Intellectual Capital

1.1. Definition of intellectual capital and a brief history of IC management

Before someone can measure something, he/she has to know what to count. So how should intellectual capital be defined? A universally accepted definition is the first step toward standardization, but still it is hard to find the best one for "intellectual capital". In this section I'll define intellectual capital and study the history of its development.

Intellectual capital is knowledge that can be exploited for money-making or other useful purpose. The term combines the idea of intellect with the economic idea of capital, the saving of benefits to be invested in producing more goods and services. Intellectual capital includes the skills and knowledge a company has developed about how to make its goods or services; individual employees or groups of employees whose knowledge is deemed critical to a company's continued success; and its aggregation of documents about processes, customers, research results, and other information of value to a competitor that is not public knowledge. [22]

According the article of Andrew Brown and others "Managing Intellectual Capital", intellectual capital not only includes what are commonly known as legally enforceable intellectual property rights (e.g., patents, trademarks, copyrights) but also all tangible and intangible aspects of intellectual information that a company has developed and accumulated over the years.

Most of the resources propose such a formula for identifying the value of IC:

* The value of a company's IC assets is the difference between the company's book value and market value.

Illustration 1 illustrates an IC pyramid, which shows that intellectual capital comprises not only legally protected rights but the firm's tangible and intangible assets. It is crucial that a company's information protection practices be tailored to address the risks associated with a global marketplace, rapid advancements in technology and telecommunications, and business relationships including outsourcing.

Tangible assets are assets that may be physically or electronically conveyed in or out of a company. This includes all information resources such as databases and business records, as well as documented procedures that embody the knowledge, skills and experiences of a company's former and current employees. Since the information revolution of the 1990s, firms have been generating and communicating vast amounts of data at an exponential rate each year. This poses significant challenges for firms seeking to manage the internal and external communication of information to appropriate stakeholders in a manner that protects the firm's overall IC. [3]

Intangible assets are the goodwill and relationships between a company and its customer/suppliers; the innovative ideas that ensure the viability of a company, and; the company's human capital. Although intangible assets have no physical form, they are as valuable as the legally enforceable IP rights and tangible assets. But protecting the intangible assets is more difficult and is highly dependent on the firm's human assets. Success in the 21st century business environment requires significant emphasis on managing intangible assets as strategic tools. [1, 2, 6]

The Conceptual Thinkers

Trying to think backwards of the roots of defining IC, Patric H. Sullivan in his article talks about the evolution of intellectual capital management as a discipline follows a pattern that is detectable in hindsight, although to the people involved at the beginning there was no future pattern discernible at the time. There were three distinctly different origins of what has become the intellectual capital management movement. The first was in Japan with the groundbreaking work of Hiroyuki Itarni, who studied the effect of invisible assets on the management of Japanese corporations. The second was the work of a different set of economists seeking a different view or theory of the firm. The views of these economists (Penrose, Rumelt, Wemerfelt, and others) were coalesced by David Teece of UC Berkeley in a 1986 article on technology commercialization. Finally, the work of Karl-Erik Sveiby in Sweden, addressed the human capital dimension of intellectual capital and provided a rich view of the potential for valuing the enterprise based upon the competences and knowledge of its employees.

In the early 1990s, intellectual capital (IC) was one of the hottest topics in business literature. Businesspeople sought ways to account for intellectual capital and make it part of the "balanced scorecard." This inevitably led to the question, "How does one measure intellectual capital?" Leif Edvinsson's supplements to Skandia Corp.'s annual reports helped to fuel the debate. But it soon became apparent that however attractive measuring intellectual capital was in principle, in practice it was difficult, and in most cases impractical if not impossible. Because of this difficulty, the enthusiasm for IC faded. The topic diminished almost to the point of becoming a footnote, and it seemed as if intellectual capital would be remembered mostly as a parent of knowledge management (KM). [13]

Since then, intellectual capital has returned, not as an asset to be measured, but as an asset to be managed. Now, the concept is called intellectual capital management (ICM).

What Caused the Change?

Intellectual capital has made a comeback because of the following factors:

* The most obvious factor has been the stunning increase in recent years in the market value of companies compared to, and in excess of, their book value. Something must account for that increased valuation, or else it's just a bubble. However, both hope and the continued good health of the economy have conspired to convince us that it's not just a bubble. The only other good way to explain that increased valuation is intellectual capital. (See Illustration 2.)

* A second major reason for the comeback is the recognition of