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second edition June, 1998

Measuring intellectual capital

12 techniques used to value intangible assets
How to measure intellectual capital is a hot topic in financial, human resources, information technology, and publishing. Intellectual capital is defined as human capital (the skills and capabilities of people) plus structural capital (the databases, reports, and other tangible intellectual products that people produce).
SAIC, a defense and commercial contracting firm, has developed an internal Why its important Financial managers stock market so that its employee-owners can invest in and cash out on the value of their combined intellectual capita. usually get involved with intellectual assets in four ways: tative target, is the ultimate goal. Example: Evaluating the firms progress in have 80% of employees involved with the creating and using intellectual capital; customer in some meaningful way. Assigning a value to intellectual 2. Balanced scorecard. Supplements tracapital for use in mergers, acquisitions, joint ditional financial measures with three adventures, and investment decisions; ditional perspectives customers, inter Reporting indicators on how well nal business processes, and learning/ the firm is succeeding in increasing its in- growth. Originated with a couple of tellectual assets; Harvard Business School professors, used Increasing the return on the firms by Skandia and others. investment in intellectual capital. 3. Competency models. By observing and classifying the behaviors of successHow to measure it ful employees (competency models) Our research has identified twelve and calculating the market value of their ways being used or proposed to measure output, its possible to assign a dollar value intellectual assets. Each is briefly described to the intellectual capital they create and below. use in their work. 4. Subsystem performance. Sometimes 1. Relative value. Bob Buckman (Buck- its relatively easy to quantify success or man Laboratories) and Leif Edvinsson progress in one intellectual capital compo(Skandia Insurance) are proponents of this nent. For example, Dow Chemical was able approach, in which progress, not a quanticontinued on page 2

Previous articles
Whos minding your knowledge assets, December, 1997 How companies are responding to the need for a new cross-functional role: the knowledge base editor. Auditing the Idea Inventory, June, 1997 Describes five recent articles and two new books on knowledge management and how to measure intellectual assets. Measuring intellectual assets, March, 1997 Twelve ways to assign a value to intellectual assets, an excerpt from our Executive Briefing, CFOs Guide to Intellectual Capital To receive a complimentary copy of any Limited Edition back issue, call us at (413) 367-0245 or go to the Limited Edition Web site at http://www.montague.com/ le/lenews.html

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About the publisher

LIMITED EDITION is published by Limited Edition Publishing. Editorial and subscription inquiries should be directed to: Editor Limited Edition 55 Main Street P. O. Box A-16 Montague, MA 01351 (413) 367-0245 editor@montague.com copyright Jean L. Graef. All rights reserved. 1992-1998

to measure an increase in licensing revenues from better control of its patent assets. 5. Benchmarking. Involves identifying companies that are recognized leaders in leveraging their intellectual assets, determining how well they score on relevant criteria, and then comparing your own companys performance against that of the leaders. Example of a relevant criterion: leaders systematically identify knowledge gaps and use well-defined processes to close them. 6. Business worth. This approach centers on three questions. What would happen if the information we now use disappeared altogether? What would happen if we doubled the amount of key information available? How does the value of this information change after a day, a week, a year? Evaluation focuses on the cost of missing or underutilizing a business opportunity, avoiding or minimizing a threat. 7. Business process auditing. Measures how information enhances value in a given business process, such as accounting, production, marketing, or ordering. 8. Knowledge bank. Treats capital spending as an expense (instead of an asset) and treats a portion of salaries (normally 100% expense) as an asset, since it creates future cash flows. 9. Brand equity valuation. Methodology that measures the economic impact of a brand (or other intangible asset) on such things as pricing power, distribution reach, ability to launch new products as line extensions. 10. Calculated intangible value. Compares a companys return on assets (ROA) with a published average ROA for the industry. 11. Microlending. A new type of lending that substitutes intangible collateral (peer group support, training, and the personal qualities of entrepreneurs) for tangible assets. Primarily used to spur economic development in poor areas. 12. Colorized reporting. Suggested by SEC commissioner Steven Wallman, this method supplements traditional financial
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statements (which give a black and white picture) with additional information (which add color). Examples of color include brand values, customer satisfaction measures, and the value of a trained work force. Intellectual capital and the CFO As the focal point for managing corporate resources, CFOs can be involved in intellectual capital in four areas: 1. Information technology, such as distance learning systems, intranets, and remote computing. 2. Human resources, such as competency-based training and the learning organization. 3. Business intelligence and publishing, such as the development of competitive intelligence knowledge bases, conducting electronic shareholder meetings, and publishing annual reports in knowledge base form. 4. Finance and strategy, such as developing new ways of colorized reporting that provides better information on intangible assets, implementing patent and trademark databases to earn additional revenues from royalties and licensing, and designing intellectual capital performance measures. Leveraging financial expertise In addition, CFOs are developing ways to leverage the intellectual capital of their own experts in tax, mergers/acquisitions, internal auditing, budgeting and risk management to partner more effectively with business units. Most, if not all, of the Big Six accounting firms and the top tier management consulting firms are offering access to their own experts and knowledge through Internet subscription services. And financial education is expanding to include new forecasting and analytical skills as well as business intelligence and presentation skills. This is an excerpt from the Executive Briefing, CFOs Guide to Intellectual Capital.