Preparing
for Conversations with Leif Edvinsson
Perspectives
on Intangibles and Intellectual Capital
 Introduction
Leif Edvinsson is
the sixth KM luminary in the AOK STAR SERIES.
In 1998, he won
the prestigious award, Brain of the Year, in competition with
such people as Microsoft founder Bill Gates and the Beatles'
Paul McCartney. In so doing, he followed in the footsteps of
former winners Garry Kasparov (World Chess Champion), Professor
Stephen Hawking and Poet Laureate Ted Hughes.
But Leif Edvinsson
is not just a "thinker." He's a "doer."
He rose to prominence
in a budding KM field in the mid-90s as then-vice-president and
world's first corporate director of Intellectual Capital at Skandia
of Stockholm, Sweden. He was thus a key contributor to the idea
of Intellectual Capital (IC) and oversaw the creation of the
world's first corporate IC Annual Report. He has been recognized
by both the American Productivity and Quality Center (APQC) in
the US and Business Intelligence in the UK for his pioneering
work.
Leif Edvinsson also
has a rich background in training and development as well as
KM. That combination led to his appointment as special advisor
to the Swedish Ministry of Foreign Affairs, the Swedish Cabinet
on the effects of the new digital economy, the United Nations
International Trade Center and he is co-founder of the Swedish
Coalition of Service Industries. In 1997 he coauthored the book
- "Intellectual
Capital: Realizing Your Company's True Value by Finding Its Hidden
Brainpower."
He is also founder
of his own consulting consortium, UNIC (Universal Networking
Intellectual Capital) also in Stockholm and since April 1, 2001,
he holds the worlds first chair of professorship on Intellectual
Capital at the University of Lund in Sweden.
In preparation for
conversations with Leif Edvinsson, we encourage you to read the
following paper on his perspectives on intangibles as intellectual
capital.
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Some perspectives
on intangibles and intellectual capital 2000
Leif Edvinsson
UNIC
(Universal Networking Intellectual Capital AB), Stockholm, Sweden
Keywords Intellectual
capital, Organizational structure, Human capital
Abstract After posing
some questions regarding the nature of intellectual capital,
the paper explores IC through observing the changes in market
dynamics and organizational structure. An IC growth model is
discussed which involves IC, human capital injection human capital
transformation into structural capital, and structural capital
injection.
Emerging questions
- a kind of IC quest
When
thinking about intellectual capital, the following questions
come to mind:
- What
are the hidden value drivers of nations or regions? Does the
old economics help to explain this?
- Do
we really see or have a taxonomy to describe the value drivers
of companies on the stock exchange?
- How
do we explain the growing gap between market capitalization value
and book value?
- Is
there another pattern of value creation and new business logic
emerging, other than the often-quoted value chain logic?
- Is
IC about value creation versus cost savings? Is it about outside
the firm versus inside the firm? Is it about communities or corporations?
- Is
IC only about knowledge and competence management? Or is it about
future earnings capabilities and potentials?
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Some marker observations
It
might look as if there is a new economy. But could it just be
a new sphere for value creation? The so-called intangible sphere
or intellectual capital sphere.
Looking
at some of the investment patterns in the USA, based on research
from Professor Baruch Lev (1997) at Stern University, New York,
shows a very different investment perspective since 1929. Then
approximately 70 per cent of the USA investments went into tangible
goods and some 30 per cent into intangibles. However, by 1990
this pattern was inverted, and today the dominant investments,
both in the USA and Sweden, go into intangibles, such as R&D,
education and competencies, IT software and the Internet. On
average, more than 10 per cent of GDP in OECD countries is estimated
to go into intangibles or IC. For countries like Sweden this
input is estimated to be more than 20 per cent of GDP. It is
becoming more and more essential to visualize the IC of nations.
This
is also reflected in stock prices. According to Professor Baruch
Lev (1997), the average relationship between market value and
book value in the late 1970s was one time, in the mid-1990s it
had increased to an average of three times, and now it is more
than six times the book value. For some companies, like America
Online (AOL) and Microsoft, around 90 per cent of their market
capitalization value is in intangibles. Such intangibles or IC
might be visualized systematically as has been done by Skandia,
as well as Turn IT, a stock market listed company in Stockholm.
Furthermore,
a big proportion of the global stock market value is in PC companies,
estimated to have a joint market capitalization of some US$6,000
billion. This value might then be contrasted by the global market
capitalization of Internet companies, estimated to be only US$1,000
billion, i.e. around 15 per cent of that for PC companies.
What will the future earnings potential of those companies be
versus PC companies?
These
aspects are leading, among other things, to the fact that a growing
proportion of policy and political initiatives, both at the company
and society level, often are distorted due to lack of a relevant
map of statistics, accounting figures related to intangibles,
value impact and effectiveness. Therefore, several global initiatives,
such as that of the Brookings Institute in Washington, are addressing
these issues.
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Some organizational
observations
Industrial
value chain processes no longer dominate value creation. Value
creation is in the shaping of information, knowledge and innovations
- sometimes grouped under the label of intellectual properties
(IP). Value creation or value extraction of such intangibles
is also often done through another business logic in the shape
of value constellations with temporary role participants, leading
experts or unique artists. The flow is increasingly going digital
in the form of c-commerce. This new type of value transaction
has been projected to grow some 15 times over the next three
years. The metaphor for this transition is sometimes described
as a shift from bricks and mortars to clicks and portals.
In
this emerging business world, small business operations interacting
in knowledge clusters and global networks employ and engage people,
while large corporations deploy them, The average proportion
of self-employed people, often referred to as knowledge nomads,
in the Group of Seven countries is estimated to be 11 per
cent by Hamish Mcrae, London. In the UK this figure is already
15 per cent. Just imagine the potential trend in Asia for free,
self-organizing knowledge nomads. Furthermore, Asia is expected
to have about 100 per cent more Internet users than the USA within
five years. The new economical sphere will be shaped by the soon-to-be
700 million new users in myriads of organizational combinations
solving old problems, shaping new opportunities.
This
trend will change the way value-creating interactions are done.
New organizational rules will emerge, such as much looser organizational
structures based on the Internet. The Internet is described by
Eric S. Raymond less as a global cathedral and more as a self-organizing
bazaar. Sometimes described as chaordic ones by Dee W.
Hock (1999), they are characterized by a combination of order
and chaos. It is also a tremendous power shift, challenging traditional
management of both corporations and societies to a transformation
policy - to see the options to reshape the existing to something
new and better. Old intangibles and intellectual properties such
as brands might get new values through mergers with new companies
with global soft technology assets. One illustration of this
is the merger between Time Warner and AOL.
The
value creation is going to be in shaping new ideas, exchanging
information globally, and interacting through networks with high
organizational speed in order to take action. Therefore, it might
be more relevant to visualize the new economical sphere from
a biological perspective, as a nervous system with energy flows
and cells being split, mutated and evolving. It describes life,
renewal and movements. Consequently, it will highlight the
institutional failures versus the emerging global networks. According
to the report by Stall from the corporate executive board in
Washington, 45 per cent of failure is related to strategic neglect,
38 per cent is related to organizational ineffectiveness and
only 17 per cent is related to exogenous factors. In other words,
a lack of organizational renewal or bad organizational float.
Owing
to demographical development there is also an emerging talent
war. One of the leadership consequences is the need to focus
competence and talent inflow by development of organizational
or societal attractiveness, instead of competitiveness as a key
driver for value constellations and value networks. This will
result in more and more management attention on culture, values,
ethos and story telling around intangibles (versus traditional
historical cost accounting). Sometimes this is also described
as an emerging Dream Society, according to Professor Rolf
Jensen (1999), Copenhagen, Denmark, in a recent book with the
same title.
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Global growth curve
of IC
The
following pattern of market capitalization growth and IC global
growth phases might be discernible. They are based on the above
global context evolution and the personal experiences of being
the world's first director of intellectual capital, starting
in 1991 at Skandia AFS. There the IC value has grown from a very
minimal value in the early 1990s into some US$15 billion at the
beginning of the year 2000.
This
might be a guiding vision based on the IC logic of sustainable
earnings, to be seen as a tree with roots to be cultivated for
the future financial fruits, and as the IC value scheme with
its various IC components, as well as the extended organizational
capital development prototyped in the Skandia Future Center (see
Figure 1).
Figure
1. Market
capitalization value over time
Each
phase often results in a stock market appreciation shift, based
on increased transparency, as well as new expectations from the
future value creation of the intangibles investment.
Phase
one is very much about the visualization of intangibles from
a reporting perspective. This is supplementary accounting, now
being called for by some organizations, such as the Securities
and Exchange Commission (SEC) in the USA. A special methodology
for this has been developed as an IC rating by Intellectual Capital
Sweden AB (www.intellectualcapital.se).
Phase
two is very much focused on human capital injection, often
labelled competence adding or knowledge management. It is both
the search for talents to be added, e.g. by mergers between
companies, and the effectiveness from knowledge sharing and installation
of IT based knowledge systems, or emerging knowledge exchanges
such as www.knexa.com.
The
third phase is the systematic transformation of human capital
into structural capital as a multiplier, with much more sustainable
earnings potential for the organization. It is a refined approach
based on the second phase, but very much focused on the packaging
of knowledge into recipes to be shared globally and rapidly.
It is a shift of leadership focus from human capital on to structural
capital as a multiplier for the human talents. The IC multiplier
is to offer organizational springboards to human talents. This
is very much the case of Skandia AFS, also described in their
1998 IC report, called Human Capital in Transformation (www.skandia.com).
The
fourth phase is structural capital injection externally.
It is a turbo effect on the IC multiplier by combining different
types of structural capital constellations for co-creation of
new opportunities. It is expanding the space of co-creation as
the unique space of imagination, and organizational stretch where
human capital and structural capital meet. As discussed by Kevin
Kelly in his book on the Digital Economy (Kelly, 1999),
here the marginal cost is zero while the upside is on the revenue
potentials. One illustration of this is the recent merger between
AOL and Time Warner, combining different organizational capital
components with complementary customer capital potentials. Another
illustration might be the proposed Deutsche Bank and Mannesman
alliance for new mobile and Internet banking. It is a shift of
perspective from a local and physical focus to a global and intangible
focus that will shape innovative prime movers. There also is
the new, more intangible intellectual entrepreneurship, such
as in the TINIE (telecom, informatics, media and entertainment)
sector.
These
discernible phases of global IC growth are gradually increasing
the value creation potential of organizations.
The
intangible or hidden values of the organizational competencies
will be developed around fast learning, organizational networking
and relationship building, as well as ethos and aesthetics for
the brain, leading to more of a symbolic management and meaning
of leadership.
The
challenge for the IC leadership, both on a corporate level and
society level, is therefore both to shape the context for these
growth phases, each of them being a huge challenge, and also
to communicate these intangible value phases to the stakeholders
in a repetitive, auditable and trustworthy way. Just as the old
accounting system might be viewed as the first generation of
knowledge management tools, now it is time for another generation
focused on intellectual capital.
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References
Hfock,
D.W. (1999), Birth of the Chaordic Age, Berrett-Koehler
Publishing, San Francisco, CA.
Jensen,
R. (1999), The Dream Society: How the Coming Shift from Information
to Imagination Will Transform Your Business, McGraw-Hill,
New York NY.
Kelly,
K. (1999), New Rules for the New Economy: 10 Radical Strategies
for a Connected World, Penguin, USA.
Lev,
B. (1997), "The old rules no longer apply," Forbes,
7 April.
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