Measuring Intellectual Capital

How Skandia measure intellectual capital

The Skandia Navigator

The Swedish financial services firm Skandia provides an interesting example of a firm that may be showing the way to the future, by regularly valuing and reporting on their intellectual capital – the knowledge and expertise within the organisation.

One of the first people to quantify and value intellectual capital was Leif Edvinsson. Appointed in 1991 as the world’s first Director of Intellectual Capital at Skandia, Sweden’s largest financial services corporation, Edvinsson divides intellectual capital into three types. Human capital, which is in the heads of employees; structural capital which remains in the organisation, and customer capital, deriving from the relationships the company enjoys with its customers. Customer capital is often seen as a sub-set of structural capital.

The aim of Skandia’s measures is to track whether intellectual capital is increasing or decreasing, focusing the organisation’s culture and thinking on increasing its intangible assets. In Edvinsson’s view: "Intellectual capital is a combination of human capital – the brains, skills, insights and potential of those in an organisation – and structural capital – things like the processes wrapped up in customers, processes, databases, brands and systems. It is the ability to transform knowledge and intangible assets into wealth-creating resources, by multiplying human capital with structural capital. This is the intellectual capital multiplier effect."

At Skandia, human capital is further divided into several elements: customer focus, process focus and renewal and development focus. Edvinsson has designed a process for each business unit to report on all of these areas of intellectual capital. The importance placed on Edvinsson’s work was highlighted by the inclusion in Skandia’s annual report of the value of its intangible intellectual capital assets, which was estimated at more than $15 billion. However, for Edvinsson the real benefit has been even greater: managing intellectual capital has nurtured innovation and new thinking, and has helped create a mind-set enabling Skandia to compete in the future.

The rise of knowledge and intellectual capital suggests that to be successful, organisations will need to focus on the reconfiguration of existing systems (including the organisation culture) to support knowledge workers. Also significant is the creation of a learning organisation – one that is constantly sensing, valuing and sharing information, using it in a flexible way to improve efficiency, generate profitable new ideas and, overall, add value for customers. Finally, those organisations that value intellectual capital invest in training and coaching employees at all levels, and they free managers to manage people. The result is improved productivity.

Using scorecards

Several organisations have developed their own scorecards, including Swedish financial services corporation Skandia.

Other measures emphasised include operational excellence, with businesses such as Tesco consistently delivering to their customers. Product leadership is another measure displayed by innovative firms such as Dyson who stipulate that ‘x% of revenue must come from products developed within the last x years’, and so is customer intimacy – a combination of customer loyalty and value. Scorecards are widely used to benchmark performance in three non-financial areas, augmenting financial measures. These are customer relationships, its key internal perspectives and its learning and growth. When performance measures for these areas are combined with financial metrics, they provide a broader perspective on the company’s strengths and activities. They also offer a powerful method of organising and co-ordinating a company’s operations, ensuring that all activities are aligned with the strategy.

However, for scorecards to work, it is essential that there is buy-in at all levels, with the value of the process clearly recognised. This is because scorecards need to influence behaviour throughout the organisation. Furthermore, good scorecards highlight the links between cause and effect, they sit easily with the budgeting process and they are not used as a basis for incentives, where they may be viewed too narrowly or negatively, undermining their effectiveness. As if these hurdles were not enough, people perceive a problem with the term ‘Balanced Scorecard’, as it fails to inspire or communicate the practical, dynamic nature of what is involved.