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
By the year 2010, all of the worlds 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 havent 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 companys
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
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 companys 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)