SMART COOKIES - A capital idea - A monthly primer on a hot topic in management. What is it? Who's doing it? How can you gain from it? We kick off with 'intellectual capital'.
What is intellectual capital?
The recognition that 'intangible' assets (intellectual property, internal knowledge and capabilities) and external relationships with customers and suppliers are often more valuable and critical to success than 'tangible' assets such as physical property, equipment, stocks and cash. And that these intangible assets need to be actively managed, invested in and exploited.
Who are its proponents?
The best known populariser is Thomas A Stewart, author of the book, Intellectual Capital. However, Stewart would argue that it was a Swede, Karl-Erik Sveiby, who was the first to classify knowledge assets in three categories:
- Structural capital: the company's patents, trademarks and copyright, proprietary databases, software, systems and networks. These are 'hard intangibles' whose ownership can be defended in court.
- Relationship capital: the value of established relationships with customers and suppliers.
- Human capital: the cumulative skills, knowledge and productivity of an organisation, as individuals and as a group.
Who are the practitioners?
Businesses that spend heavily on R&D or brand marketing have always managed their 'hard intangibles' aggressively. Good examples include Glaxo Wellcome and Merck in the pharmaceuticals sector, software giant Microsoft and mass consumer brands such as Coca-Cola and Nike.
On the broader intellectual capital front, many large corporations in the US and Europe have created a new position of chief information (knowledge or learning) officer, or CIO, as it is shortened to in the US. Among well-known practitioners in Europe are BP and Shell, Nokia, ICL, Unilever, and Skandia. (Stewart is struck by how active Scandinavian companies are in this area.)
In practice, it is not obvious that responsibility for all intangible assets can or should be combined under a CIO. Managing patents and brands is very different from managing the sharing of an organisation's knowledge, or from developing and exploiting long-term customer relationships. The CIO staff role may well end up being devolved to business unit managers and head office specialists, such as copyright lawyers, with more specific line responsibility for outcomes.
Most of the big consultancies now offer intellectual capital or knowledge management services - and practise it on themselves. Arthur Andersen requires teams to document their results and what they have learnt from projects.
These are then structured and made available across the firm as a worldwide internal database.
What are the practical applications of: structural capital?
Companies that depend heavily on hard intangibles are developing new strategies to:
- Defend and strengthen ownership rights. For example, internet distribution and global pirating or counterfeiting are threatening the value of music labels (Polygram), applications software producers and high-priced Western fashion brands (Calvin Klein, Rolex).
- Increase exploitation of the assets. For example, using merchandising spin-offs, re-formatting and new distribution channels to double the revenue from a Disney movie; mining outstanding patents for new applications; stretching or licensing brands and trademarks into new product areas. (Marlboro into clothes; Mars into ice cream.)
Once they understand the value of relationship capital, companies are driven to invest more in keeping customers by using loyalty programmes and personalised marketing. Keeping existing customers is far more profitable than getting new ones and this relationship asset can be mined for its cross-selling potential. So, First Direct has a great opportunity to sell pensions and insurance to its telephone banking customers.
One of the hot debates in e-commerce is who owns the customer data generated by online transactions - the merchant, the fulfiller, the credit card company, the internet service provider, or the customer? And does the owner have the right to re-sell that information?
The concept is easy to grasp - 'Our people are our assets' - but difficult to manage. Employees can walk out at any time. The challenge is to create an environment where talented individuals are more engaged, productive and satisfied than they would be elsewhere, creating a virtuous cycle in which the best people stay because the best people are there. That sort of business is usually one that is investing heavily in structural and relationship capital.