«Claudia Müller Department of Value Process Management, Productions & Logistics, University of Innsbruck, Austria claudia.mueller Session ...»
THE 3 MS OF INTELLECTUAL CAPITAL – MEASURING, MONITORING AND
Department of Value Process Management,
Productions & Logistics,
University of Innsbruck, Austria
This paper intends - based on the current state of the art of Intellectual Capital
measurement to picture necessary development towards an integrative reporting instrument for Intellectual Capital. Although Intellectual Capital measurement evolved due to the intention and necessity to disclosure intangible assets meeting the information demands of all stakeholders, it has not quite succeeded in this effort. Caused by the strict concentration on not just measuring the employed intangibles some shortcomings of traditional accounting systems are repeated. The article starts off with a representation of present Intellectual Capital measurement approaches and evaluate them due to their practicability as integrative management tools. A survey on the issue of Intellectual Capital conducted within an Austrian company with an international background prepares the background for the presentation of an integrative concept of measuring, monitoring and consequently managing Intellectual capital.
Keywords: Intellectual Capital, Measurement, Monitoring.
The 3 Ms of Intellectual Capital – Measuring, Monitoring and Managing Claudia Müller Department of Value Process Management Productions & Logistics University of Innsbruck firstname.lastname@example.org
This paper intends - based on the current state of the art of Intellectual Capital measurement to picture necessary development towards an integrative reporting instrument for Intellectual Capital. Although Intellectual Capital measurement evolved due to the intention and necessity to disclosure intangible assets meeting the information demands of all stakeholders, it has not quite succeeded in this effort. Caused by the strict concentration on not just measuring the employed intangibles some shortcomings of traditional accounting systems are repeated. The article starts off with a representation of present Intellectual Capital measurement approaches and evaluate them due to their practicability as integrative management tools. A survey on the issue of Intellectual Capital conducted within an Austrian company with an international background prepares the background for the presentation of an integrative concept of measuring, monitoring and consequently managing Intellectual capital Keywords:Intellectual Capital; Measurement; Monitoring;
Introduction Knowledge and its management have become major issues of discussion in management as well as in research in the course of the late eighties and nineties. As a consequence also Intellectual Capital and Intellectual Capital Management attracted practicians and researcher attention. However one may not get these terms mixed up, they are obviously different - but yet similar in meaning - and therefore often used in synonymous ways. Especially an article which intends to deal with Intellectual capital thus has to start off with a clear and precise definition.
Knowledge can be characterized as information in context, together with an understanding of how to use it. Examples would include knowledge about drainage in a street, derived from looking at a schematic and understanding how the placement of houses may or may not affect drainage.[Mayo 2001, Stewart 1997] Intellectual Capital is to be defined as the non-financial and non physical resources used by and within a company, it is knowledge which can be converted into profits (Sullivan, 1999:210). Intellectual Management deals with the interactions between all resources, tangible and intangibel to create maximum value (Sullivan 1999:228).
The following discussion on the current state- of- the- art and on present problems of reporting on Intellectual Assets (Intellectual Capital) will address researchers as well as practitioners. It kicks off with a valuation of present approaches which try to overcome information deficiencies concerning intangibles as the result of shortcomings of traditional accounting. Most of these approaches concentrate on measuring IC - the information gained however mainly addresses only one or a restricted number of stakeholders. The measurement of IC should rather aim at satisfying all stakeholders’ information needs - therefore it should integrate external as well as internal issues. Furthermore current measurement approaches focus on presenting intangibles without their implicit financial aspects– in how far they attribute and correspond to present and future earnings is very restrictively pointed out.
The development that has to follow in the attempt of measuring IC is to establish the relation between financial reports and reports on IC. First of all this effort demands a distinctive knowledge about possible interest groups and their needs for information.
The discussion about IC was started due to the fact that traditional financial reports could not cope with presenting intangible assets and as a consequence book value and market value diverge. For handling this discrepancy all efforts concentrated on trying to present a statement of intangible assets for present and future shareholders. However knowledge about intangible assets is especially crucial for a company’s development – the internal purpose of reporting about IC has to be put in the centre of interest since current internal accounting systems cannot provide this information. When speaking about a company’s development one should furthermore acknowledge the dynamics of intangible assets and therefore take them into account when establishing an integrative management information system for intangibles.
If we can manage measuring IC considering all issues mentioned above - internal and external - we will also be able to monitor IC. Monitoring IC – as a further challenge for research on IC - is necessary because as stated before IC represents one of the main factors of success - strictly tracking its development and its consequent protection seem to be inevitable. By doing this one will also get information on future potentials, one will know where there are shortcomings and one will be able to react to this. Moreover it will lead managers to be able to reach the ultimate goal concerning IC – namely true management of IC.
The necessity to succeed in this attempt can easily be explained. As far as normal (tangible) assets are concerned no one would question the necessity of efficient management – with intangible assets everybody seems to be satisfied by just measuring them - questions of profitability and productivity (being completely legitimate for traditional assets) are not even touched. Consequently measuring and monitoring can only function as the starting point – the goal has to be MANAGEMENT (in all its dimensions) of IC regarding all aspects of this peculiar form of assets – if a company succeeds or fails in handling its intangibles the profit and loss account will show it in the end.
This paper therefore presents a concept to how companies could set the course from simply measuring towards managing IC in an also distinctive financially-oriented way.
Deriving implications for IC from strategy it concentrates on developing a management concept that tries to embody the demand for information needed in the monitoring and managing process. This includes measuring on a less aggregated level than present approaches suggest as well as enabling not only a retrospective but active planning for the businesses future ahead.
The concept is based on a survey carried out among managers (especially CFOs) in an international company of the grinding industry. The main target of this survey was to get an impression in how far management has on the one hand already become familiar with current possibilities of intangible assets reporting; on the other hand the survey was also interested in how far the management was satisfied with these approaches and which issues still demanded further discussion and development.
Evolvement and current state of the art Although one may get the impression that the IC – movement started in the above mentioned time period of the 80s and 90s the history of Intellectual Capital – although not explicitly called IC- goes way back.
Already the published work of J. Robinson and Edward Chamberlin in the 1930s was calling on resourced based- accounting (Chamberlin 1962). In her book “The theory of growth E. Penrose continued these first steps and developed an approach for resourced- based accounting (Penrose 1959).
The term ‘intellectual capital’ was first used in a publication by John Kenneth Galbraith in 1969. His concept of the term incorporated a degree of ‘intellectual action’ rather than ‘intellect as pure intellect’. The implication of his view is that the intellectual capital is more likely to be a dynamic rather than a static form of capital. (Edvinsson and Sullivan 1996: S.358) The 1980 finally represented the real kick-off for a series of publications which explicitly dealt with the topic of Intellectual Capital. It basically started with the works of Hiroyuki Itami (Itami and Thomas1991) and Karl –Erik Sveiby in 1986 Sveiby 1990). It was in 1986 when Charles Handy published work relating to Human Capital as well as David Teece ( Teece 1986) who was interested in extracting value from innovation. 1987 saw the foundation of the Konrad Group in Sweden to discuss intangible assets and they published their results two years later.
The fact that in 1991 Edvinsson became Vice President of Skandia had significant meaning for the discipline of knowledge management and Intellectual Capital. The first implementation of Intellectual Capital as a corporate function finally led to the first publication of an Intellectual Capital report 4 years later. In 1994 another important protagonist of the Intellectual Capital movement entered the scene Tom Stewart who published “Intellectual Capital” as a cover article in Fortune, which 3 years later was even published as book (Stewart 1997). Finally the year 1996 saw the first foundation of an institution for intangibles research namely at the New York University by Baruch Lev.
The year 1997 could be described as a milestone concerning publications on the topic Intellectual Capital. Three major works were published namely by Sveiby (Sveiby 1997), Edvinsson and Malone( Edvinsson and Malone 1997) and Roos (Roos et.al.1997) It is therefore not surprising that this had to be followed by the launching of the first journal explicitly dealing with Intellectual Capital (Bontis 1999).
To continue a chronological description of the Intellectual capital movement after the millennium is hardly possible and even not very useful. On all levels – academic, company –based and by public institutions – the topic has become widely spread. Many articles in referred and acknowledged journals have been published, well-established business schools took up the issue. Official bodies such as financial regulators worldwide, government, the EU, the World Bank and the OECD established groups to take part in discussion and research and to achieve a possible consensus view.
Of course the topic has also attracted the “conference” world and numerous companies started attempts to collect their own non - financial metrics. Although a large number of surveys has been conducted, they do not really reveal what exactly is being done.
Beside this historical outline about Intellectual Capital it is definitely of major interest in how far the contents of this discipline and its measurement methodologies have evolved and developed.
"First generation measurement systems were based on the assumption that financially biased measurement systems should be supplemented with non- financial indicators, including intangibles. Whilst this was a valuable development, the problem with this first generation approaches was that they were static and failed to illustrate adequately the linkage between different performance measures. Second generation measurement systems addressed this issue by using strategy and/or success maps to take into account the dynamic nature of performance and the transformation processes linking objectives and resources. Third generation measurement systems will build on these developments and seek to link, explicitly the non-financial and intangible dimensions of business performance to the generation of free cash flow." (Neely, Marr et al.2003:129) Undertaking the effort to measure Intellectual Capital one could very easily recognize the difficulties which are inherent to this kind of asset. Therefore the measurement of Intellectual Capital was ignored or belittled, its presentation and discussion precluded or subject to potentially crushing liability and consequently its management considered to be difficult. In some cases Intellectual Capital seemed to be viewed more as a liability than an asset.(Wallman 1999:183) The amount of methods and approaches which nevertheless try to overcome this obstacle is most impressing. Table 1 tries to give an outline of the most acknowledges
approaches (Roos 200):
Basically four different categories of Intellectual Capital measurement methodologies
can hereby be distinguished which all have their pros and cons:
Table 1: Methodologies of Intellectual Capital Measurement When evaluating those approaches one will furthermore recognize that there exists a strong emphasis on the strategic aspect of intellectual capital. The metrics of IC that are delivered are often highly aggregated. Consequently their capability to transport good information about the operational aspect of intellectual Capital is rather restricted.
When talking about good metrics one should concentrate on the following checklist (Mayo 2001:44)
When taking a narrower look at the mentioned methodologies one unfortunately will find that some of proposed metrics do not meet the above mentioned requirements.