A Review of the Models Used to Measure Intellectual Capital

Dr. Nick Bontis, Ph.D., Assistant Professor of Strategic Management Michael G. DeGroote School of Business, McMaster University
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This paper reviews the literature pertaining to the assessment of knowledge assets. Since knowledge assets are at the crux of sustainable competitive advantage, the burgeoning field of intellectual capital is an exciting area for both researchers and practitioners. Unfortunately, the measurement of such intangible assets is difficult. A variety of models have surfaced in an attempt to measure IC and this paper aims to highlight their strengths, weaknesses and operationalizations.


By the year 2010, all of the world’s codified knowledge will double every 11 hours.
Dr. Nick Bontis, Ph.D.

The quote above was received with a stir from the audience at KM World. It seems that cognitive psychologists are speaking with library scientists and they are both trying to warn us about some pending doom. If individuals are being bombarded by information now, they haven’t seen anything yet. The exponential velocity with which this rate of bombardment is increasing is unfathomable. Although society as a whole should benefit from the by-product of increased technology, the average business manager may not be prepared to take advantage of this truly knowledge-intensive world.

The popular use of the terms in the following list hint at the increased importance knowledge assets have in organizations: intellectual capital, knowledge capital, knowledge organizations, learning organizations, organizational learning, information age, knowledge era, information assets, intangible assets, intangible management, hidden value, and human capital. These terms and others are part of a new lexicon describing new forms of economic value. They are descriptors belonging to a paradigm where sustainable competitive advantage is tied to individual workers’ and organizational knowledge. Reliance on productive tangible assets such as “raw materials, fixed capital, and even managerial knowledge” no longer account for
investments made and wealth created by new and prospering companies (OECD, 1996, p.15).

Instead, leveraging knowledge is the key reason attributed to corporate success stories such as the tremendous ‘overvaluation’ of high-tech and Internet companies.

The adoption of this new lexicon, concepts, and explanations has been swift and far-reaching.
The notions of intellectual capital were first advanced by economist John Kenneth Galbraith who wrote the following to fellow economist Michal Kalecki in 1969:

I wonder if you realise how much those of us the world around have owed to the intellectual capital you have provided over these last decades (cited in Hudson, 1993, p.15).

Intellectual capital was further expounded upon by management guru Peter Drucker (1993) in his description of post-capitalist society. By the end of the 1990s, references to intellectual capital in contemporary business publications were commonplace (Bontis, 1999a; 1999b).
Intellectual capital management became the domain of the so-called CKO or Chief Knowledge Officer (Bontis, 2000). Stewart, in his ground-breaking cover-story in Fortune Magazine, is credited with providing the main impetus for a new world of intellectual capitalists (Stewart, 1991). The initial momentum was supported by his popular book several years later (Stewart, 1997). Stewart (1997) defines intellectual capital as intellectual material – knowledge,
information, intellectual property and experience – that can be put to use to create wealth.

Endorsements by highly respected scholars such as Dr. Baruch Lev (from New York University)
and Dr. Tom Davenport (from Boston University) coupled with practitioner icons such as Leif Edvinsson (formerly of Skandia) and Hubert Saint-Onge (formerly of CIBC) help to round out the academic and practitioner love affair with this phenomenon.

Perhaps the most impressive evidence suggesting a transition in thinking about a new structure and process supporting a company’s productive assets is in the inclusion of intellectual capital as a strategic performance measure. In 1998, Arthur Andersen conducted an international survey of the measurement of intellectual capital. A total of 368 companies from a pool of 2,350 (15% response rate) European, North American, and Asian organizations responded to direct mail surveys. The survey revealed some interesting results.

First, the majority of respondents believed that IC (intellectual capital) reporting would increase.
Second, about three-quarters of the respondents already tracked two or more non-financial metrics. Third, most agreed that knowledge measurement would improve organizational performance. Fourth, roughly half believed that what was learned from the process of measuring IC was as important as information received from the measures. Finally, while researchers admitted that the respondents may have represented a biased sample of “pro-IC” organizations, they concluded that IC would likely not be included on financial balance sheets any time in the near future. External reporting of IC would be done on a voluntary disclosure basis and that IC measurement would be more useful as an internal management tool than as an external communication to shareholders or investors.

Similar research results have been found elsewhere. A 1998 study by Waterhouse and Svendsen of 65 CEOs and 49 Directors of Boards of large Canadian companies showed that IC disclosure was rated as a key strategic issue and should be regularly reported to boards. In addition to IC disclosure, the study highlighted other key strategic issues that received inadequate reporting such as innovation capacity, product quality, customer relations, and investor relations. Other strategic issues involving investor relations, partner relations, community relations and environment, health and safety were reported less often. Yet, of the nine strategic non-financial measures rated highly, CEOs and Directors expressed least satisfaction with their IC measures.

Huseman and Goodman (1999) also examined IC disclosure as it related to human capital in 202 of the largest 1,500 companies in the US. A small minority (i.e., 15%) had systems that attempted to quantify human capital as it is typically defined in the IC literature, and only 35% of senior HR respondents thought they would have an HC accounting system in the future.
However, the large majority of companies were, in fact, actively collecting information about employees. This included 66% of all respondents who reported that they had programs or systems in place that tried to capture knowledge, skills, and best practices.

The frustration expressed by the three aforementioned studies regarding IC measurement is interesting. It suggests a period in time when tangible measures of intangible assets of intellectual capital are wanted but early renditions have proven unworthy. This is fascinating because it is occurring in tandem with continuing high levels of satisfaction expressed by CEOs and Directors regarding traditional financial measures such as profit and loss statements and capital expenditure reports (Waterhouse and Svendsen, 1998). Yet these traditional measures themselves are now generally acknowledged as inadequate. It is indeed ironic that the reason for their inadequacy is because of the same competitive forces that have given rise to the need for IC measures. Perhaps, IC measures are recognized as necessary but are unsatisfying due to the
embryonic stage of their development.

David Moore, research director for the CICA (Canadian Institute for Chartered Accountants) states:

Financial performance measures derived from information in financial statements or other financial sources have been used by publicly listed companies for many years. They highlight specific aspects of a company’s profitability, solvency, liquidity, productivity or market strength. Such performance measures, are however based on historical and transaction based information that does not take into account changes in values or internally generated intangibles. There is the
growing view that financial performance measures by themselves are inadequate for strategic decision making. They need to be supplemented or even to some extent, replaced [italics the author] by non-financial measures that cover such matters as, for example, customer satisfaction and operating efficiency. (Waterhouse and Svendsen, 1998, p. v)

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