledge, leading to the transformation into something more tangible, is taking place in their own organisations.

Lynn (1998a) does not forsee a problem in accountants taking on these new challenges:

The role of the fund manager should also be considered. Such people, who are trying to constantly assess the benefits of investing in a particular company, are always searching for information. Although some of this will be gleaned from the annual report an increasing amount is coming from private interviews with company representatives, particularly when seeking qualitative, non-financial factors that play an important role in value creation, such as intellectual capital (Holland, 2001). The more efficient the system of capturing, measuring and valuing these assets, the greater the chance that the fund manager will invest in that company. The management accountant has a leading role to play in providing such information to management, so it can decide what information to subsequently pass on to the fund manager. A slight irony here is that the fund manager will be far more interested in the management team’s performance, whereas companies tend to devote more time and effort into measuring the performance of other employees. Two other views of the future of management accounting are also noteworthy. First, Siegel (2000) feels: The management accountant at the dawn of the 21st Century has been liberated from the data preparation and data manipulation aspects of accounting. The freed-up time is spent on data analysis and internal consulting. Today's accountant is not isolated from other parts of the organization. Pierce (2001) also concurs with this change of culture within organisations although he goes a little further:


Management accountants are professional knowledge workers. They manage and develop the information systems for organisations, helping to set and translate strategies into operational objectives and applications. They also participate in establishing and using structures (performance evaluation schemes) to evaluate system outcomes. Thus, by its nature, management accounting should be factored into the design of strategies to manage intellectual capital, from identifying and auditing the inventory of intellectual capital, through to the evaluation of the value added by intellectual capital.

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There seems little doubt now that managers will take over management accounting. The role of accountants at both operational and strategic levels is potentially more important than ever but the profession must join forces with educators and the professional bodies if it is to face the challenges ahead. To fulfil that role requires, paradoxically, a letting go of some of the traditional power base and an acceptance of the inevitability of the decentralization of accounting information. Perhaps Brouthers and Roozen (1999) sum up best the role of the accountant in the new economy. They support the creation of a strategic accounting system, which must contain information that is: ◆ ◆ ◆ ◆

mostly non-financial; focused on the future; both internal and external to the firm; based on realistic projections of the future, not simple extrapolations of the past.

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2.6 Conclusions It is clear that intellectual capital cannot be ignored and while financial accountants may have to wait for regulators’ guidance before these assets are included on the balance sheet, this does not mean that the annual report cannot be used as a medium of communicating how an organisation’s intellectual capital assets are adding value or otherwise. In Sweden for example, shareholders receive a great deal of information about the various components of a company’s intellectual capital. However, in order to gather such information, financial accountants will have to rely on management accountants to capture, measure and value these softer assets as well as monitoring any changes on an annual basis. These are skills that management accountants already possess as they are professional knowledge workers although they, and others in an organisation, must now learn to share knowledge, which in some cases will mean a change of culture.

3 Measuring Intellectual Capital


3.1 Introduction

3.2 A value on intangible assets 3.2.1 The Balanced Scorecard In 1992, Robert Kaplan and David Norton introduced their seminal Balanced Scorecard. Since that time, The Balanced Scorecard™ (BSC) has become a model for many of the reporting systems now labelled as intellectual capital. Its designers saw it as a tool for management reporting and companies all over the world use it in that role. While it was not intended for public reporting, one of its creators has recently discussed the possibility of using (or even mandating use of) BSC in communications with investors and other users of company accounts: The BSC represents a set of cause-and-effect relationships among output measures and performance drivers. It provides for the control of intangibles while simultaneously monitoring financial results. (Brennan, 2000) It is this causal relationship between the four areas outlined below that made BSC distinct from other strategic measurement systems containing as it does both financial and non-financial measures. Kaplan and Norton (1992) recommended that companies put together a set of 23–25 measures in four areas:


There have been many suggestions as how best to measure intellectual capital and several are outlined below together with their advantages and drawbacks. As yet there has been no consensus regarding a universally or even nationally acceptable method and there is a need for more experimentation. Despite this lack of agreement, one of the suggestions below has been put into widespread use, whereas others are mainly theoretical. The various suggested methods have been placed in three groups, with the first attempting to place a value on intangible assets, the next seeing intellectual capital as the difference between one set of figures and another and the final group focusing mainly on human capital. The measurement tool that has gained the greatest acceptance in both the private and public sectors, the Balanced Scorecard, is the first to be analysed.

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1. Financial measures (5) address the question, ‘How do we look to shareholders?’ 2. Customer measures (5) address the question, ‘How do our customers see us?’ 3. Internal process measures (8–10) address the question, ‘What must we excel at?’ 4. Learning and growth measures (5) address the question, ‘Can we improve and create value?’ Examples are: ◆ ◆ ◆ ◆

financial – cash flow and profitability; customer – price as compared to competitors and product ratings; internal process – length of cycle times and level of waste; learning and growth – percentage of sales derived from new products and investment in new product development.

Although highly supportive of BSC, Bontis, Dragonetti, Jacobsen and Roos (1999) have pointed out some of its shortcomings. They say that the four areas and the measures within them are fairly limiting, and companies might miss more important factors by sticking to them too rigidly. They also feel that employees should have their own area and not be lumped together with IT systems in learning and growth. Furthermore, they believe that innovation has been inappropriately placed in the internal process area. Another critic is Nørreklit (2000), who feels that some of the relationships between the areas are more logical than causal and also believes BSC to be too top-down in its execution to be a fully effective strategic management control tool. Finally, Adams (2001) suggests that BSC only addresses the needs of shareholders and customers and does not consider all of an organisation’s stakeholders. Kaplan and Norton’s (1992) own insistence that organisations should select their own measures and that BSC is merely a framework can counter some of these criticisms. There is no doubt that BSC has had a tremendous influence, not only as a measurement tool in itself but also as a prototype for other organisations to build upon (see Chapter 4). Its extensive acceptance is perhaps its greatest testimony.

3.2.2 The value added approach This measurement and valuation technique was proposed by Robinson and Kleiner (1996) and comprises of a two-part framework.

The second part of the framework is borrowed from the economic value added (EVA™) theory, which has its roots in finance and was developed by Stern Stewart and Co., a New York-based consulting firm. If the return on capital for any project is greater than the cost of capital then it should proceed. The basic objective of EVA is to develop a performance measure that accounts for all the ways in which organisational value can be added or lost. To this end Stern Stewart and Co. has identified ‘164 performance measurement issues, including methods of addressing shortcomings in conventional GAAP accounting’ (Stewart III, 1994). Robinson and Kleiner proposed combining both Porter’s concept and EVA so that the: Financial project evaluation approach, which relies on value creation, should be applied to all of the internal processes of the value chain. The unfortunate difficulty is that many of the internal processes are in the form of intellectual capital and are not readily measurable. In order to overcome this major barrier Robinson and Kleiner came up with a number of suggestions, including: ◆ measuring intellectual property (patents, licences etc.) at their current market value; ◆ using the Hay method (named after the Hay Group a global consultancy corporation that specialise in personnel advice) to measure human capital, whereby job categories, and their related salaries, are evaluated by measuring know-how, problem solving and accountability; ◆ the use of ratios such as training per employee, number of ideas per employee and other productivity/employee ratios;


The first part uses Porter’s (1985) value chain concept. The basic premise of this, from an industrial perspective, is that raw materials enter from one end of the chain and, as they undergo the various processes that will eventually convert them into finished goods, value is added. Production is not the only function involved as the raw materials have to be procured and the finished goods marketed and sold, furthermore the whole procedure has to be administered and managed. The key point is that all of these internal functions should serve the purpose of the organisation, which is to create value for its customers.

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◆ measuring the ability of an organisation to learn and adapt to changes in the environment.

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Porter’s value chain and EVA are both well established and the combining of them to assess how every single activity creates value within an organisation has clear benefits, as it should eliminate any wasteful activities and lead to the maximum amount of value being added to a product or service. However, the difficulty arises when it comes to the measurement of value, especially when the activity is ‘soft’. Clearly the prompt answering of a customer query adds value, but it would be extremely difficult to put a monetary value on it. The suggestions provided by Robinson and Kleiner to overcome this difficulty fall well short of providing any clear valuations for all ‘soft’ assets and thus their proposal can be seen as more of a framework to be used once a reliable method of measurement of intellectual capital is agreed upon.

3.2.3 The value creation index Working with Cap Gemini, the Ernst & Young Center for Business Innovation, Chris Ittner and David Larcker (2000) of the University of Pennsylvania’s Wharton School developed the value creation index that attempts to measure the importance of different non-financial metrics in explaining the market value of companies. Publication of the Value Creation Index followed a survey of readers of Forbes ASAP (see Appendix 2) in which they were asked to rank the key drivers of corporate value for their industries. Ittner and Larcker then used publicly available information to develop a series of metrics associated with those value drivers. They then used techniques from capital markets research to test the correlation between those metrics and share prices. In doing so, they sought to discover what factors markets consider important rather than what managers say is important. The Forbes ASAP article was the first step in the development of the value creation index. Ittner and Larcker report that they are expanding the data and plan to do more thorough and complex research with these non-financial measures. The statistical and data-gathering techniques required for this type of analysis are daunting and few corporate management teams have the requisite skill or would willingly incur the associated costs. However, the sort of rigorous analysis described in the value creation index, especially the attempt to cor-

The results of this research are interesting, particularly the fact that customer satisfaction does not have the impact in the marketplace that managers always assume it has. There is no doubt that this is a complex approach and the cost of analysis could deter its implementation. However, the insights concerning which measurable non-financial metrics are correlated with the creation of value would be of considerable benefit to companies considering setting up their own intellectual capital measurement system.


relate metrics (individually and as a group) with capital markets is in stark contrast with other far simpler measurement techniques. The value creation index provides at least two important insights. First, what management (and, perhaps, users as well) say is important may not coincide with how they behave in the marketplace. Second, the creators developed different indices for different industries – consistent with the view that non-financial performance metrics must be industry-specific.

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3.3 Juggling with the figures 3.3.1 Market or value-based approach One of the simplest methods of calculating the value of an organisation’s intellectual capital is to take the difference between its market value, i.e. the number of shares in issue multiplied by the market value of the share, and the net value of its assets. This can be carried out with a minimum of information and the gap between the two figures, the market to book ratio, is often used as an indication that a company has a large amount of intellectual capital assets that are not reflected in its financial statements. There are several drawbacks with this method. The market value of a company is subject to a number of external variables that do not affect the assets in the same way. For instance, one only has to look at the over valuations of some of the earliest dot.coms to go public and then the subsequent and dramatic drop in their share values. In the case of lastminute.com the share price fell by 90 per cent in less than eighteen months, yet there was little change to the company’s intellectual assets. External factors such as deregulation, media and political influences and rumours can all have an effect on the market value of a company.


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Another argument against this method is that many of the tangible assets are recorded on the balance sheet at way below their current market value; therefore, the gap might not be as large as some of the ratios suggest. Furthermore, this method also values intellectual capital as one asset and no attempt is made to value the separate elements therein. A final criticism is that the current financial accounting model does not attempt to value a firm in its entirety. Instead it records each of its severable assets at an amount in accordance with extant legislation and the financial accounting standards. The market, however, would value a company in its entirety as a going concern. So the figure for intellectual capital would differ simply by the adoption of different accounting policies across national boundaries. For example, a company that capitalised development costs would have a lower intellectual capital value than a company that had written off development costs directly to profit and loss. To illustrate this last point the net asset values and market values of two fictitious companies will be used. Company A and Company B both have net asset values of £20 million and market values of £32 million, however during the year Company A writes off £1 million of development costs, whereas Company B capitalises development costs of the same amount. The value of the two companies intellectual capital would, according to this method, now differ. Company A’s would be valued at £13 million (32 – 19), whereas that of Company B would be £11 million (32 – 21).

3.3.2 Tobin’s q A method that overcomes one of the drawbacks of the market or valuebased approach is Tobin’s q. James Tobin, an economist who won the Nobel Prize in 1981, initially developed this to predict investment behaviour. The ‘q’ is the ratio of the market value of the firm to the replacement cost of its assets. If the latter is lower than the former then the company concerned is making higher than normal returns on its investment. Technology and human capital assets are typically associated with high ‘q’ values. Stewart (1997) argues that, as a measure of intellectual capital, Tobin’s ‘q’ identifies a company’s ability to generate unusually high profits because it has something that no other company has. By using replacement as opposed to historic costs it could be argued that Tobin’s q is more accurate than the market to book method, how-

3.3.3 Calculated intangible value Another measure is called the calculated intangible value (CIV) method. Stewart (1995) illustrates this method by using data from a US company, Merck & Co (see Appendix 3). It is similar in nature to the super-profits method of valuing a company, i.e. the difference between the maintainable profit and the expected return on the tangible assets employed. One major benefit of CIV is that it makes possible inter- and intraindustry comparisons on the basis of audited financial results. As with other methods that provide values or ratios there is also the potential for setting benchmarks and spotting trends. There are however, two problems with this approach. First, it adopts the average industry return on assets (ROA) as a basis for determining excess returns, and as averages tend to suffer from outlier problems there could be excessively high or low ROAs. Second, the company’s cost of capital will dictate the net present value (NPV) of intangible assets. Calculating the industry average to counter this will result in the same problems emerging as the adoption of an average industry ROA. Furthermore, it is not possible to separate out intellectual capital from goodwill using the resulting value, therefore, this method fails to evaluate the individual components of intellectual capital.

3.3.4 Matching assets to earnings – The Baruch Lev method Baruch Lev is the Philip Bardes Professor of Accounting and Finance at the Stern School of Business, NYU and also the Director of the Vincent C. Ross Institute for Accounting Research and the Project for Research on Intangibles. He is recognised as a leading authority on intellectual capital. His suggestion as outlined by Stewart (2001a) is


ever, finding these replacement costs is more difficult than simply referring to a balance sheet. Additionally, this method still uses the market value of the company as one of its key measures and thus is liable to the same drawbacks as the previous method. Therefore, Tobin’s q will not provide an accurate figure for individual intellectual capital assets and thus its real value lies in trend analysis. If the ‘q’ value is falling then the company concerned is either not managing its intangible assets effectively or investor sentiment has moved against it, depressing its market value.

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to match earnings with the assets that generate them. The calculation uses expected after tax returns on assets, two of which are averages while one, for intellectual capital assets, has been formulated using correlations between return on equity and cash flow, traditional earnings or knowledge earnings. Lev’s method is demonstrated in Appendix 4. Similar to CIV, Lev’s method uses both earnings and assets as data sources rather than relying purely on assets. By matching assets to earnings organisations would be left with a figure that they could then use for comparisons either with other companies or for indicating that their own earnings from intellectual capital are going up or down. It is an interesting suggestion but like many other measures it results in a single figure for intellectual capital and, therefore, does not attach values to the individual components. It once again relies on average values, the drawbacks of which have already been highlighted. The figure of 10.5 per cent representing the expected rate of return on knowledge assets could also be challenged.

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3.4 Human capital 3.4.1 The asset value of skills method A useful formula for placing a monetary value on employee skills was forwarded by Kieran Sheedy-Gohil, a senior consultant with the then Price Waterhouse consultancy firm, in 1996. This formula is: Skill asset value = (cost of skills) × (average years of service) × (retention rate) The three parts of the formula are calculated as: ◆ The cost of skills is determined by total payroll cost over the relevant accounting period rather than by training and development. ◆ The average years of service is taken as the average number of month’s service of all employees employed at the end of a period and is expressed in years. ◆ The retention rate is equal to 100 per cent minus the number of staff who have voluntarily left the business. This figure is then taken as a percentage of the average number of staff employed in the particular period.

An example of how this might work in practice can be seen in Appendix 5.

Although this formula is useful, and takes into account the rapid turnover in the modern labour market, it focuses purely on human capital, which although the source of innovation and renewal, is only one aspect of intellectual capital. Furthermore, the formula has as its central component a valuation of skills that is based purely on salaries and wages, with the consequence that the value of all of the various skills (decision-making, problem solving, manual dexterity etc.) are determined by a factor that has no precise correlation. There is little doubt that organisations operating in the knowledge industry will increasingly need to rely on ratios, such as those proposed by SheedyGohil, that better reflect their strengths and could be invaluable in gaining finance. However, although Sheedy-Gohil’s proposal has several benefits, it is too limited to become a generally accepted intellectual capital measurement system.

3.4.2 Human resource accounting Due to the fact that the attempt by Flamholtz (1972) and other writers to place employees on the balance sheet during the 1970s was unsuccessful, human resource accounting (HRA) can sometimes be dismissed, rather too easily, as a fad. However, the financial accounting aspect of capitalising expenditure on recruitment, training and development, is only part of human resource accounting. An additional objective was to ‘quantify the economic value of people to the organisation’ in order to contribute to the decision-making, planning and control process (Sackmann, Flamholtz and Bullen, 1989). Various cost models have been proposed, although the underlying rationale of this element of HRA is to calculate the contribution each employee makes to the organisation.


Once this figure has been calculated Sheedy-Gohil (1996) proposed that it should be included on the balance sheet in order to ‘make possible the calculation and use of additional measures’. The two ratios suggested are skill asset utilisation ratio (sAUR) and return on skill capital employed (ROsCE), both of which are relevant to skills-based organisations and may paint a more accurate picture than the more traditional AUR and ROCE.

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Human beings are the source of all knowledge and it is the combination of their intelligence, skills and expertise that gives any organisation its distinctive character and competitive edge. Therefore any models that attempt to capture the value they provide is to be welcomed. According to Bontis et al (1999) as well as the external information HRA can provide to users of accounts, there are other concomitant benefits, namely: ◆ internal feedback to the members of the organisation on the accomplishment of strategic goals; ◆ as a starting point to develop future plans and strategy by recognising the core competences inherent in the unique intellectual capital resident in the organisation. As far as a general measurement of intellectual capital is concerned HRA still has two major problems. As with Sheedy-Gohil’s method it only focuses on human capital and second, while salaries, wages and the costs of recruitment and training are simple enough to measure, ‘putting a value on the growth and accumulation’ of employee knowledge is considerably more difficult (Bontis et al, 1999).

3.4.3 Value-added intellectual capital coefficient Bassi and Van Buren (1999) describe this approach that was originally proposed by Pulic in 1998. It is value added, that is the difference between sales and all inputs (except labour expenses), divided by intellectual capital, which is approximated by total labour expenses. The higher the ratio, then the more efficient the company is at using its intellectual capital assets. The main advantage of this approach is its simplicity. The figures are easy to obtain from any annual report and once calculated for one year can then be used for either inter- or intra- company comparisons. However, the straightforwardness of this approach also leads to several disadvantages. Approximating an organisation’s labour expenses to its intellectual capital would appear to undervalue intellectual capital when compared with other methods such as the market-based approach. Additionally, a company could be using its labour resources very inefficiently, but this could be masked by a more efficient use of other inputs leading to a similar ratio.

3.5 Conclusions


The approaches outlined above give a good idea of the range of ideas and the different angles from which the problem of measuring intellectual capital has been approached. Only one of them, BSC, is widely used, as although EVA and, to a limited degree, value chain analysis (Porter’s theory) are employed, they are not combined as suggested by Robinson and Kleiner. The majority are theoretical and contain too many drawbacks or limitations in order to be universally accepted. However, one of the benefits of methods such as the market-based approach, Tobin’s q or CIV is that they provide benchmarks that can be used for comparison purposes. Although the single figure provided falls short of measuring the individual components of intellectual capital, the fact that it is going up or down in itself provides the company with vital information. Another benefit of these suggestions is that they may act as a prompt for a standardised system of measurement and eventually it might be a combination of some of these ideas that provide a practical solution to one of intellectual capital’s major stumbling blocks. In the absence of any international or national guidance, several companies have gone ahead and either developed their own framework for measuring intellectual capital or initiated working practices that maximise the potential of their human, customer and structural assets. Chapter 4 now investigates some of their work and ideas.

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4 Individual Organisational Approaches


4.1 Introduction

4.2 The Skandia Navigator The Skandia Group is a large Swedish financial services corporation and is acknowledged to be the leading exponent in the field of intellectual capital. In 1994 it developed the Navigator model that reflects four key dimensions of business: ◆ ◆ ◆ ◆

Financial focus; Customer focus; Process focus; Renewal and Development focus.

At the heart of these four is the Human focus that drives the whole model. The model is closely related to BSC. Indeed, Sveiby (1998) sees the Navigator as a combination of BSC and the Intangible Assets Monitor that he developed at Celemi (see section 4.3). Leif Edvinsson (1997), the first ever Director of Intellectual Capital in the world – at Skandia AFS – says that the Navigator (see Figure 4.1) can be ‘viewed as a house. The financial focus is the roof. The customer focus and process focus are the walls. The human focus is the soul of the house. The renewal and development focus is the platform. With such a metaphor, renewal and development becomes the critical bottom line for sustainability’. Each of the five focuses has critical success factors that are quantified in order to measure change over time, as detailed below.


Despite the growing international acceptance of intellectual capital, the majority of the work being conducted in this area is either being carried out in Scandinavia or North America. Companies in Sweden, Denmark and Norway have done a great deal to develop frameworks for measuring intellectual capital, whereas those in the US and Canada have developed practices that lever the maximum value from the various components that make up intellectual capital. The best-known framework is the Skandia Navigator and this is outlined first before looking at the work of other Nordic companies and, more briefly, at the work practices of several North American organisations.

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Indicators for the five focuses

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◆ Financial largely represented in monetary terms. ◆ Customer concentrates on assessing the value of customer capital to the organisation and makes use of both financial and nonfinancial indicators. ◆ Process emphasises the effective use of technology within the organisation. The measures tend to monitor quality processes and quality management systems but also include some financial ratios. ◆ Renewal and development attempts to capture the innovative capabilities of the organisation, measuring the effectiveness of its investment in training and its expenditure on R&D. ◆ Human includes measurements that reflect the human capital of the organisation and how those resources are being enhanced and developed. The various measurements from the five focuses can then be recorded and compared from year to year, see Appendix 6. More recently Skandia has developed the Dolphin Navigator System, which it describes as a ‘PC based business control software package’. This is an intranet system based on the Navigator concept (Skandia, 2001).

Financial focus

Customer focus

Human focus

Process focus

Renewal and development focus

Figure 4.1: The Skandia Navigator Source: Edvinsson (1997), ‘Developing Intellectual Capital at Skandia’, Long Range Planning, reproduced with permission.

4.3 Ericsson’s Cockpit Communicator

◆ ◆ ◆ ◆ ◆

innovation; employee; process; customer; financial.

Each perspective is represented in diagrammatical form as the dials in an aircraft cockpit. The perspectives have their own indicators and following inputs relevant to each indicator from the participating organisation, the Cockpit Communicator suggests the actions that will match the organisation’s strategies. The dials indicate whether a company is on target, on track to achieve the target or is failing to achieve the desired performance in each perspective. The aims of this product are: ◆ a vision driven organisation, whereby priority is given to those actions that are compatible with the company’s strategies, thereby achieving its vision and mission statements; ◆ a communicated strategy linked to indicators and actions; ◆ a balanced focus on past, present and future performance; ◆ a balance between short-term results and long-term strategy; ◆ an opportunity to evaluate and change organisational strategy rapidly in line with performance and changing business conditions; ◆ an opportunity to manage, measure and communicate future values (Ericsson, 2001). Leading Scandinavian and multinational companies throughout the world use the Cockpit Communicator including ABB, a multinational industrial, energy and automation company, Saab AB, which has interests in the automobile, aviation, defence and space sectors and SAS, the Swedish airline service.


Another Swedish company, Ericsson, which operates in the telecommunications sector, has developed a commercial product, called the Cockpit CommunicatorTM. As with Skandia’s Navigator it is based on the BSC. It also has five very similar focuses, in this case being called perspectives and consists of:

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4.4 Celemi’s Intangible Assets Monitor

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A third Swedish company, Celemi, which is involved in consultancy services has developed an Intangible Assets Monitor in cooperation with Karl-Erik Sveiby, PhD, see Figure 4.2. This method monitors three overall categories: ◆ clients (external structure); ◆ organisation (internal structure); ◆ people (competence). Under each of these interdependent categories, three key areas are tracked: growth/renewal, efficiency, and stability, each with its own set of specific performance indicators (Celemi, 2002). As with Skandia’s Navigator each indicator is scored and then the scores can be compared from year to year. Our clients

Our organisation

Our people

(External structure)

(Internal structure)

(Competence)

Growth/renewal

Growth/renewal

Growth/renewal

Revenue growth

Organisation enhancing clients

Average professional experience, years

Image enhancing clients

Revenues from new products

Competence enhancing clients

R&D revenues

Growth in professional competence

Intangible investments (% value added)

Experts with tertiary degree

Efficiency

Efficiency

Efficiency Revenues per client

Stability

Proportion of admin. staff

Value added per expert

Revenues per admin. staff

Value added margin on sales

Stability

Stability

Client satisfaction index

Admin. staff turnover

People satisfaction index

Repeat orders

Admin. staff seniority (years)

Expert turnover

Five largest clients

Rookie ratio

Expert seniority (years) Median age all employees (years)

Figure 4.2: Celemi’s Intangible Assets Monitor Source: Celemi (2002), ‘Intangible Assets’, Celemi Annual Report, reproduced with permission.

4.5 Ramboll’s Holistic Company model

◆ ◆ ◆ ◆ ◆

values and management; strategic processes; human resources; structural resources; consulting services,

which all lead up to three sets of results – customer, employee and societal – and all three combine to produce the financial results. Examples of performance indicators for human resources are: staff composition, staff turnover and competence building. These key performance indicators are themselves sub-divided into other indicators, for example, in competence building, they consist of items such as supplementary training expenses excluding salary, amount spent on per course participant and hours off contributed by employees (Ramboll, 2001).

Human resources

Values and management

Strategic processes

Customer results

Consultancy

Structural resources

Employee results

Financial results

Societal results

Figure 4.3: Ramboll’s Holistic Company model Source: Ramboll (2001), ‘The Holistic Company Model’, Holistic Operations, reproduced with permission.

All four of the individual organisational approaches to date are known as direct intellectual capital (DIC) methods in which individual components are identified, evaluated and measured. Once completed


In 1995, Ramboll, a Danish company also involved in consultancy services, developed its Holistic Company model, see Figure 4.3. As with the other Nordic models it consists of a number of key areas within which certain performance indicators are managed. These key areas consist of:

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these measurements can be aggregated to derive the total value of a company’s intellectual capital. These measurements are also known as indicators and Table 4.1 provides a list of possible human, organisational and customer capital indicators. There are some general indicators, although it must be remembered that measurements will always be company specific.

4.6 Bates Gruppen CompanyIQ measurement system Bates Gruppen is the Norwegian arm of Bates Worldwide and part of the Cordiant Communications Group. It has recently proposed a methodology that consists entirely of non-financial measures. Known as the CompanyIQ it allows a company to score its knowledge assets against those of another similar organisation (Stewart 2001b), see Appendix 7. The Bates Gruppen suggestion is more than just a measurement system. It requires an organisation to identify its highly valuable, unique capabilities and what intellectual capital assets are behind them. Furthermore, while calculating its IQ, a company may find it is producing goods and services that are little different to those of a competitor or contain features that mean very little to customers. This will leave the company with a ready made list of indicators, the measurement and management of which should lead to action being taken that impacts directly on the profit maximising capabilities of the organisation concerned. Table 4.1: Measures for managing intellectual capital Human capital indicators

Organisational capital indicators

Customer capital indicators

Revenue generated per employee

Income per R&D expense

Growth in sales volume

Number of senior positions filled by junior staff

Individual computer links to database

Revenues per customer

Recruitment, development and training spend per employee

Number of times database has been consulted

Proportion of sales by repeat customers


Upgrades of database


Average years service of staff

Contributions to database

Effectiveness of advertising campaign

Staff turnover

Upgrades of SOPs

Brand loyalty

Education level of staff

Value of new ideas

Brand image

Ratio of new ideas generated to new ideas implemented

Product returns as a proportion of sales

New ideas generated by members of staff

Number of new product introductions

Customer complaints

Value added per employee

New product introductions per employee

Reputation of company

Post training evaluation Proportion of income from exercise – benefits accrued new product introductions

Proportion of revenue generating staff to other

Number of patents

Image of company from employee’s perspective

Average length of time for product design and development

Proportion of customer’s business that your product or service represents

Changes implemented due to employee or customer satisfaction surveys IT expenditure as a percentage of administration spend Notes: It is worth noting that all of the above indicators are either numerical or can be represented numerically, e.g. company image can be rated from 1, for poor, to 10, for excellent. Therefore indicators provide figures that can be compared from year to year. Where the indicators give a financial figure they represent a link between the nonfinancial and financial dimensions. For example the innovative capabilities of staff (new ideas) can be measured by assessing the value of new ideas to the organisation (money saved or money earned). Skandia Banken (part of the Skandia Group) make an interesting measure – an expense ratio that compares the cost of knowledge transfer to overall operating expense (Lynn, 1998b). The key is in identifying appropriate measurement techniques and indicators that show how value has been created.

Initially, the proposal will mean a great deal of work; although once it is in operation it will only require occasional adjustments. It entails gathering data from employees and customers, both of which may either be unwilling to participate or may provide information that has been hastily compiled and be of little use. It may also be difficult for a company to divide its most important knowledge assets equally between the three types of intellectual capital, with the result that some are incorporated to make up the numbers, while other more important ones are excluded. Finally, the suggestion that at least 60 per cent of the indicators must be comparable with those from other companies still leaves a large amount that could be prone to subjec-


Staff with professional qualifications

45


tivity making the exercise less valuable. Tests commenced on the system in 2001 and it will be interesting to see if companies within the pilot find it beneficial.

4.7 Other approaches It is no surprise that Petty and Guthrie (1999) found that ‘the Nordic nations stand out as pioneers in the field’ of intellectual capital as opposed to the little work being done in this area in their native Australia. A year later having sampled the annual reports of twenty of the top Australian companies they found some elements of intellectual capital were being reported, albeit mainly in a narrative format. However, they concluded that in Australia ‘intellectual capital reporting and measurement developments are piecemeal and not widespread in large companies’. This, despite the fact that ‘company representatives emphasise that they view managing intellectual capital as vital to future success and competitiveness’ (Guthrie and Petty, 2000).

46

Despite a lack of innovation when it comes to developing intellectual capital measurement models it should be mentioned that in different parts of the world, particularly Europe, there have been attempts to measure and manage intangible assets through the use of frameworks normally associated with improving quality. Examples being the European Foundation for Quality Management (EFQM), total quality management (TQM) and the Tableau de Bord that has been used in France since the early 1900s (Epstein and Manzoni, 1997). However, several North American companies have also developed their own approaches and these are often cited in articles regarding intellectual capital but none of them have actually produced models such as those outlined above. These companies include Dow Chemical, IBM, CIBC, Ernst and Young and The Royal Bank of Canada. The work that each of these has carried out in this field is now briefly examined.

4.7.1 Dow Chemical In 1993 Dow Chemical appointed Gordon Petrash as global director of intellectual assets and capital management. Two of Petrash’s earlier successes were a complete streamlining of the vast amount of patents the company then had, developing a patent inventory and an

acceleration of the patent to product process, by improving communication and co-ordination throughout the entire company. The managing of soft assets led to ‘hard, measurable results’ (Lynn, 1998a).

In the early 1990s IBM centralised the consulting groups that had been previously spread throughout the entire organisation. Within this central consulting group a core intellectual capital team ‘was made responsible for developing a method of exploiting the intellectual capital generated by consultants around the world’ (Lynn, 2000a). Part of the intellectual capital framework established by the team included a set of measurements and incentives to motivate members worldwide. Some of the measurements used included: ◆ ◆ ◆ ◆ ◆ ◆ ◆

number of users; number of pieces of intellectual capital on the ICM system; user satisfaction; impact of intellectual capital reuse; impact on win/loss ratios; intellectual asset value; anecdotal evidence of value (Lynn, 2000a).

4.7.3 CIBC This Canadian bank set up a leadership centre abolishing generic training programmes. It calculated what skills employees working in various parts of the business would need and then put the onus on them to learn these skills using the centre as a base. It also began to measure key performance indicators within the three main categories – human, customer and organisational capital (Stewart, 1994). A further example of the work of the leadership centre was teaching senior management ‘to generate customer capital through achieving congruence of values and strategies with their clients’. Because of this ‘CIBC has seen its business move from transaction-based operations to relationship management with its client base’ (Bontis, 1996).

4.7.4 Ernst and Young This global company has set up a centre for business innovation, which ‘encourages and supports research in this area’ and hosts ‘con-


4.7.2 IBM

47


48

ferences on knowledge management and intellectual capital’ (Lynn, 1998b). Significantly, the business innovation group has encouraged clients to experiment with methods and models of measuring intellectual capital and has therefore taken a ‘proactive stance on accounting for intellectual capital’ (Lynn, 1998b).

4.7.5 The Royal Bank of Canada The Royal Bank of Canada has been one of the pioneers of assessing credit risk by using ‘soft’ information alongside ‘harder data on cash flows, track record etc’. In other words, ‘the measurement and evaluation of intellectual assets from another perspective – that of the lender evaluating the creditworthiness of a client. It also underscores the fact that such intellectual asset measures are needed not only by management to evaluate progress towards strategic goals but also by external parties deciding whether to lend to or to invest in the organisation’ (Lynn, 1998b). Some recent research by the Ernst and Young Strategic Finance Group found that ‘35 per cent of investor decisions are now based on non-financial indicators – a paradigm shift in business viability measurement from the present value of the company to the projected value of its future growth options’ (Buckingham, 2001).

4.8 Conclusions It can clearly be seen that the rest of the world is lagging behind the Nordic nations when it comes to developing easily adaptable frameworks for measuring intellectual capital. A look at either the websites or annual reports of Skandia, Ericsson, Celemi and Ramboll give a clear idea of just how much work these companies are doing in this area. Additionally, Edvinsson of Skandia and Sveiby of Celemi have written extensively on this topic. While the suggested frameworks of their companies can be adapted to fit any other organisation’s circumstances, Ericsson’s Cockpit Communicator is only available commercially. The Bates-Gruppen method is more of a management system although it will eventually provide a figure that can be used for benchmarking or comparison purposes. Some interesting work is also being done in North America, though a lot of this is for more of an internal focus. Of particular interest is the work being done by the Royal Bank of Canada. The way lenders assess the creditworthiness of a client is already beginning to change in order to allow for the soft-


er assets that nowadays make up a higher proportion of company value. Accountants must be aware of the value of these assets, so that they do not underestimate their organisation’s borrowing potential. As a footnote to this chapter, it is perhaps only fair to point out that all of the Scandinavian companies mentioned do derive at least part of their income from consultancy services and therefore have a commercial interest in promoting such intellectual capital measurement models.

49


5 Problems with Measuring Intellectual Capital


5.1 Introduction

5.2 Problem areas The measurement of intellectual capital assets does have a number of drawbacks. For example, there are problems with human capital measurement that could impinge on the performance that it is attempting to measure. A great deal of the data will come from staff monitoring themselves, for example compiling tick sheets such as the number of telephone calls answered and completing questionnaires. This could waste time by distracting staff from their actual core tasks and could be subject to inaccuracy (genuine mistakes) or self-protection (staff boosting their own performance measures so as to make themselves appear hard working). Customers may be unwilling to answer questions on what influenced their decision to purchase from a particular company and this could influence future purchase behaviour. As Dalmahoy (1996) observes ‘customers are, no doubt like many others, reaching a stage of advanced survey fatigue’. The cost versus benefit argument of providing information would also play its part here. Other costs would be easier to assess, the cost of reprocessing applications that were originally filed with errors, for example. Likewise, tracing some of the transfers of knowledge across the categories is more straightforward in certain areas. For example, the idea of a member of staff that then becomes part of the organisational standard operating procedures. Additionally, there is the danger that once the measures are chosen they are the only factors on which members of staff will concentrate, as employees feel that future rewards will depend on the chosen measures alone. Hauser and Katz (1998) found that firms became what they measured. A company that began to measure new ideas


There is a growing acceptance that the newer, ‘softer’ assets now appear to becoming more important to many organisations than the more traditional tangible fixed assets. There are, however, several problems in measuring such assets beyond finding a suitable basis of measurement. Having outlined some of the problem areas, this chapter then highlights why it is vital that such problems are overcome. The chapter concludes by looking at a generic model upon which all measurement systems could ideally be based.

53


generated by members of staff could suddenly become inundated by a large number of new ideas, all of which had to be tested and that could distract staff from other tasks. It also discovered that an obsession with measuring certain aspects could lead to far more important factors being overlooked. For example, if customer services staff were told to answer telephones within three rings this could become an end within itself, when of far greater importance would be the quality of the information customers were given and the attitude of the staff answering the telephone. It is therefore important to measure customer satisfaction from the customer’s point of view rather than that of the organisation. A final problem is one of timescale. Most intellectual capital gains occur in the long-term, yet measurements tend to monitor and evaluate short-term results, normally comparing one year with the next. Nevertheless, certain writers deem the prediction, measurement and evaluation of these intellectual capital assets to be essential. According to Claude Balthazard, a senior consultant with CIBC:

54

Intellectual capital is by nature dynamic, so parts of it may always be hard to measure with precision. We are finding that the most meaningful measurements involve a degree of subjectivity either in their derivation or in their interpretation. But it is better to have an approximate measure of the right thing than a precise measure of the wrong thing. (Edwards, 1997) Only by concentrating on those areas that are essential to organisational growth can management accountants play an important role in the modern, service-based, knowledge organisation, which is an organisation that makes profits by converting knowledge into value. The key as far as human capital is employed is value added per employee, which can be difficult to measure beyond simple measures such as sales per employee or direct labour costs in production compared to sales revenue. One method suggested by Dan Rubenstein, a principal in the Office of the Auditor General of Canada, is a timereporting system. Under this system, similar to that used by accounting and law firms, employees account for how they spend their working day (Edwards, 1997). Once again, this can be seen as a time wasting activity or even intrusive by some employees. Nonetheless, in a market driven economy if an employee is not adding value then

they should not be part of any organisation, although in practice things are rarely so simple.

Lynn (2000b) suggests that in the absence of hard measurements, proxy indicators (e.g. customer complaints and satisfaction surveys) should be used and again states that use of such indicators is better than ignoring intellectual capital altogether. She also felt (1998b) that the participation of all staff in any measurement scheme ‘can mitigate somewhat the potential for doctoring results, which is present in any performance evaluation scheme’. Finally, on this point, Dalmahoy (1996) stated that while measuring and recording human capital is difficult and contentious, a service and knowledge-based economy requires an organisation to regularly assess the collective value of its investment in its workforce to determine whether there has been an improvement in its actual and potential productive capacities and capabilities.

5.3 Towards a generic model for measuring intellectual capital Despite all of the suggestions proposed and all of the work being done in this area, there is still no universally acceptable method or model for measuring intellectual capital. Lynn (1998b) suggests that any such model must fulfil a number of criteria. It must: ◆ be flexible enough to be adapted to many types of organisational structures and cultures; ◆ provide multiple measures to track growth, innovation and knowledge transference in a dynamic fashion; ◆ be based on information that is currently accessible and/or can be obtained at minimum cost and effort;


Lev, in an interview with Bernhut (2001), stated that the fact that there are difficulties in valuing intangible assets should not be used as an excuse to ignore them altogether. Booth (1998) concurs with this, pointing out that training departments ‘tend to be viewed as overheads and a target for cost reduction. A performance model, linking financial performance to investment in intangibles, can help the departmental manager argue the case for the necessary investment’. Vakharia (1995) noted that outsourcing and downsizing should be seen as significant losses in an organisation’s revenue generating capacity, not as savings in expenses.

55


◆ use measures that are understandable and relevant to the unique business needs of the organisation; ◆ propose proxies and surrogates where possible for the ‘soft’ data that make up the measures; ◆ provide links with more traditional financial return measures (e.g. ROI, ROE, EPS and profit); ◆ enlist participation of all the organisation’s members, beginning with top management endorsement, so as to ensure organisational commitment. Vitale, Mavrinac and Hauser (1994) suggested that any measurements should consist of accessible data, be conceptually simple, relevant, reliable and above all, dynamic. ‘The set of measures a firm uses to guide itself should be flexible and capable of change and improvement.’ In 1995, Vitale and Mavrinac suggested several ways of checking whether a performance measurement system was effective. One sure sign that it is not effective is if ‘no-one notices when performance measurement reports aren’t produced’.

56

5.4 Conclusions There is no doubt that there are several problems regarding the measuring of intellectual capital, such as time wasting, inaccuracy, customer intrusion and losing sight of other important objectives. However, these must be overcome or else the role of the accountant will become increasingly marginalised. Lynn’s suggested model provides a valuable framework for any organisation considering undertaking the measurement of intellectual capital assets.

6 Survey of Irish Companies


6.1 Introduction

6.2 Background Ireland as a whole has seen a remarkable economic transformation over the past two decades. In NI, the advent of the peace process has seen a vast increase in inward investment and the profits of many longer established companies, e.g. Bombardier Shorts plc, steadily improve. RoI has become one of the developed world’s fastest growing economies, experiencing real growth of 37 per cent in five years, and again has seen a dramatic increase in the amount of inward investment. A large number of Irish companies operate within the service sector, which employs four times the number of the manufacturing sector, and therefore intellectual capital assets play a major part in their competitive future, growth and even survival. Furthermore this growth has been achieved with no more than 2 per cent direct expenditure by the state on R&D, which contrasts with a EU average of 7 per cent. Twenty per cent of this expenditure is funded by various EU schemes, whereas business spends a considerable 69 per cent on R&D (McBrierty and Kinsella, 1998). Therefore, one would expect to see a great deal of activity in the areas of intellectual capital measurement and development. To give some idea of the size of the two countries, RoI has a population of approximately 3.5 million, whereas NI’s is approximately 1.6 million. These compare with the other countries reviewed in the report as follows: Great Britain (58 million), Sweden (9 million), Denmark (5.4 million), USA (270 million), Canada (31.6 million) and Australia (19.3 million). The actual responses made by the participating companies are set out below. As well as stating the number of organisations that answered a question in a particular way, the sector response is also analysed, where appropriate. There would be certain practices with regard to intellectual capital one might expect to see more in a new economy company, e.g. telecommunications, when compared to a traditional manufacturing company. This hypothesis is tested where relevant. The analysis also attempts to give explanations for some of the findings, and the results of the in-depth interviews are also discussed.


Having stressed the significance of intellectual capital and summarised some of the suggestions proposed to date for measuring the various elements the report now investigates what is happening in this area in Ireland.

59

6.3 Analysis of the questionnaire


Recognition

60

Only one company stated it was unfamiliar with intellectual capital, whereas the remaining 27 (96 per cent) recognised the term. The organisation that claimed to be unfamiliar with the term was in the manufacturing sector, however, the same company felt that information was of vital importance, maintained a manual of standard operating procedures and a customer database, as well as measuring several elements of intellectual capital. It is, therefore, currently carrying out practices that would be associated with ICM.

Dedicated personnel Out of the 28 responding companies, only four (14 per cent) had personnel dedicated to working with intellectual capital. Two of these had specific people while the other two had dedicated teams. In one of the companies that had specific people working on intellectual capital, the chief finance officer and the company secretary shared the role, whereas in the other a person working in finance fulfilled this function. The fact that finance personnel are among the only dedicated members of staff working on intellectual capital would suggest that this is an area of importance for accountants. The remaining 24 respondents were asked to suggest who they thought should be responsible for managing intellectual capital within an organisation. They could suggest more than one person. The most popular choices were: ◆ ◆ ◆ ◆

chief executive/managing director – selected by ten companies; human resources director – six; finance director/chief finance officer – five; chief legal officer – three.

This latter suggestion is of note and could suggest that some organisations still equate intellectual capital with the much narrower intellectual property, which is legally defined. One useful proposal was that the human resource director should be responsible for human capital, the marketing director for customer capital and the finance director for organisational capital.

The importance of information

Standard operating procedures Companies were asked specifically about manuals of standard operating procedures (SOPs). Although considered to be part of an organisation’s structural capital there is nothing new about these and therefore one would expect to find SOPs in some form or another in the majority of companies. Twenty companies (71 per cent) stated that they had a manual of SOPs. Out of the remaining eight organisations, one intended to produce a manual within the next year, four intended to produce one within the next five years and three had no plans to produce such a guide within the foreseeable future. A sector analysis showed that out of the eight companies that do not currently have a manual, three would be considered to be part of the old economy, i.e. manufacturing and transport, where one may reasonably have anticipated such manuals being up and running for many years. The companies producing a manual were next asked how often they update it. The majority, fifteen (54 per cent), said that they update it as and when required, three updated it every year, one updated it every two years and finally one updated their manual between every two and five years. The three companies that updated the manual every year were all in different non-manufacturing sectors: banking and finance; recruitment and consultancy; and pharmaceutical and biotechnology. The company that updated its SOPs every two years was in the banking and finance sector, whereas the one updating the manual between every two and five years was in the food and beverage sector. This latter point is surprising as one might expect manuals to be updated far more regularly in such a sector, due to changes in health and safety and other legislation.


The organisations were then asked how important they thought information was as an asset. Twelve companies (43 per cent) considered it to be of vital importance, three (10 per cent) thought it to be more important than tangible assets, 12 (43 per cent) thought it to be important and finally one (4 per cent) company, operating in the manufacturing sector, considered it to be of limited importance only.

61


Databases

62

Another element of organisational capital that the survey specifically focused on was databases. Since the late 1980s/early 1990s most companies have invested in a large number of desktop computers and made use of database software, which has been available for many years. The companies were asked whether they maintained any of the following databases: ◆ ◆ ◆ ◆

customer database; mailing list; ideas database; other (company to specify).

The vast majority of respondents maintained a customer database (26, i.e. 93 per cent), which is to be expected. One of the companies not having this type of database was, somewhat surprisingly, in the banking and finance sector. A large number of organisations also maintained a mailing list (23, i.e. 82 per cent). Only five respondents (18 per cent) maintained an ideas database, two of these being in the banking and finance sector. Six organisations listed other databases that they maintained and these included R&D, sales and marketing and product and knowledge management databases. The electronics company maintained this latter database. All responding organisations had at least one database and 23 (82 per cent) maintained more than one. The survey then looked at what measurements Irish companies made with regard to databases. The survey asked if the following measures were made: ◆ ◆ ◆ ◆

the number of individual computer links to the database; the number of times the database has been consulted; the contributions to the database; and upgrades of the database.

Out of these four, upgrades were the most popular with thirteen companies stating they conducted this measure. Ten measured contributions, seven measured the number of computer links and six measured the number of times the database had been consulted. Thirteen (46 per cent) companies made none of the above listed measures, while twelve (43 per cent) made more than one.

Elements of intellectual capital

From Table 6.1 it is evidenced that most companies find the Internet important, with those in a range of mainly old economy sectors either finding it not very important or not important at all. Far more surprising is that two companies felt that customer satisfaction was of no importance. One of these was in the manufacturing sector, while the other was in pharmaceuticals and biotechnology. Even if neither of these sell directly to an end user it might have been reasonably assumed that they would wish to satisfy their immediate customers. The same two companies also did not think that the expertise of their workforce or market intelligence was important. As far as R&D was concerned, 82 per cent of the respondents, covering all sectors with the exception of recruitment and consultancy, found it important. Once again, it was surprising to find an organisation operating within the pharmaceutical and biotechnology sector not to find R&D important at all. It is noteworthy that the elements that were the most important (either vital or very important) to the majority of the respondents (over two thirds) represented the three categories of intellectual capital. These were: workforce expertise (human capital), software (organisational capital) and market intelligence and customer satisfaction (customer capital).

Measuring human capital The questionnaire then attempted to gather information on what elements of the three main categories of intellectual capital the Irish companies were already measuring. The findings regarding human capital measures can be seen in Table 6.2. Twenty-five organisations measured more than one element, one measured employee satisfaction


The next part of the questionnaire asked respondents to rank how importantly they rated certain elements of intellectual capital. The results of this part of the survey can be seen in Table 6.1. Totals are out of 26, as two respondents did not answer this question, whereas the percentage figures in brackets are expressed as a proportion of the total sample, i.e. 28. The majority of the responses were dependent on the sector within which the company concerned operated. For example, non-manufacturing companies would not find manufacturing processes important. However, some of the results were interesting and are outlined below.

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Table 6.1: The importance of the various elements of intellectual capital


Element

64

The Internet

Of vital importance

Very important

Important

Not very important

Not important at all

5 (18%)

9 (32%)

7 (25%)

3 (11%)

2

(7%) (7%)


17

Brands

12 (43%)

(61%)

4 (14%)

0

2

6 (21%)

3

(11%)

6 (21%)

2 (7%)

0 1

Distribution networks

8

(29%)

9 (32%)

5 (18%)

3 (11%)

Workforce expertise

15

(54%)

8 (29%)

1 (4%)

1 (4%)

1

(4%)

8 (29%)

6 (21%)

7 (25%)

2

(7%)

3

(11%)

1 (4%)

1

(4%)

1

(4%)

Licences Market intelligence

12

(4%)

(43%)

11 (39%)

Manufacturing processes

7 (25%)

6 (21%)

4 (14%)

4 (14%)

5

(18%)

Mailing/ Phone lists

2

(7%)

9 (32%)

11 (39%)

3 (11%)

1

(4%)

Consultancy/ Advice

2

(7%)

3 (11%)

14 (50%)

6 (21%)

1

(4%)

R&D know-how

7

(25%)

0

3

(11%)

Software

6 (21%)

1 (4%)

0

Design rights

5

2

2

(18%)

6 (21%) 10 (36%) 14 (50%)

5 (18%)

5 (18%)

12 (43%)

(7%)

(7%)

Royalties

2

(7%)

5 (18%)

9 (32%)

6 (21%)

4

(14%)

Patents

3

(11%)

6 (21%)

8 (29%)

5 (18%)

4

(14%)

only, and two organisations did not measure any of those elements listed or offered any that were currently being measured. The most measured elements of human capital were concerned with staff loyalty, i.e. staff turnover, measured by three-quarters of the respondents, and number of years service per employee and employee satisfaction, both measured by just under two- thirds. Perhaps surprisingly, one of the next most popular measures was staff with professional qualifications. Although this might seem less important than other elements, the large amount of respondents measuring this is probably explained by the fact that such data is easy to capture. A large number of respondents also measure development and training

Table 6.2: Elements of human capital being measured Element of human capital

No. of companies measuring element

%


18

64

Number of years’ service per employee

18

64

Number of senior positions filled by junior staff

10

36

Development and training spend per employee

16

57

Post training evaluation exercise

12

43

Staff with professional qualifications

16

57

Staff turnover at all levels

21

75

Percentage increase per annum of recruitment and selection expenditure

13

46

New ideas generated by members of staff

4

14

Value added per employee

8

29

Measuring customer capital Table 6.3 details what elements of customer capital the respondents measure. As with human capital, 25 organisations measured more than one element whereas two did not measure any of those elements listed or offered any that were being measured. One organisation only measured the number of customers. As with some of the human capital measures, it is the fact that companies are not measuring certain aspects of customer capital that is worthy of the most attention. For example, seven companies are currently not measuring the number of customers that they have. However, if one does a sector analysis it becomes a little clearer. Two of the companies work in the property sector, while another is in the hotel business. In such sectors there may be such a rapid turnover that it would not be feasible to constantly capture customer numbers.


spend per employee, although less carry out a post training evaluation exercise. Two elements that have a surprisingly low number of companies measuring them are value added per employee and new ideas generated by staff. The first of these is possibly explained by the difficulty in finding an accurate method beyond simple ratio measurements such as dividing turnover by the number of employees. On the other hand, there is nothing new about staff suggestion schemes and one would assume that if a company had such a scheme, which is to be expected, they would measure it.

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Table 6.3: Elements of customer capital being measured

66

Element of customer capital


%

Number of customers

21

75


21

75

Telephone accessibility

10

36

Customer retention

20

71

Customer complaints

25

89

Revenues per customer

22

79

Number of contracts

13

46

Effectiveness of advertising campaign

11

39

Repeat orders

12

43

It is also noteworthy that, out of the 24 companies that felt customer satisfaction was important (see Table 6.1), 21 actually measure it. At the same time almost 90 per cent of the respondents do measure customer complaints. One item of interest to management accountants is the fairly low frequency of measurement of the effectiveness of an advertising campaign. This is precisely the sort of measure that writers such as Booth (1998) advocate should be made or there is the danger that marketing campaigns will be eliminated during times of financial hardship. Unless links are made between expenditure and sales, advertising could be viewed as an unnecessary expense. Table 6.4: Elements of organisational capital being measured Element of organisational capital Proportion of revenue generating employees to other employees


%

11

39

Ratio of new ideas generated to new ideas implemented

1

4

Value of new ideas (money saved, money earned)

4

14

Number of new products introduced

14

50

Proportion of income from new products

14

50

Changes implemented due to employee or customer satisfaction surveys

9

32

Expenditure on research and development

17

61

IT expenditure as a percentage of administration spend

21

75

9

32

Average length of time for product, design and development

Measuring organisational capital

As can be seen only two elements were measured by more than 50 per cent of the respondents and these were both expense items, i.e. expenditure on R&D and IT expenditure as a percentage of administration spend. It could be argued that these are the simplest elements to measure, as both would be gathered as part of the drafting of financial statements and the IT to administration ratio, in particular, would be very easy to calculate. The fact that only four companies measure the value of new ideas accords with the findings from Table 6.2, where only four companies measured new ideas generated by staff members. However, one would expect that all of these four companies would be interested in finding out how many of the new ideas are actually implemented, if for no other reason than employee feedback, whereas only one actually measures this. With regard to measuring the proportion of revenue-generating employees to other employees, this was carried out by all three responding pharmaceutical and biotechnology companies with the remaining eight all being involved in the non-manufacturing sector. This reflects the structure of these companies where there would be a high proportion of staff not directly involved in the production facility. It is worth mentioning that pharmaceutical companies may seem akin to those in the manufacturing sector, however the end product of such companies, drugs for example, are merely packaging for all the knowledge and research that has gone into creating them. One other point of interest is the number of companies following up employee and customer satisfaction surveys. From Table 6.2 and Table 6.3 it can be seen that eighteen (64 per cent) and twenty-one (75 per cent) companies currently measure employee and customer satisfaction respectively. It would be expected that such surveys contained a certain amount of negative responses and that, in light of these some changes, however minor, would be made. Thus, the fact that only nine (32 per cent) organisations actually monitor this is surprising.


The elements of organisational capital that Irish companies are currently measuring can be seen in Table 6.4. Out of the three categories this was the one that companies measured the least. Twenty-two organisations measured more than one element, two organisations measured R&D expenditure only, whereas four did not measure any of those elements listed or offered any that were being measured.

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Management often report that due to both kinds of survey certain changes have been implemented, so one may have reasonably expected that they be measured.

68

Evaluation of intellectual capital One of the most important aspects of the research was to try and ascertain what formal systems Irish companies are using to evaluate their intellectual capital having identified the various elements that are currently being measured. Out of the 28 respondents only eleven (39 per cent) do not use a system at all. The most popular system is BSC, which eight (29 per cent) use. Four (14 per cent) use their own inhouse system and two use a key performance indicator (KPI) system. Three other methods are employee opinion surveys, value chain analysis and a system using basic financial and qualitative data. Neither of the companies working solely in pharmaceuticals used any system and, apart from an employee opinion survey, nor did any organisations working in manufacturing. Two technology companies did not use any system of evaluation and neither did one of the organisations working in banking and finance. BSC was being used in the retail, banking, hotel, technology, telecommunications and property sectors. The in-house criteria systems are of particular interest and are discussed in greater depth in the qualitative findings. There appeared to have been no discernible alignment between the system being used and the number of measurements being made. One might have expected that the companies that had no system of evaluation would not be measuring many of the individual elements of the three categories of intellectual capital. This, however, was not always the case. Although four of the companies without a system had the lowest number of measurements, one company in this category measured 24 separate elements out of a possible total of 28. No other company, regardless of system used, measured more than this. Furthermore, one of the companies that was using its own in-house system only measured eight elements and none of these came under the heading of organisational capital. The two organisations using a KPI system measured 24 and 19 elements respectively and the company using basic financial and qualitative data also measured 24 elements. Those using BSC, as would be expected, measured across all three categories and they ranged from measuring only 12 elements to measuring 23.

Disclosure of intellectual capital


Finally respondents were asked if they had any plans to incorporate any information regarding intellectual capital in their annual reports. Two (7 per cent) stated that they were planning to do this; one (4 per cent) said they might, while 25 (89 per cent) said that they had no such plans. One organisation thought the most appropriate place for this information would be the financial statements; while others felt that it would be better placed in either the chair’s statement or the directors’ report. Both of the companies that stated they were planning to disclose details of intellectual capital in their annual reports have dedicated teams working in the area and both would be considered to be operating in new economy sectors. From the in-depth interviews, it became clear that most companies deem this information too sensitive for disclosure.

6.4 Qualitative findings 69

The companies were selected for more in-depth interviews if they either used an evaluation system that appeared to be original or had personnel dedicated to intellectual capital. This was an area of particular sensitivity as far as participating companies were concerned, with one of the two companies using a KPI system unwilling to be interviewed, however some interesting information was still obtained. The original intention was to conduct in-depth interviews on a faceto-face basis and letters were sent out, in the first instance, to the company secretaries of selected companies, to try and arrange these. When this approach proved to be fruitless another letter was sent to chief finance officers. Due to another poor response it was decided to conduct the interviews by telephone. De Vaus (2002) feels that telephone interviews allow rapport to be built up, while at the same time maintaining considerable respondent anonymity. Despite this clear advantage they remain fairly impersonal. Eight interviews were eventually carried out via this means, but it was not a straightforward operation, and often several telephone calls were required to each company before the appropriate person was located. The interviews lasted, on average, for about half an hour.


In-house criteria

70

Unfortunately, one of the four companies using their own evaluation criteria did not provide its name; therefore contact was not possible. A representative from another company, working in what would be considered a more traditional sector, stated that it relied greatly on the uniqueness of its products. This was derived from both research and development and purchased know-how through acquisitions. Parallels can, therefore, be drawn between this company and those in the pharmaceutical industry where the end product is merely the packaging for R&D and knowledge. The in-house method of valuation used by this company involved the matching of intellectual capital assets, with a great emphasis on know-how, against the relevant product life cycle and the asset’s cash generating ability. It would appear therefore that this company is using a variation of the value chain analysis. In the third company that uses its own in-house method of evaluation, the human resources department undertakes the role of capturing the data. This method focuses purely on human capital. The company sets up a role profile for each position within the organisation listing the skills, competences, knowledge and experience that the ideal holder should have. This profile (known as a laboratory profile) is then matched with that of any potential candidate or existing employee, and has two distinct benefits. First, it is an aid to recruitment in that it is far more precise and scientific than the normal essential and desirable criteria, which can be fairly broad. Poor or hasty recruitment decisions can have long-term detrimental affects on any company and thus more cost and effort at the early stages can result in savings in the longer term (lost working days, potential legal disputes and re-recruitment) and, more positively, financial benefits through the value each employee brings. The second benefit is that for existing employees it clearly identifies if there are any gaps between the target skills, knowledge etc. and that which the employee currently possesses. Then suitable, rather than generic, training can be identified. As well as bringing long-term benefits to the company, it also acts as a form of motivation for the employee. The approach of this company is similar to that of CIBC, who have abolished generic training in favour of this more tailored approach. The final company also only used human resource information. This involved building a profile of each employee with regard to existing

Basic financial and qualitative data A similar situation exists with the company that evaluates intellectual capital using basic financial and qualitative data. This consists of traditional financial measures such as ROCE and ROA, specific financial measures such as expenditure on R&D, IT and training, as well as softer data such as employee and customer satisfaction and customer complaints. Although much of this softer information is acted upon (for example they have a clear policy on dealing with customer complaints), there is no system that evaluates these elements holistically. Therefore, the finance department deals with expenditure, the human resource department with staffing issues and there is a customer care section within the sales and marketing department. The interview brought out some interesting anomalies, for example, the company measures new ideas generated by staff but does not follow these through to see how many of them are implemented and if they are, what value they bring to the organisation. Expenditure is closely monitored in all areas, strict budgets set, but then the company does not see how effective this expenditure is in enhancing its long-term competitiveness. This was clear from its post-training evaluation exercise that consists of interviewing staff immediately after a training course and then again three months later. The follow up appeared to be almost cursory and went no further than the human resource department.

Value chain analysis Although it was felt initially that the company that stated it used this method would be using a method similar to that advocated by Porter (see section 3.2), it soon became clear that its system, although thorough, is only practised in the production department and not throughout the whole organisation; furthermore, it bears no relation to Porter’s theory. The company is aggressive and continues to acquire under per-


qualifications, examinations taken and performance at various interviews; then suitability for other positions in the company could be assessed. Although this system captures some of the suggested human capital measurements, it could be argued that a large number of companies would undertake similar practices as a matter of course and there is nothing novel about this approach.

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forming businesses, making it a world leader in its own sector. Although it has a wide portfolio of products, they are all centred on its core manufacturing business. When this company refers to value chain it is referring to the practice of constantly enhancing its existing product mix by using and experimenting with new and specialist grades of the raw materials used in the production facility. In this way, it continues to bring out products that have comparatively higher growth prospects and command higher prices than conventional ones. The company has recently moved into e-procurement and is clearly forward thinking and highly successful, however there is no real evidence of the existence of an overall coherent intellectual capital strategy.

KPIs The interview with one of the companies using a KPI system indicated that its system, referred to as a business benefit scorecard, is very similar to BSC, in that it touches on all aspects of the company and not just on financial outcomes. The company is not in a fixedasset intensive industry, and operates in a number of diverse areas including business-to-business marketing and distribution, software development, supply chain management and customer interface with clients. Within this KPI framework, when providing a service for a client, a full business case is compiled and with this, the lists of objectives that are to be achieved across all the functional areas. The idea is to build these micro objectives into an overall macro model and ensure that both products and processes are measured appropriately. From this point onwards, these objectives are then reviewed on a quarterly basis to see what progress is being made. This review takes the form of a self-assessment exercise undertaken by the head of each department and say, for example, it is discovered that only 70 per cent of a particular objective has been achieved, then they see how this can be improved and where they expect to be in the next three months, six months and so on. If a particular course of action is needed, such as more staff training or better process management, then that is investigated and implemented. This process continues until 100 per cent of a particular objective is reached, although this rarely happens in practice as targets keep on moving and changing. They find that this quarterly review is sufficient, anything more than that and it becomes

‘paralysis by analysis’, whereby so much performance information is collected and collated, that it is difficult to act on the findings themselves.

Some of the KPIs used focus on the following areas: key product lines; organisation of processes (organisational capital); marketing strategies; marketing knowledge (customer capital); and investment in training and investment in people (human capital). Examples of specific KPIs would be time to process a sales order or to produce a set of accounts and the number of credit notes issued. However, a lot of attention is still paid to the more traditional cost reduction and revenue enhancement measures, as these are regarded as highly important as well as being easy to measure. This company also had a team dedicated to intellectual capital and are referred to again in the next section.

Dedicated intellectual capital personnel Further investigation of the organisations that stated they had people working on intellectual capital showed that this is only part of an overall portfolio and is not the only work carried out by any person or persons. One company that was decentralised had staff responsible for intellectual capital working in each functional area. The company admitted that intellectual capital was not a term everyone within a functional area would be aware of, however, it would be more relevant in some areas than others, for example software development. Another company, which is also in a new economy sector, also had what was labelled an intellectual capital team, but in reality this was more of a working party that met occasionally to discuss issues. Once again this was a human resources led operation and much of the work going on was to do with either personnel or customers, with a smaller emphasis being placed on operations.


The company’s ideal target is what it calls the optimisation of utilisation. In order to achieve this the company finds the setting, measuring and refining of objectives and goals essential. It is felt that it is not good enough to never return to the business project once it is up and running, as one will always need to make changes and always try and improve. To the respondent, improvement is best achieved by a bottom-up approach and, to this end, all staff receive the training that enables them to improve and gain better skills and to ensure that information is fully utilised.

73


6.5 Conclusions

74

Despite what appeared to be some promising scenarios with companies having dedicated intellectual capital personnel and a variety of evaluation systems, the in-depth interviews effectively revealed that little work is taking place in Ireland when it comes to intellectual capital. The analysis of questionnaires indicated that there might be a lack of any defined linkages between a working practice, the capture of information surrounding this practice and any evaluation of it alongside data gathered from other parts of the company. This contention was reinforced by the qualitative findings.

7 Conclusions


7.1 Introduction

7.2 Summary of results There is no doubt that there is a high awareness of intellectual capital among Irish companies. Furthermore, the majority of companies already measure certain elements of human, customer and organisational capital. However, it appears that this may be occurring as part of normal working practices and not co-ordinated within an overall intellectual capital programme. For example, employee and customer satisfaction surveys, staff suggestion schemes, manuals of SOPs and databases are nothing new and would have been in use before the term intellectual capital was commonly referred to. This assumption is backed up, to a certain extent, by the fact that very few companies (14 per cent) have personnel dedicated to intellectual capital and there is a lack of agreement as to which department should be in charge of such a task. Most respondents saw it as a role that the most senior person in the company should undertake and only five thought it to be a task that the finance department could be engaged in. It should be noted, however, that where companies did have personnel working in this area they tended to be working in finance, which suggests that intellectual capital is relevant to the accountancy profession. On telephoning organisations to gather more information, there was no linking of the term intellectual capital with any specific department or person and it is clearly not something staff are familiar with. Even where organisations claimed to have people working in this area, this was only as part of a portfolio and not an exclusive role. Nevertheless, it would appear that just under two-thirds of the responding companies (61 per cent) use a formal system, such as BSC, to capture and monitor the various elements of intellectual capital. This statement however, requires a deeper examination. In three cases organisations conduct practices that are mirrored, with minor variations, in many other companies and although linked to intellectual capital measurement systems, could also be deemed to be totally independent of


In this chapter the findings of the survey are summarised before being compared with other research undertaken in Ireland. The chapter concludes by comparing the situation in Ireland with other parts of the world as well as suggesting possible areas of future research.

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them. These are the companies using basic financial and qualitative data, employee opinion surveys and the system measuring employee qualifications and interview performance. Likewise, although the company using a form of gap analysis to fill internal posts and determine training provides an example of a useful practice, it only focuses on one category, human capital. Finally, the practice of value chain analysis that one company appears to conduct is a term it uses for new product development and is not an intellectual capital measurement system. It would, therefore, be more accurate to state that less than half (43 per cent) of the responding companies use a formal system to evaluate their intellectual capital (this is assuming that the systems used by two organisations either unable or unwilling to provide more detailed information are as comprehensive as BSC). Other findings are more encouraging. Almost all of the respondents found information to be at least important (96 per cent), 71 per cent had SOP manuals and all maintained at least one database, with 82 per cent maintaining more than one. Furthermore, when presented with a list of intellectual capital elements (e.g. software, customer satisfaction) the majority of the respondents acknowledged the importance of each element with 57 per cent being the smallest finding an element at least important and 89 per cent being the largest. The average figure for all fifteen elements, considered to be at least important, that were listed was 76 per cent. When it comes to measuring the various elements that make up the three categories of intellectual capital, there is a lot of work under way in Ireland. The vast majority of respondents measure at least one element in each category and 68 per cent of the organisations surveyed measure more than one element in each of the three categories. The average measurements for the elements listed in human, customer and organisational capital were 49 per cent, 61 per cent and 40 per cent respectively; the most popular elements in each of the categories were measured by 75 per cent, 89 per cent and 75 per cent respectively. The main problem, as far as companies in Ireland are concerned, is that much of this work seems to be going on independently and is not part of on overall ICM strategy. This can be seen in several areas. First, despite 100 per cent of the responding organisations maintaining a database, only just over half of them (54 per cent) were monitoring the use of these databases to see how often they were used or even upgraded. These databases could therefore be ineffective or out of date.

However, it would be unfair to suggest, on an appraisal of the facts, that Ireland is lagging behind the rest of the developed world as very little substantive work seems to be taking place outside Scandinavia and North America.

7.3 Comparison with other Irish research Although the focus of this research was not on external reporting, the central question that was asked concerning this issue did accord with the findings of Brennan (2001) who discovered that although Irish companies had substantial intellectual capital assets, they were rarely referred to in annual reports. None of the companies in this survey were currently including information regarding intellectual capital in their annual reports and only two had definite plans to do so, with one stating that they might. This, despite the fact that the responding companies quite clearly all currently measure some aspects of intellectual capital. Some of the same organisations took part in both pieces of research and what is also noteworthy is that some of those that Brennan felt were including, however obliquely, relevant information in the annual report did not see themselves as providing it. As a footnote to the above, UK companies may soon have to incorporate information regarding intellectual capital into their annual reports due to changes in company legislation. The company law


Second, there was at times no linkage between what companies deemed to be important and what they were actually measuring, for example, 86 per cent of the respondents felt that customer satisfaction was at least important to them; yet a smaller number (75 per cent) actually measure it. Likewise 82 per cent felt that R&D was important, whereas only 61 per cent measure actual expenditure on it. Third, having measured the various elements in all three categories, only 43 per cent then feed this information into a formal evaluation system such as BSC. Finally, there is an almost total lack of intention to present this information, which is deemed to be important, to their various stakeholders via the annual report. While it may be many years before any universally acceptable method of valuing these assets is agreed upon, making it possible to include them in the financial statements, companies such as Skandia have shown that there is great scope for including this information both in narrative and quantitative formats elsewhere.

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review that was published in July 2001 had as one of its recommendations that large companies should be required to publish an operating and financial review (OFR) detailing ‘soft’ corporate information. According to Wild (2001) future OFRs should ‘include information about the skills and knowledge of the employees, business relationships and corporate reputation’. With regard to the research undertaken by O’Donnell et al, again there are similarities, but due to the differing sampling frames it is difficult to draw any concrete comparisons. Their research focused on the Irish software/telecommunications sector and it emerged that it is felt that almost two-thirds of company value is attributable to intellectual capital. Only five companies from this survey fitted in to that sector, however all found the majority of the elements normally associated with intellectual capital (see Table 6.1) at least important and over 69 per cent were considered to be very important. O’Donnell et al also found that 50 per cent of this intangible value derived directly from the people employed in these knowledge-intensive firms. Once again this survey could only draw on five companies with three measuring half, and two measuring three, of the ten elements of human capital listed (see Table 6.2), however the sample in the sector concerned was much smaller and the questions asked were not of a similar nature.

7.4 Comparison with other countries 7.4.1 United Kingdom In 1998, Oppenheim outlined the results of a survey carried out by Reuters, which reported on the results of 500 telephone interviews with senior managers in UK companies. The main conclusions were that one in four UK companies stated that information was its most important asset; 50 per cent said that it was more important than trade names and registered trade marks; and one in ten valued it more highly than its staff. Some comparisons can be made between this survey and the one conducted on Irish companies, despite the fact that the Reuters sample was much larger and different questions were asked. A larger number of Irish companies (43 per cent) considered information to be of vital importance – although this does not necessarily mean it is the most important asset, while 54 per cent thought it to be more important than tangible assets, and 96 per cent in total thought it to be at least important. This contrast is possibly less indicative of substantive differences

7.4.2 Australia The findings of the present Irish survey have several comparisons with the conclusions reached by Petty and Guthrie in the research they have carried out to date regarding intellectual capital in Australia. As in Australia, a great many Irish companies see the importance of intellectual capital yet little original or pioneering work is being done in corralling it into a coherent framework or format. In 1999, Petty and Guthrie felt that efforts in Australian organisations were more of a stocktaking exercise and there was little evidence of an ‘ability to manage, develop, support, measure and report intellectual capital’. They also found that the two most common measurement techniques were the BSC and the Intangible Assets Monitor. Here again, there are similarities with our findings; although no company was using the Intangible Assets Monitor, the BSC was the most popular technique in use. Their later work (Guthrie and Petty, 2000) did find some external reporting, albeit mainly in a narrative form, in Australian organisations. However, a lot of this was in the area of customer capital, for example distribution channels and customer value, which one could argue would be reported anyway and not necessarily as a key defining characteristic of intellectual capital. Certainly Guthrie and Petty found that ‘the key components of intellectual capital are not reported within a consistent framework, if reported at all’. The present survey certainly ascertained that there was no real intention to report intellectual capital in any part of the annual report and although Brennan (2001) found the occasional reference to a particular element in Irish external reporting, it was not part of an overall strategy.

7.4.3 USA and Canada Irish companies are, however lagging behind those in North America when it comes to the measuring and management of intellectual capital (Bontis, 1996, Lynn, 1998a, 1998b, 2000a, Stewart, 1994). Even


in perceptions about information between the two countries (some of the UK companies might have been from NI); of greater importance, perhaps, is the growing appreciation of the strategic value of information within companies, in the process of providing a competitive advantage in the current commercial environment, that has occurred since the time Oppenheim’s study was conducted.

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those organisations that are part of a group of companies owned by a North American parent do not perform better than those wholly Irish companies. Unlike some of the companies highlighted in Chapter 4, there is no work being originated in Ireland and the in-house criteria used are variations on a tried and tested technique, for example value chain or gap analysis. Intellectual capital is clearly not another American fad as it has gained increasing acceptance over the past decade, yet Irish companies still seem to be adopting a ‘wait and see’ approach. They are, however, not alone in this respect and, apart from the Nordic nations, the rest of Europe seems to have a similar attitude.

7.4.4 Other European countries As in the UK and Ireland, there is little pioneering academic work being undertaken in other European nations. As part of their research, Brennan and Connell (2000) examined what work was being undertaken in Austria, The Netherlands and Spain. In Austria, there was a growing awareness of the importance of intellectual capital and companies were using non-financial measures, such as KPIs. In the Netherlands, organisations appreciated the significance of intangible assets, yet there were relatively few examples of actually measuring these intangibles and the management valuation of such assets tended to be subjective. There was some acknowledgement that providing information on intellectual capital as an appendix to the annual report would be useful, but, as with Ireland, there were no definite plans to actually do this. In Spain companies felt that there was a need to develop firm and industry specific models for measuring intellectual capital, but it was found that there was little work being done to achieve this ideal.

7.4.5 The Nordic nations As stated previously, companies from the Nordic nations, particularly those in Sweden, stand out when it comes to leading the way in both measuring and managing intellectual capital and providing usable frameworks for other companies to adopt or adapt to suit their particular circumstances. Together with their counterparts all over the rest of Europe, Irish companies are a long way behind certain Scandinavian companies. Brennan and Connell (2000) summarised research undertaken in both Denmark and Sweden. It was discovered that companies in both countries showed great creativity when it came

Also noteworthy is that in Denmark there are various public sector organisations that assist private sector companies with the development of intellectual capital management and measurement systems. Examples include the Danish Agency for Trade and Industry and the Danish Confederation of Trade Unions. Although similar bodies exist in Ireland they do not provide the local business sector with any advice or information on intellectual capital in its broadest sense. The IDB (now known as Invest Northern Ireland) in NI do, however, assist clients with intellectual property rights.

7.5 A future research agenda The survey undertaken for this report has shown that, while there is much work going on within Irish companies that would fall under the banner of intellectual capital, what is needed in the majority of cases is an overall strategy whereby the various elements could be assessed as a whole. This holistic approach would lead to a more co-ordinated approach similar to that going on in many Scandinavian companies and, to a lesser extent, in North America. The management accountant has a leading role to play, both in identifying and auditing the inventory of intellectual capital and then evaluating the value added by it. Consequently there will be various aspects that need to be researched in the future and these can be placed under four broad headings, as outlined below.

Monitoring The situation in Ireland needs to be monitored. First, a survey investigating allied issues could be carried out within two years, to see if


to measuring intellectual capital and that in some companies intellectual capital accounts were maintained separately from the normal financial accounts. In other pieces of research focusing solely on Swedish companies, it was found that a lot of work was being done in improving the critical success factors in order to enhance organisational long-term competitive needs. It was also found that market considerations were deemed to be the most important when it came to developing a measurement system, followed by human capital. This was also the case in Ireland with regard to measuring individual elements; however when it came to evaluation systems, several of these focused purely on human capital.

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the situation has changed. Are better systems in use with regard to the management and measurement of intellectual capital or have things gone the other way? Has the whole thing been dismissed as a fad with companies again only measuring purely tangible assets? Given the difficulties in conducting this research, a different approach may well be necessary. For example, prior to sending out the questionnaire an introductory letter could be sent, followed up by a telephone call, explaining the previous findings and the importance of the study. Second, annual reports could be monitored as they are issued (the half yearly ones are unlikely to contain such detailed information) to see if the level of disclosure has changed in any way. Beattie (2000) suggests several areas that could be investigated: ◆ Is there an increase in the amount of reporting on intangible assets? ◆ Are there signs that companies are making more use of non-financial performance indicators? ◆ Is there more reporting on the quality of management beyond biographical information on high-ranking executives? ◆ Is there any reporting on the relationship between financial and non-financial indicators or are the two always kept separate? ◆ Do these additional disclosures have any impact on the market value of the companies concerned? It would also be interesting to observe whether this was a push or pull phenomenon. Have the various stakeholders demanded increased disclosures or have organisations done it to enhance their reputations? Additionally, it will be important to monitor the situation as intellectual capital develops further; are nations such as Ireland catching up, keeping the same distance apart or falling even further behind? Skandia announced in 1999 that they were currently working on a project called UNIC, one of the purposes of which was ‘to move into the third generation of intellectual capital by capitalising of thoughtware’. This meant they intended to move from the recognition of the importance of intellectual capital, through the current stage of the identification and weighting of key measures of success in order to obtain a single, summary intellectual capital index (see Appendix 6) on to actually capitalising it. This is clearly not an area that is going

to remain static and any company that is only paying lip service to it will find it increasingly harder to change its culture and move in the same direction as the more pioneering organisations in this field.

Despite the favourable response rate, it is more than possible that some of the other Irish companies quoted on either the Dublin or London stock exchanges are currently undertaking positive intellectual capital practices. The survey could be repeated and, if possible, carried out by someone actually visiting the companies in the sampling frame. This would be facilitated by the fact that the majority of the companies are based in the Dublin area. A personal interview would overcome many of the shortcomings as outlined in Chapter 1. By using an interview approach, any future study would be able gather more indepth, richer data on the subject of ICM processes, given the inherent strengths of this method. First, the structure of an interview can allow for the researcher to modify his/her line of enquiry (this is especially true in the semi-structured interview format). Second, interviews allow for the follow up of interesting responses and the investigation of respondents’ underlying motives. Third, non-verbal clues may emit messages, which help in understanding verbal responses. The problem naturally would be getting busy people to give up part of their working day in order to participate in the in-depth interview, yet with sufficient resources this could be overcome. Although similar research work may be going on in the rest of the UK, as yet no results have been published. A survey of the leading 100 companies on the FTSE would be in itself highly informative as well as being useful for comparison purposes. UK companies may provide examples of best practice when it comes to measuring intellectual capital that management accountants elsewhere could follow. Following on from the aforementioned survey, a size and sector analysis could be conducted. This survey did find some evidence that new economy companies were doing more work in the area of intellectual capital than the more traditional fixed asset intensive companies, yet the difference was not as marked as might have been expected. The size of the companies may also be important. Large companies might be able to employ dedicated personnel, whereas in small or medium-sized companies managing intellectual capital might form a small part of someone’s job specification.


Repetition of survey

85


The changing role of the management accountant

86

It is easy to theorise about what a management accountant should be doing in the information age, but this may not prove to be quite as simple in practice. The management accountant might be far too busy to even contemplate changing or the organisation may not be supportive of BSC or similar methods of evaluation. Empirical research of what management accountants actually do and how much this has changed over the past decade would provide some useful insights. This could be done on a company size, sector and regional scale. One issue that became clear was that, although personnel working in finance were carrying out much of the work being done in the area of intellectual capital, some organisations limited associated tasks to the human resources department only.

Intellectual capital in periods of economic recession A final area that could be investigated is how much emphasis is placed on intellectual capital during periods of economic recession. After a long period of economic growth during most of the 1990s, companies worldwide are once again laying off large numbers of staff and certain sectors, for example the airline industry, are facing severe problems. Is intellectual capital merely a phenomenon that organisations can entertain when profits are increasing or at least stable? It could be argued that for all its pioneering work in this area, Skandia has still faced the same economic hardships as other, less visionary companies. In November it reported a nine-month operating loss of $538 million (Croft, 2001). This current harsh economic climate may well be an acid test for intellectual capital and a survey could therefore be conducted to see if organisations are still dedicating the same time and resources towards it. As a counterpoint to the overwhelming positive bias it attracts, it would also be interesting to investigate the role ICM played in the recent ignominious collapse of some large corporations. The year 2002 could well go down as the year in which the creative accounting practices of several big companies were finally exposed, and in one, well-publicised case intellectual capital played a part. According to Rombel (2002) ‘Enron captivated financiers, lenders, analysts, investors, traders, and its employees by building a trading and risk management powerhouse largely on its own intellectual capital and the assets of others’.

Appendices


Appendix 1 SECTOR BREAKDOWN OF SURVEYED COMPANIES Survey

Respondents

No. of No. of companies – RoI companies – NI

Total (%)

Total (%) No. of No. of companies– RoI companies- NI

Banking and finance

9

1

10 (14%)

3

0

3 (11%)

Construction and property

7

1

8 (11%)

2

0

2 (7%)

Electronics

3

0

3 (4%)

1

0

1 (3.5%)

Electricity supply

0

1

1 (1%)

0

0

0

Food and beverage

8

0

8 (11%)

2

0

2 (7%)

Manufacturing

6

4

10 (14%)

3

1

4 (14%)

Media and publishing

2

1

3 (4%)

1

0

1 (3.5%)

Mining and extraction

3

0

3 (4%)

0

0

0

Pharmaceuticals and biotechnology

6

1

7 (10%)

3

0

3 (11%)

Recruitment and consultancy

4

1

5 (7%)

1

0

1 (3.5%)

Retail

1

0

1 (1%)

1

0

1 (3.5%)

Technology

4

1

5 (7%)

2

1

3 (11%)

Telecommunications

2

0

2 (3%)

2

0

2 (7%)

Transport and distribution

3

0

3 (4%)

1

0

1 (3.5%)

1

Sector

Travel, hotel and leisure

4

0

4 (5%)

Anonymous

0

0

0

Totals

62 (85%)

11 (15%)

73

26 (93%)

0

1 (3.5%)

3

0 3 (11%)

2 (7%)

28

Appendix 2


THE VALUE CREATION INDEX

90

Key drivers of corporate value The following findings come from a survey of readers of Forbes ASAP: Key drivers of corporate value (in rank order): 1. 2. 3. 4. 5. 6. 7. 8.

Customer satisfaction Ability to attract talented employees Innovation Brand investment Technology Alliances Quality of major processes, products or services Environmental performance

The authors then compared the above findings with those of their own research: Key drivers of corporate value in durable manufacturing (in rank order): 1. 2. 3. 4. 5. 6. 7. 8.

Innovation Ability to attract talented employees Alliances Quality of major processes, products or services Environmental performance Brand investment Technology Customer satisfaction

Notes It is interesting to note that although the readers rated the importance of alliances relatively low, the authors’ statistical analysis shows that companies with more joint ventures, marketing and manufacturing alliances, and other forms of partnerships have substantially higher market values. It suggests that in the connected economy, connections


matter. Alliances are incredibly, even decisively, important. Similarly, the results indicate that quality is not dead. The survey respondents ranked it seventh in importance, yet in the durable sector, product quality, including the quality of the manufacturing process, remains statistically a strong predictor of corporate value. Just as surprising is the importance of environmental performance. Although most companies pay only lip service to this issue, and readers ranked it the least important of the value drivers, companies that perform better in this dimension have significantly higher market values. Perhaps the most interesting result of the research is that two intangible asset categories – use of technology and customer satisfaction – had little statistical association with market values. That means these things, in contrast to the readers’ perceptions, are not helping companies create value at all. For all the emphasis over the past ten years about the importance of customer satisfaction, it apparently has no effect on corporate value.

91

Appendix 3


HOW TO CALCULATE CIV

92

Stage 1 billion.

Calculate average pre-tax earnings for three years – $3.694

Stage 2 Go to the balance sheet and get the average year-end tangible assets for three years – $12.953 billion. Stage 3 cent.

Divide earnings by assets to get the return on assets – 29 per

Stage 4 For the same three years, find the industry’s average ROA. For pharmaceuticals the average is 10 per cent – this method will not work if a company’s ROA is below average. Stage 5 Calculate the ‘excess return’. Multiply the industry average ROA by the company’s average tangible assets – 10 per cent × $12.953 billion. This is what the average drug company would earn from that amount of tangible assets. Subtract that from the company’s pre-tax earnings, which in the case of Merck would give an excess of $2.39 billion. This is how much more that company earns from its assets than the average drug maker would. Stage 6 Calculate the three-year-average income tax rate, and multiply this by the excess return. Subtract the result from the excess return, to get an after-tax figure. This is the premium attributable to intangible assets. For Merck, with an average tax rate of 31 per cent, this is $1.65 billion. Stage 7 Calculate the NPV of the premium. This is achieved by dividing the premium by an appropriate percentage, such as the company’s cost of capital. Using an arbitrarily chosen 15 per cent rate, this yields Merck $11 billion. This is the CIV of Merck’s intangible assets, the missing asset that does not appear on the balance sheet.

Notes One point worth highlighting is that the $11 billion does not represent the amount that is left were one to subtract the tangible assets from the market value of Merck, which at the time of calculation would have been $45.6 billion. What the $11 billion does reflect is a measure of the company’s ability to use its intangible assets to out


perform other companies in its industry. A rising CIV indicates that a business is generating the capacity to produce future wealth – even if the market has not recognised it yet, whereas a weak or falling CIV may point to the fact that a company’s investments in intangibles are not paying off or that too much is still being spent on tangible fixed assets.

93

Appendix 4


THE BARUCH LEV METHOD Stage 1 Take average annual earnings for a company. Lev suggests using three years of past earnings and three years of earnings as provided by the consensus forecasts of analysts. For the sake of this example assume they are $1 billion. Stage 2 Look at the company balance sheet and see what it has in the way of financial assets. Assume that they are $5 billion. Then take the expected after tax return on financial assets, which is approximately 4.5 per cent. Therefore the $5 billion worth of financial assets explains $225 million of the earnings. Stage 3 Now turn to the physical assets of the company and again assume they are worth $5 billion. Using the average after tax return for physical assets, which is approximately 7 per cent, $350 million of earnings can be credited to them.

94

Stage 4 This leaves a balance of $425 million that must have been produced by assets not on the balance sheet, which Lev calls knowledge-capital earnings. These earnings are then divided by an expected rate of return on knowledge assets, which has been worked out to be 10.5 per cent (see notes below). Stage 5

Using the formula:

Knowledge capital earnings Knowledge capital discount rate It can now be assessed that in order to produce $425 million in earnings this imaginary company would have needed to have $4.06 billion of intangible assets.

Notes In order to calculate the intellectual asset discount rate Lev, working with Seng Gu of Boston College, examined whether cash flow, traditional earnings or knowledge earnings most correlates with return on equity. They found just a 0.11 correlation between strong returns on equity and cash flows, a 0.29 correlation with traditional earnings and a strong 0.53 correlation with knowledge earnings. This, therefore, would seem to justify a rate of 10.5 per cent that compares with 4.5 per cent for financial assets and 7 per cent for physical assets.

Appendix 5 THE ASSET VALUE OF SKILLS METHOD – WORKED EXAMPLE

Stage 2 Also assume that the twenty members of staff have worked for company for the following periods: Employee 1 Employee 2 Employee 3 Employees 4–6 Employee 7 Employees 8–10 Employees 11–12 Employee 13 Employee 14 Employee 15 Employee 16–17 Employee 18 Employee 19 Employee 20

9 months 1 year 15 months 3 years 4 years and 6 months 5 years 5 years and 6 months 7 years 8 years and 3 months 8 years and 9 months 10 years 12 years and 9 months 15 years 16 years and 3 months

This would come to 1,566 months, which when averaged out among the twenty employees and expressed in years, gives a figure of 6.525. Stage 3 Finally, assume that during the period two members of staff left with only one being replaced. The average number of staff employed during the year is, therefore, 21 and 2 as a percentage of this is 9.5238 per cent, thus the figure would be 100 – 9.5238, which equals 90.4762 per cent. Stage 4 Therefore, the skill asset value would be equal to £600,000 × 6.525 × 90.4762 per cent, which comes to £3,542,143.

Notes This figure of £3,542,143 would not only appear on the balance sheet but also be used to calculate ratios such as return on skills capital employed, that is dividing the above figure by total liabilities and skill asset utilisation ratio, whereby total sales would be divided by the above figure.


Stage 1 Assume a company has twenty staff, which accumulates payroll costs, on average, of £30,000 each. This would, therefore, total £600,000 per annum.

95

Appendix 6


INTELLECTUAL CAPITAL REPORT – SKANDIA REAL ESTATE

96

1996

1995

1994

Financial focus Direct yield (%) Net operating income (MSEK) Market value (MSEK) Total yield (%)

6.15

6.00

6.64

1,215

1,258

1,399

20,092

20,702

21,504

-0.62

5.06

4.44

58

56

N/A

Customer focus Satisfied customer index (maximum value = 100) Average lease (years)

8.6

8.5

N/A

Average rent (SEK per square metre)

960

970

1,041

71

60

N/A

Human capital index (maximum value = 1,000)

615

617

N/A

Employee turnover (%)

10.1

7.9

7.7

Average years of service with company

10.0

10.1

10.2

32

31

31

Occupancy rate measured by area (%)

91.8

89.7

89.3

Financial occupancy rate (%)

94.9

93.0

91.2

Net operating income per square metre (SEK)

569

590

657

3.1

3.2

0.8

Telephone accessibility (%) Human focus

College graduates as a % of total office staff Process focus

Renewal and development focus Property turnover: purchases (%) Property turnover: sales (%)

1.1

6.1

0.4

Change/development of existing holdings (MSEK)

311

333

313

Training expense/administrative expense (%)

1.0

1.5

1.0

Notes The measures shown above are then consolidated into a single measure of performance. First, key measures of success are identified, they are then weighted according to their importance in order to obtain a single, summary intellectual capital index. This summary index will then provide a score, which should provide a measure of the efficiency of intellectual assets that can be related to traditional measures of efficiency. The choice of measures will be specific to the company and it can be designed for each segment of the business.

Appendix 7 THE COMPANYIQ MEASUREMENT SYSTEM

Stage 2 Identify the intellectual assets that produce the aforementioned star attributes – Bates Gruppen has identified 100. Ideally these should be divided as equally as possible between human, customer and structural intellectual capital assets. All of these assets must either be measurable in absolute terms, e.g. training expenses, or capable of measurement using scales, e.g. customer satisfaction. At least 60 per cent of the assets identified should be comparable to data from reputable benchmarking studies or from the PIMS database – a huge repository containing data on items such as quality on thousands of companies. Stage 3 It is now possible to calculate your CompanyIQ. Scores on the 100 selected assets must first be weighted for relative impact on profitability (available from PIMS) then compared with similar companies on the chosen database. Bates Gruppen has selected a median score of 100 and one of its divisions scored 112, therefore outperforming its rivals.

Notes The process does not stop at Stage 3. As with any measurement system some form of feedback has to be built into the system in order for a company to remain competitive. Strong and weak assets within the 100 can be identified and the weaker ones can then be improved.


Stage 1 Identify why customers buy from your company as opposed to a rival. This is best done in a daylong workshop in which management select eight to twelve attributes. Examples would be rapid response or good design. The final list is then sent to customers and employees who rate each attribute twice, once for its value to customers and then again for its uniqueness. A scale of 1 to 7 is used. The results will be plotted onto a two by two matrix. Any attributes that make into the top upper-right quadrant, i.e. high on value and uniqueness, are the attributes that will be explored further.

97


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105


Index


Accountants, 13, 18–22 Aims of this report, 4 Alliances, 90–1 Annual reports, 69, 79, 84 Anonymous questionnaires, 8 Asset value of skills method, 32–3, 95 Assets, information as, 61 Australian companies, 46, 81 Balanced Scorecard, The™, 25–6, 68 Baruch Lev method, 31–2, 94 Basic financial/qualitative data, 71, 78 Bates Gruppen CompanyIQ measurement system, 44–6, 48, 97 Beattie, V. A. (2000), 84 Brennan, N. (2001), 4–5, 79 BSC, see Balanced Scorecard, The™

Danish companies, 83 Databases, 62, 78 Dedicated ICM personnel, 60, 73, 77 Definitions of IC, 15–18 Denscombe, M. (1998), 6 Direct intellectual capital (DIC) methods, 39–43 Disclosure of IC, 69 Dolphin Navigator System, 40 Dow Chemical, 46–7 Economic recession, 86 Economic value added (EVA™), 27, 28 Employee satisfaction, 65, 67

Financial data, 71 Financial focus, 39–40 Five focuses, 39–40 Forced-choice questions, 5–8 Fund managers, 21 Future research agenda, 83–6 Generic measurement model, 55–6 Gruppen, Bates, 44–6, 48, 97 Guthrie, J. and Petty, R. (2000), 81 Hard assets v. soft assets, 14–15 Holistic Company model, 43–4 HRA, see Human resource accounting Human capital, 16–18, 32–4, 54–5, 63–5, 78 Human resource accounting (HRA), 33–4 IBM, 47 ICM, see Intellectual capital management Ideas, 62, 65, 66, 67 In-depth interviews, 69, 85 In-house measuring systems, 68, 70–1 Individual organisational approaches, 39–49 Bates Gruppen, 44–6, 48, 97 Celemi, 42 CIBC, 47 Dow Chemical, 46–7 Ericsson, 41 Ernst and Young, 47–8 IBM, 47 Ramboll, 43–4 Royal Bank of Canada, 48 Skandia, 39–40, 96 Industrial economies, 14 Information as asset, 61 Information technology (IT), 13–14

Index

Calculated intangible value (CIV), 31, 92–3 Canadian companies, 81–2 Celemi’s Intangible Assets Monitor, 42 CIBC, 47 CIV, see Calculated intangible value Closed questions, 5–8 Cockpit Communicator™, 41 CompanyIQ, 44–6, 48, 97 Corporate value, key drivers, 90–1 Customer capital, 17, 65–6, 78 Customer databases, 62 Customer focus, 39–40 Customer satisfaction, 66, 67

Ericsson’s Cockpit Navigator, 41 Ernst and Young, 47–8 European companies, 82 Evaluation, 68, 69–73, 77–8 EVA™, see Economic value added theory

109

Intangible Assets Monitor, 42, 81 Interviews, in-depth, 69, 85 Irish companies, 4–5, 59–74, 77–86 Kaplan, Robert, 25–6 Key drivers of corporate value, 90–1 Key performance indicators (KPIs), 68, 72–3 Knight, D. J., 18 ‘Knowledge silos’ (Dzinkowski, 1999), 20

Index

‘Laboratory profiles’, 70 Lev, Baruch, 31–2, 94

110

Mailing list databases, 62 Management accountants, 21–2, 86 Manuals of SOPs, 61 Market-based approach, 29–30 Measurement of intellectual capital, 23–35, 63–8 Balanced Scorecard™, 25–6, 68 Baruch Lev method, 31–2 calculated intangible value, 31 generic model, 55–6 human capital, 32–4 human resource accounting, 33–4 problems, 53–6 Tobin’s q, 30–1 value added approach, 26–8 value creation index, 28–9 value-added intellectual capital coefficient, 34 Monitoring, 83–5 Navigator model, 39–40 New economy, the, 13–22 Non-rival assets, 15 Nordic companies, 82–3 North American companies, 39–40, 81–2 Northern Ireland (NI), 59 see also Irish companies Norton, David, 25–6 Operating and financial review (OFR), 80

O’Regan, P. H. et al (2003), 80 Organisational capital, 16–18, 67–8, 78 Personality traits of accountants, 13 Porter, M. E., 27, 28, 71–2, 78 Postal questionnaires, 5–8 Problems in measurement, 53–6 Process focus, 39–40 Qualitative findings, 69–73 Questionnaires, 5–8, 59–74 Ramboll’s Holistic Company model, 43–4 Ranking IC elements, 63–4, 78 Recognition of ICM meaning, 60, 77 Recruitment, 70 Renewal and development focus, 39–40 Replacement costs (assets), 30–1 Report structure, 8–9 Republic of Ireland (ROI), 59 see also Irish companies Research conclusions, 77–86 Research and development (R&D), 63 Research strategy, 4–8 Return on assets (ROA), 31, 92 Return on skill capital employed (ROsCE), 33 Revenue-generating employees, 66, 67 ‘Rival’ assets, 15 ROA, see Return on assets Robinson, G. and Kleiner, B. H., 26–8 ROI, see Republic of Ireland Roles, 13, 18–22, 60, 70–1, 73, 86 ROsCO, see Return on skill capital employed Royal Bank of Canada, The, 48 sAUR, see Skill asset utilisation ratio Sector breakdown of companies, 89 Self-monitoring (staff), 53 Sheedy-Gohil, Kieran, 32–3 Skandia Navigator model, 39–40 Skandia Real Estate report, 96 Skill asset utilisation ratio (sAUR), 33, 95 Skills, 32–3, 95

‘Soft’ assets, 14–15, 28 Software sector, 80 Standard operating procedures (SOPs), 61 Stern Stewart and Co, 27 Stewart, Tom, 15 Surveys, 59–74, 77–86 Telecommunications sector, 80 Telephone interviews, 69 Timescale problems, 54 Tobin’s q, 30–1 Transference of knowledge, 20

UK companies, 80–1 UNIC project, 84 US companies, 39–40, 81–2 Value added approach, 26–8 Value chain analysis, 27, 28, 71–2, 78 Value creation index, 28–9, 90–1 ‘Value platform’, 17 Value-added intellectual capital coefficient, 34 Value-based approach, see Market-based approach Van Reenan, J. (2001), 13–14 ‘Virtuous cycle’ (Knight, D. J., 1999), 18

Index

111

Intellectual Capital: Measuring the Immeasurable? (CIMA Research)

Intellectual Capital

Intellectual Capital for Communities

Unleashing intellectual capital

Intellectual Capital (Express Exec)

Modelling intellectual capital

Intellectual Capital (Express Exec)

Immeasurable Love

Comprehensive Intellectual Capital Management: Step-by-Step

Technological Innovation: An Intellectual Capital Based View

Intellectual Capital in Enterprise Success: Strategy Revisited

Management consulting practice in Intellectual capital

Technological Innovation: An Intellectual Capital Based View

Intellectual Capital in Enterprise Success: Strategy Revisited

Technological Innovation: An Intellectual Capital Based View

Comprehensive Intellectual Capital Management: Step-by-Step

Interest Rate Risk Management (CIMA Research)

Corporate Social Responsibility: a case study guide for Management Accountants (CIMA Research) (CIMA Research)

Measuring the Tax Burden on Capital and Labor

Interest Rate Risk Management (CIMA Research)

Measuring Capital in the New Economy (National Bureau of Economic Research Studies in Income and Wealth)

Intellectual capital: Forty years of the Nobel prize in economics

The Innovation SuperHighway: Harnessing Intellectual Capital for Collaborative Advantage

Intellectual Capital: The Intangible Assets of Professional Development Schools

Intellectual Capital: Forty Years of the Nobel Prize in Economics

Measuring Social Capital: An Integrated Questionnaire (World Bank Working Papers)

The Intellectual

Measuring the World

Measuring the World

Intellectual Capital: Measuring the Immeasurable? (CIMA Research)