Intellectual capital

The knowledge within a company that is used to improve business performance is known as its intellectual capital.

How it works

Every business has capital, which refers to the physical, tangible assets that appear on the balance sheet of its financial statements. A business also has
intellectual capital—the knowledge and skills inside the company. This collective knowhow is hard to quantify and measure, but it is essential to a company’s ability to generate revenue. For instance, management must provide training and a handover period for new staff so that human capital does not go down when people leave the company, taking their expertise with them. Management academics have identified three main kinds of intellectual capital: human, structural, and customer.

Human capital

The combined talents of the staff and
T I executives employed by the business. It includes skills and abilities, drive, creativity, and innovativeness, all of which can be quite hard to measure.

• Top talent
• Human intellect
• Volume of practical experience

Customer capital

Goodwill developed between a company and its customers, reflected in customer loyalty to the business and its products. This relational capital can be extended to suppliers, but is very hard to quantify.

• External links
• Market relationship
• How long relationship last

Structural capital

The support structures developed and held by the company, including its own software, databases and other information systems, patents, copyrights, and trademarks. Structural capital is non-physical, so it can be hard to assess.

• Organizational routine
• Innovation
• Internal link

MEASURING INTELLECTUAL CAPITAL

Various different methods have been developed to quantify and measure a company’s intellectual capital.

Watson Wyatt index A survey conducted every two years in public companies to assess the value of human capital and HR practices.

Intellectual capital monitor Matrix that measures the past effects, present power, and future potential of the intellectual capital in a company.

FIVA Framework of intangible value areas (FIVA): an eight-step system used to calculate the worth of a company’s intellectual capital.

Knowledge capital scorecard Method developed by New York University professor Baruch Lev to rate a company’s intellectual capital and assess its contribution to a company’s success.

NEED TO KNOW

❯ Strategic capital A company’s knowledge of its market and the business model needed for success

❯ Intellectual property Creations or inventions that are legally recognized as belonging to a particular entity or individual on a balance sheet

❯ Intangible capital All knowledge assets belonging to a business or organization; can be audited under various systems

“The only irreplaceable capital an organization possesses is the knowledge and ability of
its people.”

Andrew Carnegie