Intellectual Capital Measurement Methods

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Intellectual Capital Measurement Methods Market-to- Book Value Technology Broker Citation- Weighted Patents The Value Explorer Intellectual Asset Valuation Total Value Creation, TVC Stewart (1997) Luthy (1998) Brooking (1996) Bontis (1996) Andriessen & Tiessen (2000) Sullivan (2000) Anderson & McLean (2000) The value of Intellectual Capital is considered to be the difference between the firm’s stock market value and the company’s book value. DIC Methodologies Value of intellectual capital of a firm is assessed based on diagnostic analysis of a firm’s response to twenty questions covering four major components of intellectual capital: Market Assets, Human-centred Assets, Intellectual Property Assets and Infrastructure Assets. The base of the develop of the Technology Broker method is that the market value of a company is the result of the addition of tangible assets and the intellectual capital. A technology factor is calculated based on the patents developed by a firm. Intellectual capital and its performance is measured based on the impact of research development efforts on a series of indices, such as number of patents and cost of patents to sales turnover, that describe the firm’s patents. Accounting methodology proposed by KMPG for calculating and allocating value to 5 types of intangibles: 1) Assets and endowments, 2) Skills & tacit knowledge, 3) Collective values and norms, 4) Technology and explicit knowledge, 5) Primary and management processes. Methodology for assessing the value of Intellectual Property. A project initiated by The Canadian Institute of Chartered Accountants. TVC uses discounted projected cash-flow to reexamine how events affect planned activities. within the same industry. However, they give far too little detail for an adequate comparison. The DIC is intended to be holistic and offer the potential to create a more comprehensive picture of an organization’s health than financial metrics. The methods are more detailed and can be easily applied at any level of an organization. They measure intellectual capital resources from the bottom up and can therefore be faster and more accurate than ROA and MCM measures with respect to resources. Since they do not need to be measured in financial terms, they are very useful for not-for-profit organizations, business units, government agencies, and for environmental and social purposes. Their disadvantages are that they cannot be connected easily to financial results Human Capital Intelligence Fitz-Enz (1994) Sandia Navigator Edvinsson and Malone (1997) SC Methodologies Sets of human capital indicators are collected and benchmarked against a database. Similar to HRCA. Intellectual capital is measured through the analysis of up to 164 metric measures (91 intellectually based and 73 traditionally metrics) that cover five components: 1)financial, 2)customer, 3)process, 4) renewal and development, 5)human. The idea is the Intellectual Capital is formed by the addition of the Structural Capital and Human Capital. This Structural Capital is also formed by: Human Capital and Organization Capital; and this last one is formed by the Innovation Capital, and the Process Capital. SC methods offer the potential to create a more comprehensive picture of an organization’s health than financial metrics, and they can be easily applied at any level of an organization. They also measure intellectual capital resources from the bottom up. They are very useful for not-for-profit organizations, business units, government agencies, and for environmental and social purposes. Their ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 42
Intellectual Capital Measurement Methods Value Chain Scoreboard Intangible Asset Monitor Intellectual Capital Navigator and Intellectual Capital Index (IC Index) Value Creation Index Lev (2002) Sveiby (1997) Roos and others (1997) Ittner and others (2000) A matrix of nonfinancial indicators arranged in three categories according to the cycle of development: Discovery, Learning, Implementation, Commercialization. Management selects indicators, based on the strategic objectives of the firm, to measure four aspects of creating value from intangible assets. By: 1) growth, 2) renewal, 3) utilization / efficiency; and 4) risk reduction / stability. The Intangible Assets Monitor consists on a formal presentation of several relevant indicators for measuring assets according to the company strategy. This indicators form the base to create and develop a company with knowledge focused strategy. It can be integrated in the management information systems. The object is to represent the intangible assets from different perspectives: growth and renewal, efficiency and stability. Intellectual capital is broken down into 3 areas: human, relational and organizational plus the conventional physical and monetary resources. These are all subdivided. Several user-friendly plots are produced including a navigator, a conceptual diagram of how the company works in IC terms. Indices are defined based on the key resources and resource transformations in the navigator. The purpose of the method is to help managers to visualize growth by measuring the Intellectual Capital. For the creators of the method, the importance of the specific measures varies from one company to another. They suggest four high level categories as the foundation for discussion in individual cases. The develop of measures within these categories is formed by a three stage process: 1. A critical review of existing indicators 2. Development of indicators that represent the flows between different Intellectual Capital categories 3. Develop a hierarchy of Intellectual Capital indices All the indices have to be aggregated into a single index that can be used to make comparison over time of the same unit or even compare with other business units. The critical factor for the successful application of the method is the process of creation of the Intellectual Capital Services, and this is the point in which the experience of the Intellectual Capital Services lies, the assistance to the companies to create their own ICIndex. Drivers of value are derived from an extensive literature survey and advanced statistics. Metrics are weighted and combined to give a Value Creation Index. The index is compared and combined with financial data. disadvantages are that the indicators are contextual and the meanings of the resource definitions can vary between each organization and each purpose, which makes comparisons very difficult. They cannot be connected easily to financial results. ECONOMICS AND ORGANIZATION OF ENTERPRISE 1/2008 43
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