Measuring Intellectual Capital in Business
“There is less to fear from outside competition than from inside inefficiency, miscalculation, lack of knowledge. Beat your competitors with the knowledge edge. Train your staff”.
A business can be only as successful as is its weakest link, and the results can be measured through various kinds of tools, such as employee productivity, which consists the human capital part of the enterprise. Human capital is generally thought of as a value including employee skills, know-how, and expertise. But in addition, human capital includes employee motivation. In addition, human capital is an organization´s capability for solving business problems, thus exploiting its intellectual property.
Measuring intellectual capital in any business is not as easy as e.g. measuring the firm´s fixed assets and properties. However, smart firms know how to value and to retain their employees, investing in intellectual capital and knowledge in the first place.
When employees leave their work, human capital, and thus knowledge, is being lost. A high staff turnover rate, low motivation, and low productivity, are signs for a firm´s management to take a look in the mirror and define what changes need to be taken in order to improve the state of the firm´s human capital. At its best, human capital can be measured by a significant amount of creativity and innovation in a firm, a safe and open-work atmosphere, where knowledge is being shared and development takes place not only through organized training, but also through natural evolution and learning by doing, experience, and fun.
Further on, IC includes a firm´s infrastructure, enabling its human capital to operate productively. Structural capital includes processes, patents, trademarks, the organization’s image, organization, information system, and proprietary software and databases. And finally, relational capital in a business consists of its networks, and relationships, as well as possible trademarks and trade names. Goodwill is another term for the value of the firm´s relationships.
Knowledge Management, a process of capturing, developing, sharing, and effectively using organizational knowledge, has become an important tool for optimizing the values of intellectual capital in a business. Mostly implemented through business strategy, IT, or HRM departments in large organizations, KM is also a valuable tool for any small firm and/or startup. When knowledge management, and intellectual capital, is integrated to business at an early stage, these powerful intangible assets can be optimized in order to create long-term success for any organization.
According to Jurczak (2008), intellectual capital can be measure through various means, such as Direct Intellectual Capital Methods (DICM), Market Capitalization Methods (MCM), Return on Assets Methods (ROA), Scorecard Methods (SC).
More specifically, ROA Methodologies include following tools: Economic Value Added (EVA), Human Resource Costing and Accounting (HRCA), Calculated Intangible Value, Knowledge Capital Earnings, Value Added Intellectual Coefficient (VAIC), Accounting for the Future (AFTF), Tobin´s q, Investor Assigned Market Value (IAMV), Market-to-Book Value.
DIC Methodologies, in turn, include: Technology Broker, Citation-Weighed Patents, The Value Explorer, Intellectual Asset Valuation, and Total Value Creation (TVC).
SC methodologies: Human Capital Intelligence, Sandia Navigator, Value Chain Scorecard, Intangible Asset Monitor, Intellectual Capital Navigator and Intellectual Capital Index (IC Index), Value Creation Index, Balanced Score Card.
Many of the tools and measurement methods may sound rather fine and abstract, far from e.g. a small business owner´s daily running of business. Some of the previously mentioned measurement tools are in more common use than others. Whichever your business chooses to use (or if you prefer creating your personalized tools), measuring intellectual capital and the efficiency of knowledge management in your business is definitely a way of increasing productivity and in achieving better results.
For further interest in knowledge management and intellectual capital, there is plenty of literature available upon both topics, e.g. by Sveiby, K-E., and Nonaka, I.
“Knowledge is power”
Sir Francis Bacon