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Impacting FutureValue: How to Manage yourIntellectual
Capital
By
Bernard Marr
MANAGEMENT ACCOUNTING GUIDELINE
M A N A G E M E N T
S T R A T E G Y
M E A S U R E M E N T
Published by The Society of Management Accountants of Canada,
the AmericanInstitute of Certified Public Accountants and The
Chartered Institute ofManagement Accountants.
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Copyright © 2008 by The Society of Management Accountants of
Canada (CMA Canada), the American Institute of CertifiedPublic
Accountants, Inc. (AICPA) and The Chartered Institute of Management
Accountants (CIMA). All Rights Reserved.
No part of this publication may be reproduced, stored in a
retrieval system or transmitted, in any form or by any means,
withoutthe prior written consent of the publisher or a licence from
The Canadian Copyright Licensing Agency (Access Copyright).For an
Access Copyright Licence, visit www.accesscopyright.ca or call toll
free to 1 800 893 5777.
ISBN: 1-55302-220-3
NOTICE TO READERS
The material contained in the Management Accounting Guideline
Impacting Future Value:How to Manage your Intellectual Capital is
designed to provide illustrative information with respect to the
subject matter covered. It does not establish standards orpreferred
practices.This material has not been considered or acted upon by
any senior or technical committees or the board ofdirectors of
either the AICPA,CIMA or CMA Canada and does not represent an
official opinion or position of either the AICPA,CIMA or CMA
Canada.
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INTRODUCTION
Intellectual capital helps to drive successand create
value.Although physical andfinancial assets remain
important,intellectual capital elements such as theright skills and
knowledge, a respectedbrand and a good corporate reputation,strong
relationships with key suppliers,the possession of customer and
market data, or a culture of innovation setenterprises apart.
Growth, above-average earnings, andsustainable competitive
advantages areno longer driven by investing in physicalassets such
as factories, offices, ormachinery, but instead by investing in
and
managing intellectual capital.The successof leading companies
such as Amazon,Google, Microsoft, and Wal-Mart is based on their
intellectual capital. Physicalassets such as distribution
warehouses,office buildings, and stores are important,but not as
much as (for example) know-ledge about customers, technology,
andmarkets. For example, organizations such as Wal-Mart, with its
huge storeinfrastructure, couldn’t perform as well as it does
without (a) the intelligence to build its stores at the right
locations,(b) the knowledge about consumers to stock the right
goods, and (c) itsexpertise in inventory replenishment.Intellectual
capital allows organizations to
IMPACTING FUTURE VALUE:HOW TO MANAGE YOUR INTELLECTUAL
CAPITAL
CONTENTS EXECUTIVE SUMMARY
Success and future value creation in today’seconomy depend on
the ownership andappropriate management of intellectual
capital.Superior performance is no longer driven bytraditional
physical assets, but instead primarily byintellectual capital.That
term includes knowledge,skills, brands, corporate reputation,
relationships,information and data, as well as processes,
patents,trust, or an innovative organizational culture.The
importance of intellectual capital as anenabler of future
performance is now generallyaccepted among executives across the
world.Most organizations, however, still lack practicalskills,
tools, and techniques to identify, measure,and manage this vital
performance driver.Thismanagement accounting guideline
(MAG)addresses this lack by introducing five key stepsfor
successfully managing intellectual capital,namely: (1) how to
identify intellectual capital inyour organization, (2) how to map
its impact,(3) how to measure it, (4) how to manage it, and(5) how
to report it. Practical and easy-to-applytools and techniques are
provided for each ofthese steps, to equip managers and
accountantswith the necessary skills to successfully manage the
intellectual capital of their organizations.
INTRODUCTION 3
ABOUT THIS MAG 4
WHAT IS INTELLECTUAL CAPITAL? 5Defining Intellectual Capital
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FIVE STEPS TO SUCCESSFUL INTELLECTUAL CAPITAL MANAGEMENT 7
1. Identifying your Intellectual Capital 7
2. Mapping the Intellectual Capital Value Drivers 10
3. Measuring Intellectual Capital 14
4. Managing Intellectual Capital 24
5. Reporting Intellectual Capital 27
CONCLUSION 29
USEFUL WEBSITES 29
REFERENCES AND ENDNOTES 30
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leverage their tangible resources.Withoutappropriate
intellectual capital, physical assets arejust commodities that can
yield, at best, averagereturns.1 Identifying and managing the
rightintellectual capital is and will increasingly be thekey
differentiator between successful, mediocre,and failing
enterprises.
It is therefore not surprising that intellectualcapital has
moved from the periphery to the coreof modern businesses.
Organizations that want toremain competitive in today’s world need
toolsand techniques to manage their intellectual capital. In fact,
executives around the world haveconfirmed this in a recent survey
by Accentureand the Economist Intelligence Unit,which foundthat
most executives believe that intellectualcapital is absolutely
critical for the future successof their businesses.2 The same
survey also findsthat most executives agree that their
currentapproaches to measuring and managing intellectualcapital are
either poor or non-existent. Otherrecent surveys, including one
that surveyed 780 Chief Executive Officers and Chief
FinancialOfficers of the 5,000 largest companies in theUnited
States, and another involving 15 of theworld’s leading banks and
financial services firms,found that measuring and managing
intangibles is the least developed in current
performancemeasurement and management systems.3 A reportfrom the
Brookings Institution, an independentresearch and policy institute,
outlined that thelarge and growing discrepancy between (a)
theimportance of intangible assets to economicgrowth, and (b) our
inability to clearly identify,measure, and account for those assets
is a seriousproblem for business managers, investors,
andgovernments.4 Also, Intellectual capital is not only critical
for commercial enterprises, butincreasingly it matters as well in
government andnot-for-profit organizations. Studies in
governmentorganizations have found that intangibles such as
corporate reputation, human capital, andrelationships with key
stakeholders are of vitalimportance.5
The internal problem of identifying, measuring,and managing
intellectual capital also applies toexternal reporting, where there
are growingfrustrations with the inability of traditionalfinancial
reporting to account for and report onintangibles.The increasing
gap between (a) whatorganizations report in their annual
reports(mainly traditional physical and financial assets),and (b)
what actually matters the most (theintangibles) is reflected in the
ever increasingvariance between book value (mainly
traditionalassets or liabilities recorded in the balance sheet)
and market value (the value of a public companyas measured by
the share price times the numberof shares issued).
To positively impact future value, organizationsrequire a better
understanding of intellectualcapital and the latest tools available
to identify,measure, and manage this important value driver.This
MAG provides such understanding and out-lines the latest tools that
will equip managers andaccountants with the necessary skills to
bettermanage intangibles to improve organizationalperformance and
drive future value. In addition,this MAG looks at the latest tools
for externalreporting of intellectual capital, to improve
theexternal communication of the company’s value to its
shareholders and stakeholders.
ABOUT THIS MAG
This guideline is aimed at finance professionals andaccountants
in business who would like to betterunderstand how to manage
intellectual capital. Inparticular, it is for those who are
responsible forimplementing or improving the
management,measurement, and reporting of intellectual capitalin
their organizations. It will also be useful toanyone looking for a
general introduction and an overview of the key ideas and
challenges ofmeasuring, managing, and reporting intangibles.This
guideline follows on from the CIMA report‘Understanding Corporate
Value:Managing andReporting Intellectual Capital,’ published in
20036.This earlier technical report provided an overviewof tools
and approaches for managing andreporting intellectual capital.
However, the worldhas moved on since 2003, and new tools
andstandards have emerged. Also, this MAG providesclearer guidance
and practical tools to enable thereader to better measure, manage,
and reportintellectual capital.
This MAG outlines five key steps for successfullymanaging
intellectual capital. Each step contains a number of practical and
easy-to-follow tools and techniques. Although all of these tools
andtechniques are rigorously grounded in the latestresearch, they
have been selected because of theirpractical relevance and easy
application.The firststep looks at how to identify intellectual
capitalwithin an organization. Step two provides tools forassessing
the strategic value of intellectual capitalby visually mapping how
it helps organizations toaccomplish their strategic objectives.
Step threediscusses how to measure intellectual capital andprovides
tools and techniques to do so. Step fouroutlines how to use the
resultant information tobetter manage intellectual capital in
organizations.
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It explores how to improve decision making,how to review the
strategy, and how to assess therisks associated with intellectual
capital.The finalstep discusses the reporting and disclosure
ofintellectual capital, and provides guidance on howto prepare such
reports. Before discussing each ofthe five intellectual capital
management steps, weprovide a detailed definition of what
intellectualcapital is – to dispel a lot of confusion about
themeaning of this term.
WHAT IS INTELLECTUAL CAPITAL?7
Before we can identify, measure, manage, andreport on
intellectual capital, we need to under-stand what we mean by that
term.The concept of intellectual capital is often discussed, but
notalways well defined.8 And a multitude of differentwords have
been used to describe the same or asimilar concept. People tend to
use terms such as assets, resources, or performance drivers; and
they often replace intellectual with words such asintangible,
knowledge-based, or non-financial. Any of these words (or a
combination of them) can be found in the management literature.
Also,some disciplines (such as the financial accountingand legal
disciplines) have created quite narrowdefinitions, such as
‘non-financial fixed assets thatdo not have physical substance but
are identifiableand controlled by the entity through custody
andlegal rights,’ the definition found in accountingstandards.
Although narrow definitions like thisare necessary to ensure
consistency in balancesheets and other external reports, they are
lessuseful in creating a broader understanding ofintellectual
capital.This is so because they excludemany commonly accepted
intangibles, such ascustomer relationships or knowledge and skills
of employees, as they cannot be controlled by the firm in an
‘accounting’ sense. All of this has led to some considerable
confusion about whatintellectual capital is and is not.
In this guideline, we will use the terms ‘intellectualcapital’
and ‘intangibles’ interchangeably. It isimportant to stress that
there is no generally rightor wrong way to classify intellectual
capital. Forthe purpose of this guideline, it is important
toprovide as broad a classification as possible, toensure that the
reader gets a complete picture of what intellectual capital
encompasses.The keyobjective of this broad classification
(definedbelow) is to increase the general understanding of what
intellectual capital is, and therefore tofacilitate the
identification of intellectual capitalwithin organizations.The
classification should be
used as a template to ensure that all possibleintangibles are
identified. Debates about apotential overlap, or whether one
intangibleshould be put into one category or another,are therefore,
at this point, not productive orparticularly useful.What is
important is that we identify all intangibles that matter to
ourorganizations.
Defining Intellectual Capital
Together with physical and financial capital,intellectual
capital is one of the three vitalresources of organizations.
Intellectual capitalincludes all non-tangible resources that (a)
areattributed to an organization, and (b) contributeto the delivery
of the organization’s valueproposition. Intangible resources can be
split into three components: human capital, structuralcapital, and
relational capital (see Figure 1). Each of these is discussed
further below.
Human Capital
The principal sub-components of an organization’shuman capital
are its workforce’s skill sets, depthof expertise, and breadth of
experience. Humanresources can be thought of as the living
andthinking part of intellectual capital resources.9
These can therefore walk out at night whenpeople leave;
relational and structural capital onthe other hand remains with the
organizationeven after people have left. Human capital includesthe
(a) skills and competencies of employees,(b) their know-how in
certain fields that areimportant to the success of the enterprise,
and (c) their aptitudes and attitudes. Employee loyalty,motivation,
and flexibility will often be significantfactors too, because a
firm’s ‘expertise andexperience pool’ is developed over time. A
highlevel of staff turnover may mean that a firm islosing these
important elements of intellectualcapital.
Relational Capital
Relational capital includes all the relationships that exist
between an organization and anyoutside person or organization.These
can includecustomers, intermediaries, employees, suppliers,alliance
partners, regulators, pressure groups,communities, creditors, and
investors. Relation-ships tend to fall into two categories – those
thatare formalized through, for example, contractualobligations
with major customers, suppliers andpartners, and those that are
more informal.
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Although the former tended to be predominant inthe past, today,
the latter have a more importantimpact on how the enterprise is
managed. Intoday’s integrated economy, with just-in-timesupply
chains, relationships with trading partnersand suppliers can be
crucial. Brand image,corporate reputation, and
product/servicereputation, which reflect the relationshipsbetween
organizations and their (current andpotential) customers, also fall
into this category.
Structural Capital
Structural capital covers a broad range of vitalelements.
Foremost among these are usually (a) the organization’s essential
operatingprocesses, (b) how it is structured, (c) its
policies,information flows, and content of its databases,(d) its
leadership and management style, and (e) its culture, and (f) its
incentive schemes.Theycan, however, also include legally
protectedintangible resources. Structural capital can be
sub-categorized into Culture, Practices and Routines,and
Intellectual Property.
Organizational culture is fundamental to achievingorganizational
goals. Organizational cultureprovides a common way of seeing
things, sets thedecision-making pattern, and establishes the
valuesystem.10 Cultural resources include corporate
culture, organizational values, and managementphilosophies.They
provide employees with ashared framework to interpret events, a
frame-work that encourages individuals to operate bothautonomously
and as a team to achieve thecompany’s objectives.11
Processes and Routines, which reflect sharedorganizational
knowledge, can be importantorganizational resources. Practices and
routinesinclude internal practices and processes; these can be
formal or informal (tacit) procedures andrules. Formalized routines
can be reflected inprocess manuals that provide codified
proceduresand rules; informal routines include understood(but
unstated) codes of behavior and workflows.One example of a process
that has become avaluable strategic resource is Southwest
Airlines’airplane turnaround, which they have optimized to only
last 25 minutes.This process, introduced asa necessary part of
Southwest’s start-up as a low-cost carrier, has today become a
keydifferentiator.12
Intellectual property – owned or legally protectedintangible
resources – is becoming increasinglyimportant. Patents, copyrights,
trademarks, brands,registered designs, trade secrets, database
content,and processes whose ownership is granted to thecompany by
law have become a key element of
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Figure 1: Classification of Intellectual Capital
Human Capital
• Knowledge and skills• Work-related experience• Competencies•
Vocational qualification• Employee engagement• Emotional
intelligence• Entrepreneurial spirit• Flexibility• Employee
loyalty• Employee satisfaction• Education• Creativity
Relational Capital
• Formal relationships• Informal relationships• Social networks•
Partnerships• Alliances• Brand image• Trust• Corporate reputation•
Customer loyalty• Customer engagement• Licensing agreements•
Distribution agreements• Joint ventures
Structural Capital
• Organizational culture➢ Corporate values➢ Social capital➢
Management philosophy
• Processes and routines➢ Formal processes➢ Tacit / informal
routines➢ Management processes
• Intellectual property➢ Brand names➢ Data and information➢
Codified knowledge➢ Patents / copyrights➢ Trade secrets
PhysicalCapital
FinancialCapital
IntellectualCapital
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competition.13 Intellectual property is owned bythe organization
and not its employees. Itrepresents the tools and enablers that
help todefine and differentiate an organization’s uniqueoffering to
the markets in which it operates.Examples of intellectual property
includetrademark symbols such as the McDonald’sArches and the Nike
Swoosh, or the patented ‘1-click’ buying option at
Amazon.com.Coca-Cola,for example, made a conscious decision to
keepthe formula for Coke a trade secret that it activelyprotects.
Had they patented the formula instead,their patent protection would
have run out manyyears ago, most likely destroying its market
share.
FIVE STEPS TO SUCCESSFULINTELLECTUAL CAPITALMANAGEMENT
In this MAG, we will outline five key steps forsuccessfully
managing intellectual capital (seeFigure 2).The first step is to
identify anorganization’s intellectual capital. Once this isknown,
we need to assess its value. It is importantto understand that not
all intellectual capital isautomatically valuable to an
organization. It is onlyvaluable if it helps to deliver the
organizationalobjectives. In step two, we therefore assess
therelevance of intellectual capital by mapping thestrategy (with
its intellectual value drivers) onto a strategic map.The third step
is to extractmeaningful management information frommeasuring the
performance of intellectual capital.In step four, this management
information canthen be used to analyze performance and todevelop
management insights that informorganizational decision making and
learning. Finally,in step five, external reports can be produced
tocommunicate the value of intellectual capital tointernal and
external stakeholders.
Figure 2: Five-Step Intellectual CapitalManagement Model
Each of these five steps will be discussed in detailbelow.We
will explain what each step involves,and provide a number of tools
and techniquesdesigned to help the practicing manager to
bettermanage the organization’s intellectual capital.
1. Identifying your Intellectual Capital
The first step, an inventory check, requiresidentifying an
organization’s intellectual capital.The categorization of
intellectual capital outlinedabove can be used to facilitate a
discussion aboutthe current stock of intangibles. It can be used
tocreate a template that informs people about thedifferent
categories of intellectual capital, andprompts them to think about
their organizations’different types of intangibles (see Figure
3).
Intellectual capital can be identified throughconducting
interviews, facilitated workshops, orvia mail or online surveys.
From experience,face-to-face individual interviews or surveys
workbest, as they allow everyone to have a say, free ofthe
suppressing influence of stronger or moredominant participants in
workshops.
It is important to emphasize again that theobjective of this
classification template is tofacilitate a discussion about as many
differentresources (intellectual, physical, and financialcapital)
as possible, to create the most realisticpicture of the existing
resource architecture.
Individual responses from surveys or interviewscan then be
analyzed and compiled into a list of allthe major resources. At
this point, it is no longeras important to use the categories
introduced inFigure 1, as it is to present the individual
resourcesin a language that is understood within theparticular
organization. Different organizationstend to use
organization-specific terminology todescribe the same resources. It
is always advisableto use the organization’s commonly used
languageinstead of the categories or examples provided inthe
template below. Using terminology such as‘human capital’, for
example, can cause misunder-standing or even cynicism, especially
if thisterminology is not commonly used within theorganization.
Intellectual Capital Underpins Competencies
Even though most organizations possess a widevariety of
intellectual capital, some will contributemore to delivery of their
value proposition thanothers.This is because (a) the value of
intellectualcapital depends on an organization’s specificstrategy,
and (b) intellectual capital dynamicallyinteracts with and depends
on other resources:
1. Identifing your intellectual capital
2. Mapping the key value drivers
3. Measuring intellectual capital
4. Managing intellectual capital
5. Reporting intellectual capital
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• The value of intellectual capital depends on an organization’s
specific strategy. Forexample, the know-how of building engines is
essential for Honda, but of little value to afinancial services
firm; likewise, the compe-tencies associated with creating light
anddurable composite materials so essential forsuccessful Formula
One motor racing teams is undoubtedly probably of little value to
atelecommunications firm.
• Intellectual Capital elements are not static –they dynamically
interact with each other,and often depend on other resources for
their value. For example, Amazon.com’s brandawareness and
reputation, although criticallyimportant, would rapidly fade
without itsefficient distribution network, well-designedinternal
processes, and strong supplier relation-ships. It is therefore
impossible to value a brandname without taking into account all
otherimportant factors, such as reputation, people,processes, etc.
Cases such as the accountingfirm, Arthur Andersen, have shown how
abrand name can disappear overnight if thesupporting intangibles
such as trust orreputation fall away. Often referred to as
theinterconnectedness of resource stocks, suchrelationships are
extremely important tointangibles.
This means, therefore, that individual intellectualcapital
resources interrelate with other intangibleand tangible resources
to form core competencies.
In turn, these allow an organization to perform itscore
activities to deliver its value proposition andstrategic
deliverables (see Figure 4). A coreactivity is an excellently
performed internalactivity that is central, not peripheral, to
acompany’s strategy, competitiveness, and valueproposition. An
organization should only havevery few (usually between 2 and 5)
core activities.
Figure 4: Intellectual Capital Underpins Capabilities andCore
Competencies
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Figure 3: Identifying Your Resource Stock (Source Marr,
2008)
Resource Category Examples of Sub-categories: Intellectual
Capital elements with a significant presence in our
organization:
Human Capital Knowlege, education, technical knowledge and
expertise, skills, know-how, attitudes, experience,motivation,
flexibility, commitment, creativity, etc.
Relational Capital Customer relationships, supplier
relationships,reputation, image, trust, contractual
relationships,informal relationships, alliances, relationships with
regulators, partners, etc.
Structural Capital Processes, tacit routines, organizational
structure,governance and management approaches,organizational
culture, social capital, shared identity,patents, brand names,
copyrights, trade secrets,codified information and knowledge, e.g.,
in databases or process manuals, etc.
Physical Capital Property, plants, location of buildings,
information and communication infrastructure, machines,equipment,
natural resources, physical infrastructure,office design, etc.
Financial Capital Cash, investments, bonds, loans, budget,
etc.
Value Proposition /Strategic Deliverables
CoreActivites
OrganizationalResources
(intangible and tangible)
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To understand the role and strategic importanceof intellectual
capital in any organization thereforerequires a clear understanding
of the firm’sstrategic direction and objectives.
Assessing the Strategic Value of IntellectualCapital
The relative importance or strategic value ofintellectual
capital can only be assessed in thecontext of the existing
organization.The questionsto ask are: How important are our
differentintellectual capital resources to achieving ouroverall
value proposition? Or, how strong are ourexisting resources and how
can we utilize themmore effectively? Independently assessing (a)
theimportance of the different resources to deliveryof your value
proposition, and (b) your resourcestrengths allows organizations to
perform a gapanalysis.This lets you understand whether you are
building the appropriate intellectual capital for your value
proposition, or whether you areunder- or over-investing in certain
areas.
This assessment is best done individually, either in interviews
or by survey. Or it can be done in a workshop setting.The easiest
way to performthe assessment is to use the list of key
resourcesidentified above, and then to add columns toassess the
relative strengths and the importanceof these resources to
delivering the currentstrategy (see Figure 5). Conducting both
assess-ments allows organizations to highlight any gaps.
The results from the individual assessments canthen be
aggregated and displayed in a resourcemap. Such a map visually
represents the relativestrength or importance of the different
resources(intangible and tangible). It is also possible to
include the two data sets (strengths and impor-tance), and to
use different size bubbles toindicate any gaps.
Figure 6 illustrates such a resource map, onecreated for a
leading online retailing business14
to understand the relative importance of itsresources to deliver
the existing value proposition.The value proposition of this
well-known retailerwas to become the world’s preferred source for
aparticular type of goods by providing consumersnot only with top
level service, but also highquality value-added information,
excellent price,simple transactions, and an enjoyable
shoppingexperience. In this example, managers assessedstructural
capital and human capital as the mostimportant intellectual capital
value drivers(indicated by the biggest bubbles).This
commercialenterprise places particular emphasis on itsknowledge of
the market and its customers,plus itsprocesses and brand. Other
important resourceswere its relationships, especially with its
suppliersand lenders, as the business is still in the growingphase
and unprofitable.This map helped theorganization to understand the
relative importanceof its intellectual capital in order to allocate
itsresources appropriately.
As discussed in Figure 6, intellectual capitalinteracts with
other resources to create a corecompetency, which in turn helps to
deliver thevalue proposition.This means that
resourceinterdependencies can only be assessed in relationto the
organization’s existing core competenciesand value proposition. If
you have defined yourstrategic deliverables and core activities,
you canthen use the above resource list to understandhow the
resources combine to deliver your corecompetencies and value
proposition.15
Figure 5: Assessing the Importance of Intellectual Capital
Identified Key Relative strengths of these resources Relative
importance of these resourcesResources Examples in our organization
to delivering our value proposition
0 = not at all important 0 = not at all important10 = vitally
important 10 = vitally important
Our specific subject 7 10knowledge
Our perceived 4 9reputation
Relationships with 4 6key partners
Our patent for X 9 2
Our brand X 8 7
Etc.
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Studies have found that organizational resources(especially
intangibles) are interdependent andenhance each other in affecting
organizationalperformance. For example, a strong brand namemight
improve performance, but a strong brandname combined with the right
market knowledgeand customer service processes can
improveperformance even more. As a consequence,organizations should
attempt not only to (a) understand the direct effect of each
organi-zational resource on performance, but also to (b) assess the
interdependencies and their effectson performance.16 For this
purpose, you can use a matrix to rate how resource A depends
onresource B to deliver the core competency, untilthe all resource
combinations are rated.The scaleused for assessing the
relationships could bebetween 0 and 5, with 0 indicating no
relationshipand 5 indicating a very strong interdependency.Again,
these matrices can be completed byindividuals and then
aggregated.
Applying these tools will allow organizations togain a solid
understanding of their intellectualcapital infrastructure. In the
next section we willdiscuss how to map this into an integrated
pictureof strategy.
2. Mapping the Intellectual CapitalValue Drivers
A value creation map is a visual representation of the
organizational strategy. Mapping your key value drivers into a
visual map has two primaryfunctions.The first is to ensure that the
strategywith all its intellectual capital value drivers
isintegrated and coherent; the second is to enableeasy
communication of the strategy and the roleand importance of
intellectual capital in deliveringthe strategy. A value creation
map brings togetherthe three key elements of an
organizationalstrategy, namely, its value proposition, its
coreactivities, and its enabling strategic elements orperformance
drivers:
• The value proposition (or output deliverables)identifies an
organization’s purpose and itsroles and deliverables. It also
identifies thekey output stakeholders of the organizationand the
value delivered to them. It is mainlyderived from the analysis of
the corepurpose and the stakeholder requirements.Clarifying the
value proposition allowsorganizations to put its intellectual
capitalinto a strategic context.
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Figure 6: Visualizing the Relative Importance of Key Resources
(Source Marr, 2006)
Organizational Key Resources
Physical Capital Relational Capital Financial Capital
Structural CapitalHuman Capital
Distribution Network
Budget
ITInfrastructure
LenderRelationships
Brand
MarketingKnow How
SupplierRelationships
Distribution Know How
ProcessDesign
Know How
PatentsProcesses
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• The core activities are the vital few things anorganization
has to excel at to deliver itsvalue proposition.They essentially
define (a) what an organization should focus on,and (b) what
differentiates it from others.Core activities are directly linked
to theorganizational core competencies.
• The enabling strategic elements (or valuedrivers) are the
other strategic elements or objectives an organization requires
toperform its core activities and to deliver itsvalue
proposition.These enabling elementsor value drivers derive from the
assessmentof the organization’s resource architectureand
intellectual capital.
These three components are then placed inrelationship and
displayed on one piece of paperto create a completely integrated
and coherentpicture of the strategy. A value creation maptherefore
visually represents an organization’sunique strategy at a specific
point in time. Ittherefore has a limited life-span.17 As a
conse-quence, the maps need to be regularly revised(usually
annually), and no two value creation maps should be the same.The
basic template of a value creation map is shown in Figure 7.
A value creation map (a) reflects a sharedunderstanding of
strategy and the importance ofintellectual capital in the context
of this strategy,and (b) facilitates its communication. Based
on
such shared understanding, an organization canthen assess and
manage its intellectual capital.
How maps are portrayed can vary depending onpreferences, levels
of understanding, and availabledata.The most basic display does not
show anycause-and-effect relationships or individual
inter-dependencies between the enabling elements.Placing all these
elements in one box indicates the interdependence of these
different enablersor value drivers and the fact that, as a bundle
of enabling elements, they support the coreactivities.
Value creation maps showing cause-and-effectrelationships (see
the example in Figure 8)18
provide the most insight. Such maps indicate themost important
cause-and-effect relationshipsbetween the different enablers. For
example,better training builds up relevant knowledge,which in turn
improves customer serviceprocesses.This type of value creation map
is truly operational, thus promoting a deep andcomprehensive
understanding of the role andimportance of intellectual
capital.
Because a value creation map without cause-and-effect links is
easier to create (because thedetailed interdependencies do not have
to bedetermined), there is a danger that intellectualcapital
elements may be added that don’t have areal impact on performance.
A value creation
Output Stakeholder Value Proposition / Output Deliverables
Enabling Strategic Elements / Value Drivers
Figure 7: Value Creation Map Template (Source Marr, 2008)
Core Activity 1 Core Activity 11 Core Activity 111
Human Resources
e.g. Know How
Relational Resourcese.g. Supplier Relationships
Structural Resourcese.g. Information
and Data
PhysicalResources
e.g.Technology
Financial Resourcese.g. Funding
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map with cause-and-effect links displays the most important
interdependencies between thedifferent enablers, thus ensuring that
each elementis clearly linked to the core activities and
valueproposition.This makes value creation maps easierto interpret
and analyze, and makes possible thetest and verification of assumed
causalrelationships and interdependencies.
We therefore recommend that organizationscreate value creation
maps (preferably with cause-and-effect links) that map the key
relationshipsbetween the intellectual capital and the
strategicoutputs of an organization. Such maps can becreated
(preferably by a small task force) from the data collected in the
first step of identifyingthe intellectual capital. A workshop with
a wideraudience (usually the senior management team)can then be
conducted to discuss and finalize the map.
Case study:Thomas Miller
The Thomas Miller Group is a global insurancegroup that includes
mutual insurance companies(known as Clubs).The TT Club,one of the
Group’s
key companies, is a leading provider of insuranceand related
risk management services for theinternational transport and
logistics industry.TheTT Club has its global headquarters in the
City of London, the central hub for insurance firms,but has 20
office locations around the world. Itscustomers range from the
world’s largest shippinglines, busiest ports, global freight
forwarders, andcargo handling terminals, to smaller
companiesoperating in niche markets. Since its inceptionover 20
years ago, the TT Club has steadily grownits premium income at an
average rate of 10% perannum.Customer loyalty has been an
essentialfactor in this growth. Indeed, 90% of its customersrenew
their policies with the TT Club each year.
Developing a value creation map (with cause-and-effect links)
was part of the TT Club’s strategicplanning cycle. It wanted to
better understand itsstrategic value drivers, with an emphasis on
thenon-financial and intangible performance drivers.Developing the
value creation map involved a setof interviews with members of the
senior manage-ment team, the CEO, and board members.Themap was
finalized in a facilitated one-day planning
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Figure 8: Value Creation Map TT Club (Source Marr, 2006)
(1.1) Provision of Sustainable Financial Security Through
Excellent and Customized Trusted Insurance Covers for the Global
Transport Industry, together with Value Added Services
(2.2) UnderstandingChanging ClientRequirements &
Underwriting Risk
(2.3) Building andMaintaining Close
Relationships with Industry
(2.1) Claims Handling andService Delivery
Structure,Processes,Systems
Reputation as Recognized Specialist in
Transport Industry
Relationships with Transport Industry, with re-insurers, and
brokers
Knowledge / ExpertiseCapital Strength /
Access to Re-Insurance
Recruiting,Training,Developing, and Retaining
Good People
Customer Care Ethos
Network / Global Presence and Headquarter
in the City of London
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workshop with the senior management team.The value creation map
for the TT Club is shownin Figure 8.
The TT Club decided that its value propositionwas to provide
sustainable financial security forthe global transport industry, by
offering excellentcustomized insurance covers and
value-addedservices that customers trust.They identifiedthree core
activities: (1) claims handling anddelivery of services, such as
risk assessments and advice; (2) understanding the industry
andchanging client demands and underwritingrequirements; (3)
building and maintaining closerelationships with the industry,
which gives the TT Club the status of an independent body within
the industry.
These competencies are delivered through thecurrent structures,
processes, and systemssupported by the reputation and recognition
of the TT Club as a specialist member of thetransport
industry.These competencies are alsodelivered through relationships
not only withinthe transport industry, but also with re-insurersand
brokers. At the foundation of the valuecreation map is the ability
to recruit, train,develop, and retain good people who help tocreate
the needed knowledge and expertise.This knowledge and expertise
together with thestrong customer care ethos, helps to shape the TT
Club’s reputation in the industry. Knowledgeand expertise also
shapes the development of itsprocesses, structures, and
systems.
Another key enabler is capital strength and accessto
re-insurance, one of the strongest resources ofthe TT Club. Access
to re-insurance depends on astrong and dynamic relationship with
re-insurers.Capital strength is also an important driver
ofreputation; without capital strength,TT Club’sreputation would
suffer very quickly.The TTClub’s global presence helps it to create
localrelationships, which in turn help its reputation
andrecognition in the field. Having its headquarters in London
enables the TT Club to develop thecrucial relationships with (a)
brokers who selltheir products, and (b) re-insurers to make
re-insurance deals.
Case study:The Royal Air Force19
We discuss below how the Royal Air Force of the United Kingdom
(RAF) has applied the valuecreation mapping tool to identify and
map itsintellectual capital value drivers.The RAF has50,000 service
and civilian personnel, and morethan 500 aircraft. It supports
operations in the
Gulf region, Kosovo, and Afghanistan, and alsomaintains an RAF
presence in Cyprus, Gibraltar,Ascension Island, and the Falkland
Islands. Its key peacetime responsibility is to maintain
therequired readiness of its forces to support therequirement to
operate as an expeditionary air force.
The RAF has applied the value creation map tocascade the overall
strategy into the forces andRAF stations across the UK. Based on
interviews,a value creation map was created for
differentstations.The essential resources on which thestation
relied (e.g., people, equipment, runways,and buildings) were
evident.There were alsoseveral obvious core activities that needed
littlethought.These included flight training, servicing of
aircraft, and administrative support. However,the importance of
maintaining fighting spirit andcohesion across the unit called for
competency ina number of intangible, but nonetheless
essential,value drivers.The emerging picture was translatedinto a
value creation map that charted how theenabling strategic elements
flowed to the coreactivities, then to the delivered output, all
toachieve the overall mission.
The goal was always to represent the essence of a station on a
single A4 page. In the RAF context,the resultant diagram was termed
the StrategicMap.The draft strategic maps were then subjectedto
rigorous review during a presentation given to station commanders
and their executives.Although there were differing views on the
keyinterdependencies and the relative importance of core
activities, agreement was achieved on themap’s essential
components. After the StrategicMap had been agreed upon in
principle, anassociated table was generated that explained the
intended scope of each element.
Figure 9 outlines the value creation map for oneof the RAF
stations, showing its value proposition,core activities, and
intellectual capital value drivers.This version does not include
the cause-and-effectlinks between the different intellectual
capitalelements. Overall, this station (RAF Waddington)exists to
generate world-class ExpeditionaryIntelligence, Surveillance,Target
Acquisition, andReconnaissance (ISTAR) Capabilities.There werethree
core activities at which the station had toexcel, namely, (a) to
successfully contribute tooperations and other tasks (today and in
thefuture), (b) to provide and develop a sufficientnumber of
capable and prepared people, and (c) to maintain, sustain, and
develop sufficientcombat-ready equipment.The station agreed oneight
intellectual capital enablers of performance
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that it required to continue to deliver itsobjectives.These
performance drivers are to:enhance and maintain competencies,
training, andpersonal development; develop excellentmotivation,
fighting spirit,morale, and ethos;maintain and improve equipment;
direct andcoordinate output to ensure optimal use ofresources;
foster a culture of innovation andcontinuous improvement;
communicate andengage proactively and openly; enhance
health,fitness, and well-being; and cultivate a positiveimage and
reputation.
In addition to these intellectual capital enablers,the stations
identified a number of otherresources it needed, including finance,
infra-structure, equipment and stock, external services,and
manpower. All of these are allocated to thestations.Together, all
the elements form a cohesivepicture of the strategy for RAF
stations.
3. Measuring Intellectual Capital
After identifying and mapping the intellectualcapital value
drivers, organizations can startmeasuring them.We often have a
misconceptionthat intellectual capital is difficult or impossible
to measure.This is not the case. Many tools andtechniques are
available to measure intellectualcapital, and it is most probably
easier to measurethan you think.This section outlines a model that
will assist you in developing performanceindicators for your
intellectual capital valuedrivers. Figure 10 shows the intellectual
capitalperformance indicator design model. It starts
withidentifying which intellectual capital element youwant to
measure. Every intellectual capital valuedriver on the value
creation map should bemeasured, and for each of them the
indicatordesign model should be followed.
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Figure 9: Value Creation Map RAF (Source Marr & Shore,
2008)
(1.1) To generate world-class Expeditionary ISTAR
Capabilities
(4.1) Financial Resources
(4.2) People:Manpower
(4.3) Equipment & Stock (4.4) External Services (4.5)
Infrastructure
(2.3) Maintain,Sustain & DevelopSufficient Combat Ready
Equipment
(2.2) Provide & Develop Sufficient Capable & Prepared
People
(3.1) Enhance & MaintainCompetencies,Training &
Personal Development
(3.2) Develop ExcellentMotivation,Fighting Spirit,
Morale & Ethos
(3.3) Maintain & EnhanceEquipment
(3.4) Direct and Coordinate Output to Ensure
Optimal Use of Resources
(3.5) Foster a Culture ofInnovation and Continuous
Improvement
(3.6) Communicate & EngageProactively and Openly
(3.7) Enhance Health,Fitness & Well-being
(3.8) Cultivate Positive Image & Reputation
(2.1) Successfully Contribute to Operations & Other
Tasks,Today and in the Future
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After you have decided on the intellectual capitalvalue driver
to measure, it is important to decidewhether it is worth measuring
in the first place.Measuring performance should provide us
withmeaningful information that helps to reduceuncertainty about
intellectual capital, and enableus to learn about the intellectual
capital valuedriver and its performance.Measuring performanceshould
help us to make better informed decisionsthat enable us to improve
our performance.An excellent way of determining whether anindicator
is worth measuring is to establish thequestion(s) the indicator
will help to answer.So-called Key Performance Questions
(KPQs)20
are designed to identify what managers want toknow about the
various intellectual capital valuedrivers. KPQs make sure that any
measure has a clear purpose. If there is no question that needs to
be answered, then there is no need for measurement.
Having identified that a question should beanswered, you should
think about how to collectthe measurement data. At this point, you
can
assume that this intellectual capital value driverhas probably
been measured before, and thatsomeone has designed a method for
measuring it,so don’t re-invent the wheel. Do some researchon
already developed measurement methods.Thiscan usually be done with
simple Internet searches.If methods already exist (the most likely
case),then it is important to assess whether any ofthem are
appropriate to use. Not all methods will be useful for your
purpose. If no appropriatemethods seem to exist, you will need to
designnew measurement methods.
For both existing and newly developed methods,it is important to
assess (a) whether it is possibleto collect meaningful data, and
(b) whether thedata will help to answer your questions. Finally,
itis important to assess whether the resultant datawarrants the
cost and efforts of measurement(which can be significant). If no
meaningful datacan be collected, if the data is not really
helpingyou to answer the KPQ, or if the costs are notjustified,
then it is necessary to rethink and designdifferent indicators.
Figure 10: IC Performance Indicator Design Model (Source Marr,
2008)
Design new measurement method
Start measuring
• Instrument?• Source of data?• Formula?• Frequency?• Targets /
Benchmarks?• Who measures?• Expiry date / Revision of data?•
Audience• Reporting
Do we have a key performance question to answer?
Which IC value driver do we want to measure?
Don’t measure, rethink!Yes No
Can we use existing methods to measure it?
No Yes
Can we collect meaningful data?
Yes No
Does it help us answer our KPQ?
Yes No
Are the measurement costs and efforts justified?
Yes No
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After you have developed indicators, it is necessaryto identify
(a) the measurement instrument, i.e.,how the data will be collected
(e.g., survey orinterviews); (b) the source of the data; (c)
theformula used to compute the indicator; (d) thefrequency of
measurement; (e) any targets orbenchmarks; (f) who will measure;
(g) how longthe indicator will be collected before it needs tobe
reviewed; (h) the target audience for thisindicator; and (i) the
reporting formats. Below, welook at developing key performance
questions anddesigning performance indicators in more detail.
Designing Key Performance Questions™
Key Performance Questions (KPQs)20 askmanagers exactly what they
want to know aboutthe various intellectual capital value drivers.
KPQsare asked to ensure that indicators are useful
andmeaningful.They make sure that we are clearabout what it is we
want to know. Also, by firstdesigning KPQs we are able to ask
ourselves:‘What indicators will best help us answer our key
performance questions?’
An example of how powerful KPQs can be inmanaging strategic
performance comes fromGoogle – one of today’s most successful and
mostadmired companies. Google CEO Eric Schmidtsays21: “We run the
company by questions, not byanswers. So in the strategy process
we’ve so farformulated 30 questions that we have to answer […]You
ask it as a question, rather than a pithy answer,and that
stimulates conversation.Out of the conversa-tion comes innovation.
Innovation is not something thatI just wake up one day and say ‘I
want to innovate.’I think you get a better innovative culture if
you ask itas a question.”
Any student of science learns that it is importantto know what
you are looking for before you startcollecting any data. If we
start collecting datawithout knowing what we are looking for,
weoften collect the wrong or unnecessary data, anddevelop few or no
insights about the reallyimportant questions we need answers to. In
ourdesire to find measures and get our hands on thedata, we often
fail to clarify what it is we reallywant to know. For example,
after deciding that therelationship with our partners is important
andthat we ought to measure it, we need to pause toclarify what it
is we want to understand. Here iswhere KPQs come in – defining the
question orquestions we want answered forces us to morespecifically
spell out just what it is we want toknow. Once we have the
question, we then haveto ask ourselves: what information will
answer thisquestion and what is the best way of collecting it?
KPQs should not be designed solely in theboardroom. Designing
KPQs provides a greatopportunity to engage everyone in the
organi-zation, as well as some external stakeholders.Here are some
guidelines for designing KPQs:22
• Design between one and three KPQsfor each intellectual capital
valuedriver: If the intangibles matter in deliveringyour strategy,
then you should developmanagement questions you want answered.Try
to keep them to the vital few (seeFigure 11).
Figure 11: KPQs and KPIs
• Involve people in the process:Try toinvolve people in the
design of KPQs byasking them what questions they believe are most
relevant. After designing a list ofKPQs, get feedback from the
subject matterexperts or different parts within andoutside the
organization. For example, askthe marketing department to discuss
andrefine the KPQs that relate to brand andreputation. Remember
that KPQscommunicate to everyone what reallymatters to an
organization, and that themore people understand and agree
withthese questions the more likely it is thateverybody will pull
in the same direction.
• KPQs should be short and clear:A good KPQ is relatively short,
and clear.A KPQ should only contain one question.Asking a string of
questions makes it muchharder to guide meaningful and focused
datacollection.The language should be clear andnot contain any
jargon or abbreviations thatmight not be understood. Likewise,
ensurethat the question is clearly written, usinglanguage those in
your organization (andthose consulted outside) are comfortableand
familiar with.
• KPQs should be formulated as openquestions:Closed questions
such as ‘Howmany people in our organization have highereducation
qualifications?’ or ‘Have we met
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Driver
KPQ
KPQ
KPI
KPI
KPI
KPI
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our employee satisfaction target of 89%?’can be answered with a
simple answerwithout any further discussion or expansionon the
issue. However, open questions suchas ‘To what extent are we
sharing know-ledge?’ or ‘How well are we increasing ourcorporate
reputation?’ trigger a widersearch for answers by seeking more than
a‘yes’ or ‘no’ response. Open questions makeus reflect, they engage
our brains to a muchgreater extent, and they invite explanationsand
ignite discussion. All of this is vital whenit comes to
intellectual capital.
• KPQs should focus on the present andfuture:Questions should be
phrased in away that addresses the present or future:“Are we
increasing our market share?”instead of questions like “Has our
marketshare increased?” By focusing on the future,we open up a
dialogue that allows us to ‘do’something about the future.We then
lookat data in a different light, trying to under-stand what the
data and managementinformation means for the future.This helpswith
data interpretation and ensures thatwe collect data that helps to
inform ourdecision making.
• KPQs are refined through usage:After KPQs have been created,
theiranswers should be evaluated, to see howwell (a) the
performance indicators answerthe questions, and (b) the indicators
helppeople to make better informed decisions.Once KPQs are in use,
it is possible torefine them to improve their focus.
Below, we have listed some example KPQs toillustrate how
organizations have developed keyperformance questions for some of
theirintellectual capital value drivers:
• To what extent are we enhancing ourinternational
reputation?
• How well are we sharing our knowledge?
• To what extent are we retaining the talentin our
organization?
• How well are we promoting our services?
• How do our customers perceive ourservice?
• How effective are we in managing ourrelationships?
• How well are we innovating?
• How well are we communicating in ourorganization?
• How well are we working in teams?
• How well are we building our newcompetencies in X?
• To what extent are we continuing to attractthe right
people?
• How well are we fostering a culture ofinnovation and
continuous improvement?
• To what extent do people feel passionateabout working for our
organization?
• How well are we helping to develop acoordinated network to
perform clinicaltrials?
• How motivated is our staff?
• How well are we sharing one set of values?
• How well are we protecting our intellectualproperty?
Designing Performance Indicators forIntellectual Capital
Once we have the KPQs and know what it is we want to know, we
can design performanceindicators for our intellectual capital. Over
thepast decade, many tools and techniques have been developed to
measure intellectual capital.Sophisticated measurement and analysis
methodsare usually used in fields such as physics andfinancial
accounting, which have a long history ofmeasurement and already
have reliablequantitative measurement instruments.Themeasurement of
intellectual capital is a relativelyyoung field, without many
generally acceptedmeasurement instruments. It is natural that
areasof measurement evolve and improve over time,and that more
generally accepted methods willemerge. For example, temperature
wasconsidered very qualitative and immeasurableuntil Daniel
Fahrenheit developed the mercurythermometer to measure it.Today, we
all acceptthis form of measuring temperature.We will seesimilar
evolutions for areas of intellectual capital.
Most measures of intellectual capital are indirector proxy
measures. For example, in measuringwork-related competencies we
might use thenumber of people with vocational qualifications asa
proxy measure. Or, if we want to measure trustin our organizations,
we collect survey data asproxies.This is completely legitimate and
some-thing we do in other more sophisticated areas ofmeasurement.
Just think of temperature, wherewe measure the expansion of
mercury, or timewhere we measure the rotations of cogs.
The one danger with using proxy measures is that we sometimes
oversimplify the process andsimply measure what is easy to count.
For
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example,we might want to understand intelligencebut just measure
IQ test scores. Another problemis that we tend to focus on numbers
more thantheir meaning. As Dee Hook, founder of the Visanetwork,
rightly said “in years ahead,we must getbeyond numbers and the
language of mathematics tounderstand, evaluate and account for such
intangiblesas learning, intellectual capital, community, beliefs
andprinciples, or the stories we tell of our tribe’s valuesand
prosperity will be increasingly false.”23
Words such as performance assessment seemmore appropriate in
this context than ‘measure-ment.’ Assessment goes beyond the
assignment ofnumbers. Instead, we should assess performanceby
systematically collecting information to enableus to gain the
required insights and answer ourKPQs. Performance assessment can
take the formof numbers, but should also include
writtendescriptions, symbols, or color codes.
Furthermore, when it comes to intellectual capital,the word
indicator rather than ‘measure’ seemsto more appropriately reflect
indirect measure-ment using proxy indicators. An
indicator‘indicates’ a level of performance, but it does notclaim
to ‘measure’ it. For example, a new indicatorto assess customer
satisfaction levels will indicatehow customers feel; however, it
will never‘measure’ customer satisfaction in its totality.
We often associate counting with objectivity and reliability,
and perception-based data withunreliability.This belief needs to
change when itcomes to intellectual capital. Many studies haveshown
that perceptual assessments are as reliable,if not more reliable,
than archival data.24 Percep-tion data can (a) provide richer
insights into thereal level of performance, and (b) allow us
toactively involve people in assessing performance.We can involve
people by asking them, forexample, to rank competitors, evaluate
the servicedelivery or organizational culture, or assess thelevel
of relationships with different suppliers.Theseassessments can take
the form of numbers orgrades; however, they can also be represented
bysymbols such as traffic lights or thumbs up ordown, as well as by
written assessments.Writtenassessments capture much more
information,allowing us to more naturally communicateassessment
outcomes. If numbers are used toassess intellectual capital, it
usually makes sense to supplement them with at least a comment
fieldto provide some explanatory narrative.
An important step in designing indicators forintellectual
capital value drivers is to decide on the measurement instrument
that will beused to collect the data. Before designing any new
instruments, it is important to check what hasalready been
developed and used by others.When deciding on the instrument, it is
importantto keep the KPQ in mind when assessing whethermeaningful
data can be collected. In many areas of intellectual capital,
improved measurementinstruments have led to more insightful
andmeaningful performance indicators.
The most suitable measurement method is most likely simpler than
you first think; also, youusually have access to more data than you
expect.Designing the right measurement instrumentmight only require
more resourcefulness.25 Forexample, instead of using the ubiquitous
andintrusive customer satisfaction survey, manyservice providers,
such as hotels or banks, nowuse focus groups to identify what
really matters to their target customers.They then
employprofessional mystery shoppers/users to assessservice levels
against the identified criteria. Callcenters, for example, used to
count only thenumber of abandoned calls, or call duration,
asmeasures of customer service delivery. Now theyuse instruments
such as audio taping telephoneconversations between service agents
andcustomers, and use coaches to randomly listen to conversations
to assess the qualitative aspectsof call handling.To enable the
user to considerdifferent measurement instruments, we presentbelow
an overview of different instruments formeasuring intellectual
capital value drivers:
• Surveys and Questionnaires provide arelatively inexpensive way
of collecting dataon intellectual capital from a large pool
ofpeople who might be at different locations.26
This can be done via mail, e-mail, internet, ortelephone. One
big problem with this is thehuge influx of surveys over the past
fewyears, as more and more organizationsrequire data for their
non-financial indicators.As a consequence, it is now harder
topersuade people to complete a survey. It is always a good idea to
reduce the amountof time and effort required to collectperformance
data, not only for yourorganization, but also for your
customers,employees, suppliers, etc. Surveys areregularly used to
measure intellectual capitalvalue drivers such as employee
engagement,corporate culture, customer attitudes,innovation
climate, or brand image.
• In-depth interviews are guided conversationswith people,
rather than the structuredqueries found in surveys.They put
forwardopen-ended (how,why,what) questions in aconversational,
friendly, and non-threatening
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manner.27 Interviews can be conducted face-to-face, or via
telephone or video-conference. Interviews, which enableinteraction
directly with respondents, mayprovide new insights about
performance.They provide examples, stories, and criticalincidents
that are helpful in understandingperformance more holistically.28
In-depthinterviews can, for example, be used toassess intellectual
capital value drivers such as relationship with key
customers,suppliers, or partners. In addition toproviding a
performance score, they canalso yield invaluable contextual
informationabout, for example, how to improverelationships between
key customers,partners, or employees.
• Focus groups are facilitated group discussions(5-20
participants) in which participants canexpress and share their
ideas, opinions, andexperiences.They provide a unique
andinteractive way to gather information, andallow the collection
of rich, qualitativeinformation. Focus groups are good ways
ofassessing employee- and customer-relatedintellectual capital
value drivers such ascustomer experience, customer or
staffengagement, team-working climate, or trust.
• Mystery shopping approaches assess a serviceby using a ‘secret
shopper’ posing as a clientor customer. Some companies hire
theirown mystery shoppers; other firms hireexternal suppliers to
provide this service.The beauty of this assessment approach is that
it is less intrusive than surveys orinterviews.Many retail
businesses,banks,and hotels have used mystery shopping to assess
customer experience.Trainedmystery shoppers can also be used
formany other intellectual capital assessments,such as assessing an
organization’s cultureor atmosphere.
• External Assessments.External organizationsand institutions
can provide independentperformance assessments and indicators.Good
examples of external assessments are independent surveys that
measure thebrand recognition, customer awareness,or market share in
specific segments. Anindependent company creates a set ofcriteria,
and then measures everyone againstthese criteria to assess, for
example, therelative position or values of brands orcorporate
reputations.The advantage ofexternal and independent assessments
isthat the data they provide allows
comparisons between organizations.However, external assessments
might betoo generic, and often use assessmentapproaches that don’t
provide the answersto the internal KPQs. External assessmentsare
best used to supplement, cross-check,and validate other internal
indicators.
• Observations allow us to collect informationby observing
situations or activities withlittle or no manipulation of the
environment.The observer can either take the role of apassive
onlooker / outsider, or can becomeinvolved in activities and,
therefore, take the role of partial or full participant.“Thepower
of using observation methods is thatit engages all of our senses
not just oursight. It enables us to take in and makesense of the
entire experience through ournose (smell), eyes (sight), ears
(hearing),mouth (taste), and body (touch).Unlikeother data
collection methods, observationdata can provide us with a more
holisticunderstanding of the phenomenon we’restudying.”28
Observation outputs can takethe format of score sheets, check
lists,narrative reports, and video or audio taping.Observations
have been successfully used in assessing organizational culture,
skill andexperience levels of employees, emotionalintelligence, and
creativity. Another exampleis employee safety. Instead of waiting
foraccidents and injuries to occur and thencount those, so-called
Safe Behaviormeasures can be used: Observers pro-actively look for
safe behaviors that wouldprevent the most common accidents,
andrecord those on a behavioral observationform.This information
can then be shared,providing immediate feedback on
potentiallyunsafe behavior.
• Peer-to-peer evaluation is the assessment ofperformance by
participants who vote onor assess each other’s performance,
eitheropenly or anonymously.This enables peopleto learn from each
other, and to considertheir own performance from the perspec-tive
of others. Peer-to-peer evaluations havebeen successfully used to
gauge intellectualcapital value drivers, including trust,
know-ledge and experience, teamwork, andrelationships.
There are many more fascinating ways ofcollecting qualitative
performance data – for moreinformation and an example see the
Handbook ofQualitative Research.29 To guide the indicator design,we
have developed an intellectual capital indicator
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template (see Figure 12) that can be completedfollowing the
model described in Figure 10.
The top part of the template states the intellectualcapital
value driver that is being assessed, theKPQ, and Ownership of the
question.Ownershipidentifies the person(s) or function(s)
responsiblefor managing the intellectual capital value driverthat
is being assessed. Every indicator should begiven a clear name.
The Data collection method describes themethod or instrument
used to assess theintellectual capital value driver. As
discussedabove, selecting the appropriate data collectionmethod is
important. It is important to considerthe strengths, weaknesses,
and appropriateness of different data collection methods. Here,
thedesigner of an indicator should briefly describethe data
collection method, specify the source of the data, state how often
the data is to becollected, identify the scale to be used to
measureit, and identify who is in charge of collecting andupdating
the data.
Source of the data identifies where the datacomes from.This
ensures that the designer of anindicator ask a number of questions
about theaccess to data. Is it readily available? Is it feasible to
collect it? Will the data collection method, forexample interviews
with senior managers, providehonest information? If not, maybe
different datacollection methods could be combined?
Frequency of data collection identifies howoften the data for
that indicator should becollected. Some indicators are
collectedcontinuously, others hourly, daily, monthly, or even
annually. It is important to decide whatfrequency will provide
sufficient data to answerthe KPQ, and how regularly it is feasible
tomeasure. Organizations might want to continu-ously track
indicators of website usage, becausesome of them might be readily
available fromserver reports. External indicators for brandranking,
for example, might only be available onceor twice a year. One of
the biggest pitfalls ofintellectual capital measurement is that
data is notcollected frequently enough. For example,
manyorganizations conduct employee surveys once ayear or even every
eighteen months.This is notvery useful, as the time between the
assessmentsis too long, and impacts of corrective actionscannot be
tracked. Instead of surveying allemployees once a year, it is
possible, for example,to survey a representative sample (let’s say
10%)of employees every month. Individuals will
still complete a survey once a year, but theorganization
receives monthly information thatallows them to answer their KPQs
and act on thedata much more quickly.
Formula / scale / assessment – Here, thedesigner of the
indicators identifies how tocapture the data. It may be possible to
create aformula. Or an aggregated indicator or index thatis
composed of other indicators may be used.Here the designer also
specifies (a) which of thefollowing scales is to be used: nominal
(numberingof categories, e.g., football players); ordinal
(deter-mination of greater or less, e.g., street numbers);interval
(determination of intervals, e.g., degreesFahrenheit or Celsius);
and ratio (determination of equality and ratio in a continuum with
a realzero, e.g., length, time, temperature in Kelvin); or(b)
whether the indicator cannot be expressed inany numerical form.
Targets and performance thresholds identifythe desired level of
performance in a specifiedtimeframe (e.g., 5% increase of market
share bythe end of March next year). Many firms use ‘traffic
lighting’ to illustrate performance levels.Here, the designer of an
indicator would specifythe thresholds for red
(under-performance),amber (medium performance), green
(goodperformance), and sometimes blue (over-performance). Here, it
is also worth thinking aboutinternal or external benchmarks; these
can bederived from past performance, from other
similarorganizations or departments, or from forecasts.
Data entry identifies the person, function, orexternal agency
responsible for data collectionand data updates.This could be an
internal personor function, or an external agency, because
manyorganizations outsource the collection of specificindicators.
Outsourcing is especially common forindicators such as customer
satisfaction, reputa-tion, brand awareness, and employee
satisfaction.
Expiry / revision date – Indicators are some-times introduced
only for a specific period of time (e.g., for the duration of major
projects,or to keep on eye on restructuring efforts).It is common
practice to introduce a significantnumber of indicators once and
collect dataforever, because no one ever goes back andidentifies
the indicators that are no longer needed.Other obviously temporary
indicators areintroduced without giving them an expirationdate;
however, for those indicators a revision dateshould be set that
allows the designers to reviewthe template and check whether it is
still valid.
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Estimated costs – Another aspect that should be considered is
the cost and effort required tointroduce and maintain a performance
indicator.Many managers and measurement experts assumethat creating
and maintaining measurementsystems does not incur significant
costs. On the contrary, however, measurement is
expensive,especially if the indicators are supposed to berelevant
and meaningful to aid decision makingand learning.Costs can include
the administrativeand/or outsourcing costs of collecting the data,
aswell as the cost of analyzing and reporting on theperformance. It
is important to ensure that thecosts and efforts are justified.
Reporting – Here, the designer of an indicatoridentifies how to
report the performanceindicator, identifying the audience, access
restric-
tions, the reporting frequency, and reportingformats.
Audience and access identifies who will receivethe information
on this performance indicator.Reports on indicators can have
differentaudiences. It might therefore be a good idea toidentify
primary, secondary, and tertiary audiences.The primary audience
will be those directlyinvolved in the management and decision
makingrelated to the strategic element that is beingassessed.The
secondary audience could be otherparts of the organization that
would benefit fromseeing the data. A possible tertiary
audiencecould be external stakeholders.
Reporting frequency identifies how often toreport on this
indicator. If the indicator is to
Figure 12: Indicator and Index Design Template (Source: Marr
2006)
TEMPLATE FOR DESIGNING
KEY PERFORMANCE INDICATORS
Intellectual Capital Element Name the strategic element from the
Value Creation Map which is being being Assessed: assessed with
this indicator.
Key Performance Question(s)™ Name the question(s) related to
performance that this indicator is helping to answer.
Ownership / Person Responsible / Identify the person(s) or
function(s) responsible for the delivery / performance Champion /
Coordinator of the measured strategic element.
Indicator Name Pick a short and clear indicator name.
Data Collection Method / Describe how the data will be
collected.Instrument
• Source of Data Describe where the data will come from.
• Frequency Describe how frequently this indicator will be
collected. If possible, include a forward schedule.
• Formula / Scale / Assessment Describe how performance levels
will be determined.This can be qualitative, in which case the
assessment criteria need to be identified, or it can be numerical
or using a scale, in which case the formula or scales with
categories need to be identified.
• Targets and Performance Identification of targets, benchmarks,
and thresholds for traffic lighting.Thresholds
• Data Entry Name the person or role responsible for collecting
and updating the data.
Expiry / Revision Date Identify the validity date of this
indicator, or when it will have to be revised.
How much will it cost or what Estimate the costs incurred by
introducing and maintaining this indicator.will the person / days
required be to collect the data and is it justified?
Reporting
• Audience / Access Name the key audience for this indicator and
clarify who will have access to it.
• Reporting Frequency Outline how frequently this indicator will
be reported to the different audiences (if applicable).
• Reporting Formats Describe how the performance indicator will
be presented (numerical, graphical,narrative formats). Here it is
good to especially think about visual representation that makes it
easy to understand and digest.
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support decision making, then it needs to providetimely
information.The reporting frequency candiffer from the measurement
frequency. Anindicator might be collected hourly, but onlyreported
on at a quarterly performance meeting.
Reporting formats identify how best to presentthe data.They
should clarify whether the indicatoris reported as, for example, a
number, a narrative,a table, a graph, or a chart.The best results
areusually achieved if performance is reported in amix of
numerical, graphical, and narrative formats.Considerations here
also include the presentationof a data series and past performance.
A graphcontaining past performance might be very usefulto analyze
trends over time; this could also includetargets and benchmarks.
Increasingly as well,organizations use traffic lights or
speedometerdials to present performance data.
When designing any indicator for the intellectualcapital value
drivers, it is essential to constantlyevaluate the validity and
information value of theindicators.The following questions are
relevant.To what extent do the indicators enable us toassess the
particular intellectual capital element?How well do the indicators
help us answer theKPQ(s)? If the indicator is not providing us
withthe required information, we should not measureit at all.
When it comes to intellectual capital, a singleperformance
indicator will rarely give us sufficientinformation.We therefore
recommend combiningdifferent measures into one index.This
providesorganizations with a more rounded and balancedview on their
intellectual capital. Human healthallows us to illustrate the
point. Only taking yourblood pressure to assess your heath would
not be sufficient. However, taking blood pressure,cholesterol and
blood tests, together with anumber of other tests, and combining
these into a health index, provides a much more balancedand
reliable assessment of physical health.Thesame is true in business.
If a company wants tomeasure customer relationships, a number
ofindicators such as loyalty, trust, commitment,profitability, and
referrals can be measured andcombined into a customer relationship
index.We outline below two illustrative examples ofhow
organizations have applied the indicatordesign model in
practice.
Case study:Measuring Partnerships atInterCorp30
A major blue chip company, InterCorp, wanted tomeasure its
partnerships with its key suppliers, an
important intellectual capital value driver. Initially,InterCorp
didn’t develop KPQs. Instead, it tried tofind the quickest and
easiest way to get some data.After some research, InterCorp
identified anexternal company that specialized in
partnershipevaluations.This company had designed a
genericquestionnaire to measure partnerships. InterCorpoutsourced
its data collection to this company,who then started to collect the
partnership datatwice a year. Initially, InterCorp was pleased
withthe service, as the external company provided itwith detailed
reports containing graphs, tables, andtrend analyses on about 50
different questions onthe survey. Although, on the surface,
InterCorpseemed happy with how things were going, thepartners were
telling a different story.Theybelieved that a lot of unnecessary
data wascollected, which took them a lot of time and effort(about 6
man-days for each survey). It very quicklybecame clear that all of
the data InterCorp werecollecting was ‘interesting to know,’ but
only that.Not one decision based on the survey data hadbeen taken
over the past three years.
InterCorp went back to the drawing board andidentified the
question(s) they really wantedanswered.The KPQ they came up with
was “Howwell are our partnerships progressing?” Afterdeciding on
this KPQ, they then asked themselveswhat data they would need to
answer thisquestion, and how best to collect the data.InterCorp
needed data that would assess therelationships, but didn’t want to
use the samesurvey again, as it was collecting too muchunnecessary
data. After some deliberation andresearch, InterCorp agreed that
the best approachwould be to ask its relationship managers
oraccount managers for an assessment. InterCorprealized that its
own account managers would beable to make this assessment without
the need fora lengthy survey. InterCorp designed a system
thatautomatically e-mailed a very simple form to theaccount
managers with just two questions:“Howwould you assess the
relationship with companyX?” and “How well is the partnership
withcompany X progressing?” The form included ascale next to the
question. Initially this was a 10-point scale, from very bad to
very good.This waslater refined into a 3-point scale. In addition,
theform also included a field for a written comment(see Figure 13).
Account managers were asked toassess the partnerships by ticking a
box on a scaleand by providing a short written comment on whythey
picked that particular assessment.
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Figure 13: Partnership KPQs
InterCorp realized that asking only the accountmanagers might
produce a biased view on thesituation, so it decided to also e-mail
a modifiedform to its partner companies. Preferring not to ask for
any written assessment, the form usedfor the partner companies only
included the twoscaled questions. After account managers and the
partner companies had completed the shortsurvey, the results were
compared in a database.In over 95% of the cases, the internal and
external assessments were identical.Where major differences in
opinion occurred, thedatabase triggered another e-mail to the
internalaccount manager, prompting him or her to pick up the
telephone and discuss any potential issueswith the partner
organization. InterCorp alsorealized that it was not collecting
such datafrequently enough.They decided that monthlydata was
required to be able to react to potentialissues before they became
big problems.InterCorp now has a very simple and cost-effective
monthly performance measurementsystem in place, one that allows it
to get all theinformation needed to answer its KPQ
aboutpartnerships with its suppliers, one of its
criticalintellectual capital value drivers.
Case study:Measuring staff engagement at TradeBank31
TradeBank is a leading Trading Bank that believesthat its
people, with their skills and knowledge,are its most important
intellectual capital valuedrivers.TradeBank believed that one of
the keyenablers of success was the level of staff engage-ment. In
the past, they had conducted traditionalstaff satisfaction surveys,
but found that eventhough people might have indicated
satisfactionwith their jobs, many were not engaged. Managersin
TradeBank believed that engagement is muchmore important than staff
satisfaction, as itindicates how passionately people feel about
theirjobs, and how connected they feel to the organi-zation.
According to the Gallup Organization,
engaged employees are passionate about whatthey do, feel a
strong connection to their company,and perform at high levels every
day while lookingfor ways to improve themselves and the companyas a
whole. Unengaged employees on the otherhand show up every day and
put in just enougheffort to meet the basic requirements of their
jobs.Without passion or innovation, these employeesneither commit
to the company’s direction, nordo they work against it. Actively
unengagedemployees present a big problem for businesses.Negative by
nature, these people are unhappy intheir work, and they compound
their lack ofproductivity by sharing this unhappiness withthose
around them. According to GallupResearch, an average organization
has about 25%engaged employees, just over half not
engagedemployees, and just under a fifth activelydisengaged
employees.TradeBank was keen toimprove its ratio and ensure that
more employeeswere closely engaged.
Managers in TradeBank agreed to the followingKPQ: “To what
extent are our employeesengaged?” In their research of existing
datacollection methods, they came across the Q12survey tool32 that
was developed by the GallupOrganization.This 12-question survey
wasdesigned to assess engagement, especially on an emotional level.
After some deliberation,TradeBank felt that this survey would allow
it to gain the information to answer its KPQ. Inaddition, the
survey would allow TradeBank tobenchmark itself with its
competitors.Thefollowing 12 questions, based on the Q12 survey,were
incorporated into TradeBank’s staff survey:
1. Do I know what is expected of me at work?
2. Do I have the right materials andequipment I need to do my
work right?
3. At work, do I have the opportunity to do what I do best every
day?
4. In the last seven days, have I receivedrecognition or praise
for doing good work?
5. Does my supervisor or someone at work,seem to care about me
as a person?
6. Is there someone at work who encouragesmy development?
7. At work, do my opinions seem to count?
8. Does the mission / purpose of myorganization make me feel my
job is important?
9. Are my coworkers committed to doingquality work?
Problematic Indifferent PositiveHow would you assess the
relationship with company X?
Written Comment:
Worse Same as Better than before before than before
How well is the partnershipwith company X progressing?
Written Comment:
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10. Do I have a best friend at work?
11. In the last six months, has someone atwork talked to me
about my progress?
12. This past year, have I had opportunities atwork to learn and
grow?
TradeBank decided to poll a representative sampleof its
employees every month to regularly checkfor possible changes. Each
employee still receives a survey only once a year, but the company
getsvalid data every month to answer its KPQquestion and to test
the impact of staff engage-ment on retention, satisfaction, and
performancelevels. In TradeBank, the results of staff engagementare
reported to the senior management teammonthly.The data is provided
in aggregated form(staff engagement index) and compared
withcompetitor positions. Engagement is best reflectedby changes
over time.The data is thereforepresented in a trend chart over
time, togetherwith a narrative commentary by the HumanResources
Director that puts the assessment intocontext and extracts the key
learning points.
4. Managing Intellectual Capital
Measures allow organizations to manage.Thisapplies to management
of intellectual capital.Without relevant assessments, it is
impossible (a) to understand current performance levels,(b) to know
whether the intellectual capital hasimproved or deteriorated, and
(c) to understandwhether any activities and initiatives have
affectedperformance. Organizations that have meaningfulperformance
information about its intellectualcapital can use it to inform
decision making, to test and review strategy, and to manage
risksassociated with intellectual capital. Each of thesewill be
discussed in further detail below.
Informing Decision Making
Performance information about intellectual capital and other
drivers of success providesperformance feedback.This in turn
underpinslearning and decision making.33 Let us use ananalogy from
the world of education to illustratethe app