Intellectual Capital: Define, Understand and Capture It

Association for Consulting Expertise Friday, September 18, 2009 Intellectual Capital: -Define It -Understand It -Capture It Mary Adams President Intellectual Capital Advisors ICA-1

Interesting company? • Many decades in business • Growth and profits over the years • Great people • Tough 2009 but will be OK • Industry has good outlook • Opportunities for innovation Good client, investment, employer? ICA-2

Co’s main production facility • Today is the company’s key competitive advantage • Started as experiment in 1980’s • Mostly internally-built components • Customized for this business • Never kept track (still don’t) of cost to build, maintain or operate What do you think now? ICA-3

Economic value is increasingly intangible Components of S&P 500® Market Capitalization 14,000 Market Premium 12,000 Intangible Book Value Tangible Book Value 10,000 8,000 S&P 500 Market Cap ($ billions) 6,000 4,000 2,000 - 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Research: Ned Davis ICA-4

This change touches all sectors Intangible Value as a % of Total Market Capitalization by Sector 100% 90% 80% 70% 60% 1975 50% 2005 40% 30% 20% 10% 0% ner gy als ials ary ap l es ar e cia ls ice s o gy tie s teri st r tion er St th C in an er v tili E M a I nd u cr e al S chn ol U Dis o ns u m He F ion s Te er ca t tion um C u ni ma C o ns o mm Inf or lec Te ICA-5

The clearest answers come from the field of intellectual capital ICA-6

Value is created when IC elements are combined in a system ICA-8

Human Capital ICA-9

+ Structural Capital ICA-10

+ Relationship Capital ICA-11

+ more Structural Capital (that generates revenue) ICA-12

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This “knowledge factory” grossed $22+ billion in 2008 From: You Can Grow Like Google on YouTube ICA-14

Every business has a knowledge factory Specialty Contractor Medical Device Co. ICA-15

Implications for management Corp Industrial Era: Hierarchy/ Division Strategic Control Unit or Project Knowledge Era: Collaboration/ Innovation ICA-16

Management dualities Networks Org charts Orchestration Command/control Innovation Strategy ICA-17

Accounting dualities Investment Capital expenditure Assessment Balance sheet Indicators Income statement ICA-18

Implications for consultants 1. A lot of consulting involves helping companies see intangibles ad hoc Increase your intangibles skill set 2. A lot of consultants have weak structural capital Find the leverage in your firm’s intangibles ICA-19

Intangibles battle cry “Technology and especially the internet can really help you be lazy. Find the leverage in the world, so you can be more lazy!” - Larry Page ICA-20

Resources • Slides will be posted on my blog: www.smartercompaniesblog.com • Bibliography/discussion: www.icknowledgecenter.com • Worksheet for knowledge factory: http://tinyurl.com/you-can-grow-like-google Mary Adams, 781-729-9650 adams@i-capitaladvisors.com Twitter: maryadamsica ICA-21

Additional Detail ICA-22

The org is now a network Social Networks: Value Networks: Patterns of connections Content of connections Dietmar Offenhuber, Judith Donath, MIT Media Lab, “Comment Flow: Visualizing Communication Along Network Elizabeth Reuthe, and Verna Allee, “Knowledge Management: Move the Path, 2008 Case Model From a Snapshot to a Story,” Health Forum Journal, May/June 1999 ICA-23

I-Capex* ($1 trillion/year) • Intellectual capital expenditures are expensed under today’s accounting • Should be tracked in a management report • Cost is actually the most concrete piece of data available about intangibles • Internally, will help with better decisions • Externally, will help tell corporate story * the new capital expenditure ICA-24

IC assessment* • Like a 360-degree review of the knowledge factory • Review is by stakeholders (both internal and external) • Asks whether it is working well today, outlook and risk • Used for strategy, reporting, M&A * the new balance sheet ICA-25

IC Rating assessment output Intellectual Capital AAA - AA A BBB R BB B CCC RR CC C A BBB R D RRR Business Recipe Organizational Relational Human Capital Structural Capital Structural Capital B BBB A R BBB BBB R A BB RR BBB BBB R BB BB BB BBB BBB R BBB BBB R BBB BB RR AA BB R BB BBB - BB BBB R IP Processes Management Employees Network Customers BBB BBB RR Brand ICA-26

Performance management* • Uses non-financial indicators • Examples: headcount, customer demographics, IP mapping, process metrics • Bottom up for learning • Top down for management and reporting—key performance indicators (KPI’s) * the new income statement ICA-27

Triangulate intangible performance Cost Assessment Indicators Graphic from: http://amath.colorado.edu/outreach/demos/hshi/2000Sum/TaT.html ICA-28

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Intellectual Capital: Define, Understand and Capture It

by Mary Adams on Sep 17, 2009

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