Saturday, 31 December 2011

Intellectual Capital



Indeed, the new source of wealth is not material, it is information, knowledge applied to work to create value.

At a charity dinner organised by the Brain Trust on 16 January, 1998, a person by the name of Leif Edvinsson was honoured with the "Brain of the Year" award. Bill Gates and Paul McCartney were amongst others who were considered for this prestigious award. Physicist, Professor Stephen Hawkings; the world chess phenomenon, Gary Kasparov; and the late prolific British author and poet laureate, Ted Hughes, were the past recipients of this award.
The above names are familiar to most of us, perhaps with the exception of Leif Edvinsson, the winner of the award. So, who is this man, Edvinsson? What contribution has he made to improve mankind, to be in league with the likes of Gates, Kasparov, Hawkings?

To know about Edvinsson, one has to know about the Stockholm-based insurance company, Skandia. Established in 1855, Skandia is today the largest insurance and financial-services provider in Scandinavia. Some 15 years ago, Skandia was a company whose operations were languishing in the mature domestic market and, it was no different from any other insurance and financial services provider in Sweden. The senior management of the company was acutely aware of the need to expand its operations quickly, into other high-growth markets, to take advantage of the global trend towards deregulation of the financial-services industry. But, it had difficulty figuring out how. What critical competencies did the company possess, in its bid to become a big player in the world of insurance and financial services; and how could they capture, measure, and use them to achieve their goals?

At the time, like any other company in the industry, Skandia also used performance measurement systems that were based solely on financial criteria. Bjorn Wolrath, the then CEO of the company, and Jan Carendi, the head of Skandia AFS, a division of Skandia started in 1986, were convinced that these traditional measurement systems ignored some factors that were most critical in the emergent economy; the knowledge flows and the intellectual capital companies had access to. Both men were alive to the fact that in the new world of competition, a company had to compete more on its organisational capability to adapt and learn quickly (that is, by managing its knowledge assets), than defending its market position. What this meant was that a company's strength now lay less and less with the assets shown in traditional balance sheets (land, buildings, equipment, and inventory), than with some hidden or intangible assets (the individual talent and creativity of workers, synergistic relationships, and the ability to manage the flow of corporate knowledge and other such competencies). 

Yet, the problem was that the old measurement systems were not geared to providing any functional methodology (or taxonomy, if you like), to identify, or capture the values of these assets. It became clear that it was now imperative that they find a way to capture and package the company's intellectual capital and its best practices on branch management, and then build them into the company structure itself (through a collection of customisable software applications, manuals, and other structured know-how), which could be used worldwide to support its branch operations. So, the need was recognised as having to develop an alternative measurement system and new management processes that would enable them to manage the portfolio of these critical assets. Wolrath and Carendi set out to tackle this challenging task. 

To begin the process, they did something that was unprecedented. In 1991, they created a new corporate position (reporting to Carendi) that they chose to call the Director of Intellectual Capital. The primary responsibility of this position was to transform the company's human capital the source of innovation and growth (an asset that the firm cannot own) into structural capital (an asset that the company could own). 

And, it was Leif Edvinsson who was hired to fill this position, as Director of Intellectual Capital, at Skandia AFS. With this appointment, as the spectacular expansion the company experienced in the next few years reveals, Skandia had practically fired a rocket under its traditional business. Within a short period of four years, by 1995, the company had successfully established its presence in high-growth markets, with its business outside Sweden accounting for about 85 per cent of the company's total premium income. Skandia had now successfully expanded its operations into 15 countries beyond Europe, the US, and into other potential high-growth markets in Latin America and Asia. UK operations of AFS accounted for nearly half of the assets under its management, whilst in the US, American Skandia was the tenth-largest company in its market segment. 

What helped Skandia's aggressive and successful foray into international markets was the so-called "branch prototype" that emerged from the work of the Director of Intellectual Capital this allowed the company to cut the investment involved in opening an overseas office by 50 per cent, and the time required for it, from 26 to six months. The knowledge system developed by Skandia also gave more than 7,000 brokers detailed, up-to-date knowledge and information on investment options and asset allocation, while also assisting in sales and client proposals.

But, Edvinsson's contribution to Skandia was not why he was honoured with the "Brain of the Year" award in 1998, though he unabashedly used the company as a virtual laboratory a touchstone for  testing his revolutionary ideas on knowledge management. In the citation honouring Edvinsson with the award, the Brain Trust described the Intellectual Capital (IC) concept as a "revolutionary re-evaluation that utterly overturns the standards of traditional accountancy", and Leif Edvinsson as "one of the pioneers in the search for prime economic indicators which will prevail in the post-millennium period".

The concept of IC had been around for some time, before Edvinsson's arrival on the scene, but it was he who gave definitive direction to move discussions on the subject from an esoteric and arcane academic exchange, to a hard-nosed evaluation of performance that was of some practical value. Edvinsson was the first to attempt and succeed in developing methods to create a taxonomy for intellectual reporting that is, to measure a company's intellectual and structural capital, which is invisible in today's balance sheets.

In 1994, Skandia became the first company in the world to publish a corporate Intellectual Capital Report, to augment its Annual Reports and accounts. That marked the culmination of Edvinsson's work concerning developing a methodology for accounting for the unaccountable until then. As Edvinsson himself has remarked, the IC Report was "a landmark in the story of the standardisation of the Intellectual Capital model".

In the same year, Fortune published a feature article concerning Leif Edvinsson's work, which helped attract keen interest worldwide to this pioneering work of accounting. Following this, Dow Chemical created the position of Director of Intellectual Assets, and it set out to create an IC report for the company. Hughes Aircraft also set up an Intellectual Capital programme it called the Knowledge Highway. The Canadian Imperial Bank of Commerce, Canada's largest bank, designed its leadership programme around the concept of Intellectual Capital.

Within a short period, thanks to the efforts of Edvinsson, Intellectual Capital has been transformed from a nebulous, hazy idea, to a full-blown working concept that has provided a new corporate disclosure standard. In his book, co-authored with Michael S. Mallone, Intellectual Capital - The Proven Way to Establish Your Company's Real Value by Measuring its Hidden Brainpower, Edvinsson quotes Charles Savage and Charles Armstrong thus: "In the short space of about three years, we already see an evolution in thinking from identifying the components of Intellectual Capital, to an understanding of the dynamic interaction between these components."

In Dubai, we repeatedly hear some of our Directors shouting from the rooftop about the value of their human capital, by which they mean the value of their people. Yet, how many of them have taken meaningful steps to give expression to the fact that the financial statements the accountants prepare are becoming less and less important in making strategic decisions relating to the future, and that we need to develop a new set of matrices to emphasise the impact of assets that are not represented in traditional balance sheets.

Recently, we heard of an attempt by a local insurance company, to put a value on its people. This, I believe, is a step in the right direction. Though meaningless by itself. If nothing is done about it. Yet, making an attempt is just a small step in a journey of a thousand miles. 

Clearly, Intellectual Capital is an idea whose time has come. It is only to our detriment that we shut our eyes to this development, and continue to spend enormous blocks of valuable executive time, year after year, in "polishing" Annual targets, so that they can win awards.

Isn't it time we learned something from Leif Edvinsson?

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