LEADING COMPANIES FOCUS ON MANAGING AND MEASURING INTELLECTUAL CAPITAL
Skandia, CIBC, Hughes, US West, Ernst & Young, Buckman Labs Seek Ways of Leveraging Knowledge (By Britton Manasco Editor, Knowledge Inc.)
The emergence of the knowledge era has left many corporate leaders feeling that something is disturbingly out of balance. While today's executives understand the importance of fixed assets and financial capital, they are very much in the dark about the value of intellectual capital and how to manage it effectively.

The new economic era, which arguably began five years ago when U.S. spending on information technology eclipsed combined expenditures on all other capital equipment, promises to reward those companies that know best how to generate and apply knowledge. Such talents, however, are hard to measure by traditional metrics. They are also difficult to sharpen through traditional learning and business practices.

New thinking is needed--and new processes must be adopted. Among the companies that have begun to closely examine the issue of intellectual capital and search for ways to measure and manage it are: Sweden's Skandia Group, Canadian Imperial Bank of Commerce (CIBC), US West, Buckman Labs, and Hughes Space and Communications. While the efforts of some are more formal than others, all are exploring new ways to accelerate learning and leverage knowledge.

One of the earliest challenges to this fledgling movement is conceptual. How, for instance, do we define intellectual capital? Larry Prusak, a principal at Ernst & Young's Boston-based Center for Business Innovation, defines it as intellectual resources that have been "formalized, captured and leveraged" to create assets of higher value.

Hubert Saint-Onge, vice president of learning organization and leadership development at CIBC considers it "the sum of human, structural and customer capital"--a definition that also services as a sweeping framework for the new field.

Human capital, he explains, is the accumulated capabilities of individuals responsible for providing customer solutions. Structural capital refers to the capabilities of the organization to meet market requirements. Unlike human capital, structural capital can be formally captured and embedded. Customer capital points to the extent and intensity of the organization's relationships with customers. The three types are interrelated--each one positively or negatively affecting the other.

Measuring Renewal and Development
While financial performance is easily measured and observed, it is just the "tip of the iceberg," contends Saint-Onge. The organization's true vitality and promise or, conversely, its weaknesses and sources of potential disaster lie below the waterline. "When the whole agenda is dominated by the financial results of the firm, it is difficult to understand how you can invest in [human development] and know that when you are investing in such intangible things that you're actually getting a tangible outcome."

If all goes as planned, CIBC will have created a meaningful system for intellectual measurement within the next year. Whereas financial accounting provides a "rear-view" perspective, the new system--which will rely on "indices of renewal and development"--promises to help the firm more thoroughly examine its competitive capabilities and future prospects, says Saint-Onge. "We need to measure intellectual capital assets and concentrate more on the developmental factors that keep the organization healthy, vibrant and strong in its marketplace."

CIBC's Leadership Center, an organization located just outside Toronto which is responsible for supporting managerial and corporate development, is the focal point of the company's work in the field. "What we find is that intellectual capital is the output of accelerated learning at the organizational level," explains Saint-Onge. "Intellectual capital helps us determine or identify what the impact of our work is." Considering that the bank annually invests $60 million in employee and organizational development, there is a lot riding on his group's success.

Saint-Onge and others at CIBC have been heavily influenced by the work of Skandia's Leif Edvinsson, director of intellectual capital for the Stockholm-based insurance and financial services firm. He and his team have gone so far as the creation of an annual report on intellectual capital, released publicly, that measures knowledge assets for Skandia's largest and most rapidly growing division, Assurance & Financial Services (AFS).

The yearly report, which is still considered "a project in progress," examines the impact of human capital--the knowledge, skills and innovative potential of workers--on shareholder-owned structural capital. Rather than trying to measure accumulated knowledge assets, however, the report attempts to gauge--through ratios and trend lines--how effectively such assets have been leveraged. For instance, the report provides indices not only of the growth of its broker network but the size of the accounts the individual brokers control.

Edvinsson believes that structural intellectual capital, knowledge that can be formally captured and continuously reused, is especially vital. The marshaling of knowledge into structural forms has helped Skandia thrive in newly deregulated insurance and financial markets around the globe. In fact, the company has leveraged its knowledge of effective processes and best practices to develop structural assets--manuals, software and other resources--that can be customized to meet the needs of brokers in all markets.

CIBC has found ways to leverage intellectual capital as well. The bank, which has assets exceeding $100 billion, has created a "knowledge-based lending group." Its responsibility is to examine the capacities of and to lend to knowledge-intensive companies. "It's a different way of measuring bankable value," according to Saint-Onge. The 60-person group is charged with finding new ways of defining credit worthiness--as opposed to merely tallying up real estate assets or other tangible holdings. While the group is in its early stages, it is believed that its efforts will help the bank value the companies to which it lends in a more precise way.

When Many Voices are Heard
US West, the regional Bell operating company headquartered in Denver, also has become a testing ground for some of these ideas. Although there is no formal program, advocates see intellectual capital management as a way to harness the firm's dispersed intelligence. "This company greatly values its diversity of employees and believes that you'll end up with better decisions if many voices are heard," says Dick Baumbusch, executive director of US West strategic marketing.

In order to heighten the organization's interest in intellectual capital formation, he launched a team, known as the "knowledge partnership group," that will seek internal clients interested in knowledge transfer and sharing. While the group is considered a "skunkworks" effort and essentially has no budget, it does have a commitment of time and energy from several entrepreneurial individuals in the organization.

The group looks for business units that have an "appetite to leverage intellectual capital"--and, indeed, it is finding them. So far, it has found that there is much interest in facilitating collaboration. Baumbusch says a vital component of his group's consulting on collaboration is "culture building"--creating an environment in which employees can freely exchange information. The idea that "knowledge is power" is at odds with this objective, he adds. "Sharing knowledge is power. As long as you're hoarding knowledge, you're adding no value to the company."

While the knowledge partnership group's project is still in its early stages, there is a great deal of optimism about the impact its work could ultimately have on the organization. Among other things, it is exploring ways of using information technology to leverage knowledge. The possibilities, according to the group, are boundless. As Baumbusch puts it: "There is a vast reservoir of talent and expertise waiting to be tapped."

Another informal effort that shows much promise is taking place at satellite manufacturer Hughes Space & Communications in El Segundo, Calif. It is informal by choice. Having been involved in high profile reengineering projects in the past, Arian Ward, Hughes' leader of learning and change, contends formal programs run up unnecessary costs and require unreasonable overhead to administer and promote. "We've taken a new approach here," he says. We're trying to avoid top management support. As a matter of fact, I've asked them not to give it."

Ward believes that employees will be far more likely to embrace new ideas about intellectual capital if they are presented to them to voluntarily accept or refuse. "The whole idea," he says, "is to get people involved in this because they care about it and they are interested in it--not because management tells them to do it. People are not completely resistant to change. What they are resistant to is being changed."

With this in mind, Ward has begun an effort to create "lessons learned" databases that will be available to Hughes' various business units through groupware technology. He calls it a "knowledge highway." The idea is that new processes and practices can be shared throughout the organization in a way that enables each group, if it sees merit, to customize the knowledge to its particular needs. With an accent on information technology, he is attempting to create " a common environment" in which knowledge can be easily transferred and new practices adopted freely. It is a "pull system, not a push system," he says.

In practice, the new environment might enable Hughes engineers engaged in the fabrication of communications satellites, for instance, to exchange insights about technology and process that cut development time. Such exchanges could also be captured and stored to help others involved in similar projects or for future reference. By leveraging knowledge in this way, the manufacturing process can be perpetually enhanced. In order to maintain a competitive edge, says Ward, Hughes will have to create the capabilities that enable employees to "rapidly and continuously learn."

Still another company that deserves attention is Buckman Laboratories, a $250 million producer of industrial chemicals headquartered in Memphis, Tenn. In contrast to Hughes' grass-roots approach, this company has benefitted greatly from the high-level leadership and inspiration of its chief executive, Bob Buckman. When he took over the firm from his father 15 years ago he encouraged employees to begin looking outward for ideas--searching the globe for new techniques and innovations that might be successfully adopted. Travel expenditures, under his direction, went way up.

But he also promoted the development of new information systems that would facilitate the sharing and transfer of knowledge. Whereas other companies were concentrated on employing technology to streamline back-office functions, he recognized early on that "the transfer of knowledge must be focused on front-line advantage," explains Victor Baillargeon, vice president of knowledge transfer for Buckman. It was crucial, Buckman believed, to support the knowledge needs of both sales and manufacturing--the company's primary sources of competitive advantage.

In that vein, the company began strongly encouraging the use of global electronic mail networks--and now relies on CompuServe's "forum" capabilities to facilitate continuous knowledge sharing and communication. Buckman Labs' knowledge transfer department--which oversees help desk services, software/hardware support, applications development, network services and a knowledge resources center (which makes marketing, product and technical information available to the entire organization)--has been instrumental in ensuring that the enterprise develops a culture of open exchange.

"When you bring down the barriers, learning can happen," says Baillargeon. "It's only a matter of time before best practices become the second best practices when knowledge is shared and transferred."

Exchanging Knowledge
Ernst & Young, which sees opportunities to benefit its consulting clients through new knowledge management practices, is also an important force in the movement. The firm is especially interested in the development of "market mechanisms" that encourage intellectual capital formation with the corporation. It is an interesting issue. While knowledge "sharing" has a progressive ring, it may be more accurate to speak of "exchange" if the process is to work as productively as possible. That means that companies must pay attention to incentives and measure the relative value of particular knowledge-intensive activities.

"There is much value in [developing] market mechanisms which create more efficient markets for knowledge," contends Ernst & Young's Prusak. "These markets enable 'buyers and sellers' of knowledge to exchange their goods at a 'market-derived' price."

While intellectual capitalists have laid a dizzying array of new issues on the table, Prusak points out that there are three key factors to keep in mind: technology, process and culture. Successful management of knowledge resources, he says, will depend on careful attention to the confluence of all three.

As this new economic era unfolds, the centrality of knowledge is fast becoming conventional wisdom. Strategic emphasis on learning and knowledge management, however, is yet to become conventional practice. It's a sobering thought. The intellectual capital movement promises to help unleash sources of tremendous economic potential, but companies that fail to catch on are surely doomed.