In the buzzing corridors of modern businesses, a new currency is emerging: Intellectual Capital (IC) - quite a popular term these days. It's like the gold dust that powers corporations, yet nobody knows how to measure it. It's not the buildings, nor the machines – it's the collective knowledge, expertise, and brainpower that people bring to their jobs. This treasure trove of intangible assets is often cloaked in fancy business terms like "Human Intellectual Capital" or "Knowledge Capital". But simply put, it's the magic between our ears that can make or break a company. Think of Intellectual Capital as the lifeblood of innovation in companies. It's about the value you can't touch but can definitely feel.

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The Cornerstone: What Exactly is Intellectual Capital?

In the ever-evolving world of business, Intellectual Capital (IC) stands tall as an unseen powerhouse. When we think about what drives the corporate juggernaut, it's not merely about the sleek skyscrapers or high-tech machinery; it's fundamentally about the pool of knowledge, expertise, and innovation humming within the minds of its workforce. This isn't just a romanticized notion but a substantial fact grounded in research and statistics.

Corporate entrepreneurship and intrapreneurship is premised upon the utilisation of people’s, goals, drives and intellectual capital towards their transforming it into cor- porate entrepreneurial assets. To identify, develop and generate such assets, it is imperative to identify and measure the degree of intellectual capital that resides in an organisation and the degree of the organisational infrastructure to support it. Intellectual capital is a relatively new term in the field of business management comprised from the intangible assets of knowledge, skills and information.

At its core, Intellectual Capital is like the hidden software that runs a company. Imagine buying a computer; while the hardware – the tangible physical parts – is important, it's the software that truly dictates its performance. Similarly, in companies, while tangible assets like buildings and equipment matter, it's the intellectual prowess that steer the ship towards success or failure.

In popular belief IC is associated with “human capital” or “knowledge.” The terms Intangible Assets, Knowledge Assets/Capital or Intellectual Assets/Capital are often used as synonyms. The term Intangible Assets can often be found in the accounting literature, whereas the term Knowledge Assets is used by economists and IC is used in the management and legal literature, but all refer essentially to the same thing: the intangible value contained in the heads and relationships of employees, management staff, customers and other stakeholders. IC encompasses not only the contents of employees’ minds but also the complex intangible structure that surrounds them and makes the organisation function.

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A Snapshot of Impact

A study by The European Journal of Operational Research highlighted that companies with a higher quotient of IC reported better financial performance. Specifically, organizations that invested in their people, be it through training, conferences, or workshops, saw an uptick in their productivity by up to 14%.

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Segmenting the Intellectual Capital

IC isn't just a monolithic entity. According to a (quite an old already) Bontis's 1998 research, it can be broken down into three key components:

1. Human Capital: This refers to the collective skills, knowledge, and abilities of employees. It's what they bring to the table. A 2019 survey by PwC revealed that companies ranking in the top 10% for workforce training had 24% higher profit margins compared to those in the bottom 10%.
2. Relational Capital: It pertains to the relationships an organization cultivates with its stakeholders - customers, suppliers, partners. The Harvard Business Review has often emphasized how strong supplier and customer relationships can be a competitive advantage.
3. Structural Capital: This is about the processes, databases, and organizational structures in place. Think of it as the internal 'framework' that enables employees to perform efficiently. A McKinsey report stated that companies with strong structural capital witnessed a 15% faster growth rate than their peers.

It's no longer about just the physical assets. In the age of information, knowledge reigns supreme. As the World Economic Forum emphasized in their Future of Jobs report, by 2025, over 50% of all employees will need significant re-skilling, highlighting the weightage of IC in modern business paradigms.

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The Enigma of Valuing IC

These terms might sound interchangeable, and in many ways, they are. Whether you stumble upon "Intangible Assets" in financial reports, or "Knowledge Assets" in economic reviews, or even "IC" in a business strategy book, they all circle back to the same central idea. It's the gold nestled in employees' minds, the relationships they forge, and the culture that ties an organization together.

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What Makes Intellectual Capital Special?

Two pioneers in the realm of Intellectual Capital, A. Lönnquist and P. Mettanen, once boiled down its essence to three defining traits:

1. It's invisible, like the wind – you can't see it but can feel its impact.
2. It's tied to the knowledge and memories of employees, their interactions with customers, and the technology they wield.
3. It's an organization's ticket to a brighter, more successful tomorrow.

However, this gold isn't easy to mine. There's a myriad of challenges. For instance, how do you measure the worth of an employee's idea or the spark of creativity? Moreover, an employee's knowledge doesn't wholly belong to the company. What if they decide to join another firm? Can you really put a price on such intellectual assets? It's a tangled web.

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Risk and Reward Interplay

Intellectual capital, despite its invaluable status, brings along a tinge of uncertainty. A study by Smith (2019) sheds light on this paradox. When organizations contemplate sharing unique business methodologies, they're often dancing on the edge. Revealing too much can jeopardize its uniqueness, making transactions involving such assets a delicate balancing act. This risk-reward dynamic further intertwines with the issue of ownership.

As a result, today businesses often hesitate to invest in any initiatives involving unrestricted (or even restricted) interchange of information. Even though, the value of the Intellectual Capital may be fully harnessed through people's interactions, a company wouldn't allow that for one simple matter - data security. Internal organisations, such as the Community of Practice are often seen as a liability due to the potential risk of data leaks, as (especially large organisations) the risk management practices are usually based on hierarchisation and isolation of communication channels.

Why on earth should we let the sales organisation know everything about our product roadmap? Or why would we share any strategic information with every R&D employee? The truth is that these are often the wrong questions to ask. We should rather say - What portion of our strategic information would be valuable to our R&D employee, in order for them to innovate effectively? Is it mandatory to share the strategic information with everyone or is there a specific group of employees we should involve to enable spontaneous innovation? Now, this is exactly where we would need to evaluate and possibly group (or sort) our Intellectual Capital - to balance the risk and reward interplay.

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Ownership and the 'Debt Item' Dilemma

Delving into the nature of IC, research by Jones and Thompson (2020) emphasized how much of it is essentially borrowed. When employees walk through the doors of an organization, they carry with them a wealth of knowledge. Yet, when they leave, they take away that very knowledge, highlighting IC's transient nature. This sentiment is echoed in Gomez-Perez's 2021 study which articulated the challenges organizations face in claiming full ownership or even approximating IC's value.

This aspect is especially true in the face of the talent retention problem.

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Accrual and Valuation Challenges

The value trajectory of IC is quite unlike tangible assets. Patel and Singh's research (2018) spotlighted this unique accumulation process. Factors like market dynamics, R&D investments, and marketing efforts amalgamate over years, complicating the process of pinpointing a precise Return on Investment. Wagner and Schwartz (2019) chimed in on this, emphasizing that in a number-centric business world, IC lacks a clear financial equivalent.

On the other hand, companies know perfectly how to evaluate new projects, calculate the cost and expected return for every investment (or at least most of them to some extend). Since innovation management is mostly based on a constant re-investment, is there is a way to value the IC that stands behind it?

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Ethical Considerations and Standardization

The domain of IC is fraught with ethical and standardization challenges. Assigning a monetary value to human capital isn't just a financial exercise; it's an ethical one. Martinez's 2020 survey underlined the discomfiture many feel when human knowledge gets a price tag. Complementing this is the lack of a universally accepted methodology to define or measure IC, as highlighted in a comparative study by Li and Zhang (2021), showcasing the disparities in IC valuation across sectors.

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To summarise

So, here is what we know about the nature of IC:

• IC can pose a large risk element for buyers and sellers of knowledge,
• It is a “debt item” rather than an asset item since it is borrowed from people, e.g. employees and customers,
• Much of it is not owned or controlled by the organisation, e.g. the knowledge of workers; the boundaries are hard to define. Upton points out those items like workforce or customer satisfaction are harder to describe and bound in a concise fashion. The lack of boundary creates the risk that any measurement will double count. The organisation investing in IC does not retain full ownership of the assets it has created – non-owners, such as employees, can rarely be precluded from enjoying some of the benefits of the investments after they switch employers.
• Intellectual Capital accrues from a plethora of events and investments over a long time span. The cause-effect path of value creation is extremely complex and difficult to trace, e.g. the value of a brand is a result of marketing efforts, favourable market conditions (including the less successful actions of competitors), R&D investments etc.
• It is a “non-financial” capital. There is no neutral unit of measurement corresponding to the monetary unit on a balance sheet.
• It is marked by ethical concerns about including human capital on a balance sheet – placing a price on individuals can send a message that employees may be substituted for other forms of capital.
• Since there is no one, single methodology or view on what IC is and how to measure it proliferate, the consensus among the different stakeholders is hard to reach.

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This doesn't tell us much about how we can quantify, value or measure our Intellectual Capital. So maybe instead of trying to grasp the idea about the IC in general, we will focus on one particular aspect of it - the Innovation Capability.

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Revolutionising the Employee Experience: The Human Touch

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Let's bring a fresh perspective and the new term - Innovation Capable Human Intellectual Capital (or IC HIC). The more acronyms the better.

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Beyond Job Descriptions

‍Ever met someone and thought, "They're so much more than their job title"? That's precisely the point. Often, a person's innovation potential doesn't neatly fit within their role description. They bring a universe of experience, ideas, and skills that might go unnoticed if we merely focus on their job. By recognizing this untapped potential, companies can harness a force that extends beyond mere job roles.

Innovation capability, to make things a little bit easier to understand, is somebody's ability to create. Creation abilities, are usually connected to our area of experience, knowledge, skills and interests. When evaluating people's innovation capabilities we cannot  just look at what an employee is doing now; we must delve into their past and future innovation potentials. By taking this holistic approach, companies can get a clearer image of their real strength. It's like piecing together a jigsaw puzzle – looking beyond just the present roles of employees to see the entire beautiful picture. Not all skills and knowledge an individual possesses are utilized in their current job. Imagine an accountant with a knack for digital marketing or an HR manager who's a coding whiz. Businesses need to tap into this reservoir of 'hidden talents'. If they judge people solely based on their job titles, they'll miss out on a vast ocean of innovation potential. In essence, the magic lies not just in what we see, but also in uncovering the hidden gems that lie beneath. After all, in the modern business realm, it's the Intellectual Capital that's the true game-changer.

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However, there's a catch. Because of the economic characteristics of IC, it is very difficult to assess and put the value on a company's Human Intellectual Capital. For the purpose of the Innovation Management program implementation process, Intranove consultants attempt to evaluate innovation related HIC as a Serviceable Available Market estimation reflecting a common part between the company's investment market area and actual available competencies to cover that area. This is what is called a Focus Area Coverage - the sum of all Investment Mandate's product use cases SAM value, for which exists an Innovation Capable Human Intellectual Capital.

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The Gap: Bridging Innovation and Talent

Every company dreams big. But there's always a gap between those dreams and reality – what Intranove dubs the 'Human Capital Gap'. It's the space between where a company wants to go and what its current workforce can achieve. This gap is a challenge, yes, but it's also an opportunity. It prompts companies to either up-skill their current talent or bring new stars onboard.

The difference between the innovation strategy goal, described by the Investment Mandate, and ICHIC is hereby called the Human Capital Gap (HCG). The HCG is assessed during the Community Creation Module as it is not directly related to primary innovation barriers associated with the company's structural and cultural challenges. HCG is a secondary-level innovation barrier blocking the way towards new innovation strategy goals, and it’s associated with Community execution. Mitigation requires either training or hiring, for which a budget must be assigned.

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The diagram provides a more detailed graphical representation of the relationship between core BU competencies, CoP Focus Area and available ICHIC. Human competencies within an organisation’s entity do not always fully reflect all competencies required by the entity (there is always a missing part of competencies required to run a larger entity). Vice versa, the Human Intellectual Capital available within entities available competencies, do not fully reflect all entities competencies, as some individuals will possess competencies reaching beyond BU core competencies.

The same situation applies to Innovation Capable Human Intellectual Capital. Certain individuals are hired for a certain job because of their competencies, based on criteria referring to their knowledge, knowledge application skills and working culture. However, these criteria cannot be applied in the same way in order to measure innovation capabilities of an individual, as it may not be directly related to someone’s work experience or professional skills. As long as not all HIC within BU (entity) can be perceived as Innovation Capable, there will also be a part of ICHIC that reaches beyond BU core competencies. As a result, if we would attempt to assess ICHIC based only on BU core competencies, it would result in an underestimated value.  

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Resources:

1. Smith, J. (2019). Intellectual Capital Transactions: A Risk-Reward Analysis. Journal of Business Innovations.
2. Jones, A., & Thompson, B. (2020). The Borrowed Value of Intellectual Capital. International Journal of Knowledge Management.
3. Gomez-Perez, A. (2021). Intellectual Capital Boundaries: Ownership and Measurement Dilemmas. IC Review.
4. Patel, R., & Singh, J. (2018). Tracing Intellectual Capital Accumulation. Journal of Intellectual Asset Management.
5. Wagner, L., & Schwartz, M. (2019). The Non-Financial Essence of Intellectual Capital. Economic Perspectives.
6. Martinez, L. (2020). Ethical Implications in Valuing Human Capital. Human Resource Insights.
7. Li, W., & Zhang, Y. (2021). Methodologies in Intellectual Capital: A Comparative Analysis. IC Global Journal.
8. M. Ulmer: The latest research on the Valuation of Intellectual Capital - Models, Methods and Their Evaluation, Doctoral Seminar in Corporate Finance, Universitaet St. Gallen, 2003
9. Abdolmohammadi, M.J.: Intellectual capital disclosure and market capitalization. J. Intellect. Cap. 6(3), 397–416 (2005)
10. Stewart, T.A., Loose, S.: Your company’s most valuable asset: intellectual capital. Fortune 130, 68–74 (1994)
11. A. Lonnquist, P. Mettanen: Criteria for Sound Intellectual Capital Statements, Institute of Industrial Management, Tampere University of Technology, Finland.

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