denotes premium content | Jul 7 2008 Feature
posted 1 Mar 2000 in Volume 3 Issue 6
Managing your Intellectual
Capital
In an attempt to implement a systemised way of identifying
and managing its intangible resources, Ericsson Business Consulting Norrköping
AB has adopted a system known as the IC-Process. Peter Baladi,
Stefano Dell'Orto and Frederik Lövingsson
explain the theory behind the formula.
"You need new ways of thinking to
solve the problems created by the old ways of thinking"
Albert
Einstein
A new
way of thinking
In 1494, Italian Luca Pacioli wrote Summa de arithmetica, geometria,
proportioni et proportionalita as a structured way to keep track of activities.
He categorised an organisation's vital resources into different groups, and
applied a number of rules for how they were to be governed. The system, known as
double entry accounting, is still used in modified forms to keep track of
organisations' performance.
However, in today's
knowledge intensive society, the financial categorisation of resources needs to
be complemented with a categorisation of a company's intangible
resources. Intellectual resources are often internally generated, interrelated
and interdependent, and their value is thus context specific. They are therefore
not calculable in the same way as physical or monetary resources (1).
Furthermore, they are not governed by the law of decreasing returns. When a machine is
used, its usability is consumed and its value depreciates. However, when an
intangible resource such as knowledge is used - e.g. converting tacit knowledge into
explicit knowledge through an exchange between individuals - knowledge is
developed and its value usually increases. In a knowledge society, resources
responsible for innovation tend to be characterised by increasing returns (2).
This requires a
company to adapt new business logic, new management logic and new working logic.
Identified key success factors for increasing market competitiveness are
customer focus, speed, innovation and ability to change. In this new world,
managing and keeping track of a company's intangible resources are also crucial.
The company's
challenge
Ericsson Business Consulting (EBC) is one of three Business Units within
the Ericsson Enterprise Solutions segment. It has about 4000 professionals,
active in 31 countries, who have come from different parts of Ericsson, mainly
from what previously was known as LM Ericsson Data AB. The company finds itself
right in the heart of the new business landscape, where telecom, computer and
media industries converge on the battleground for the telecom industry.
Ericsson Business
Consulting Norrköping AB (EBCN), the target company for this article, is a part
of the Business Unit's Nordic Region. It has about 160 employees who are active
in four divisions: Business Platforms, Business Solutions, Business@Inet and
Management Consulting. The managers for the service areas, together with the
Managing Director, the Human Resource Manager and the Operational Development
Manager, form the management team for EBCN.
This team was faced with a
significant challenge - to align its business with Ericsson's new strategy, and at the same
time maintain growth rate, profitability and innovative power. In addition, the
company had to co-ordinate the different service areas.
EBCN has been at the forefront of work
to improve internal management systems. It was therefore a natural progression
for the company to pilot the IC Process to improve its strategy, management and
measurement system (3).
Finding a language
In the same way as Paciolo categorised
an organisation's monetary and physical resources, the challenge today is to
recognise knowledge based resources. To achieve this, EBC has adopted the
language of Intellectual Capital (IC). The need for a common language was
noticed at an early stage, and was the reason why EBC, in co-operation with
SkandiaAFS, developed a web-based dictionary for IC and related topics.
IC is a way of
looking at an organisation's total value and of categorising it into different
types of resources that are governed by different rules and assumptions. These
resources should reflect the organisation's business logic, and they therefore
differ between companies and organisational units. However, it is possible to
identify a number of generic categories:
To summarise briefly (4), monetary and physical resources consolidate
into an organisation's financial resources. Today's financial reporting tools
(e.g. the annual report) capture the value of the financial resources. Human
resources are the value of the organisation's employees, including such elements
as competence, attitude, intellectual agility, and personal relationships
(Cheetham & Chivers, 1998). The human resources reflect the value of what
leaves the building at 5 o'clock in the afternoon (5). But after the employees
have gone home, there is still value embedded in the organisation, as
represented by the organisation resources. These consist of all the intangibles
that are owned by the organisation, such as processes, infrastructure, systems,
brands, and so on. The relationship resources concern the organisation's
relationships with its stakeholders - its partners, customers and
suppliers.
At
EBCN, when the value creating resources had been defined and categorised, the
company visualised the structure in a distinction tree.
Visualising the business
recipe
When an organisation has agreed upon a common language for its intangible
resources and then articulated it in a distinction tree, the next step is to
visualise their relative importance and how they interact - the business recipe.
In doing this, EBCN was
faced with the task of answering two questions:
1. How important are the defined
resources for creating future cash flow?
2. How should the resources be best
utilised to generate future cash flow?
Relative importance of the
resources
The IC Process suggests use of the Delphi Process, with a fixed sum
distribution approach, to make trade-offs between the different resources defined in
the distinction tree. At the highest level, the organisation will be urged to
make trade-offs between the four generic resource categories. This exercise
provides a static picture of what the organisation wants to look like in terms
of intangible and tangible resources at a future point. It also reveals
previously hidden disagreements and false consensus regarding the organisation's
business recipe. One of the management team members at EBCN, for example, said: "It is
very uncomfortable being asked to prioritise among issues previously agreed on.
However, doing so showed me the importance of focusing on the strategically
important areas." Experiences from performing this exercise in iterative steps
show that organisations generally over-rate the importance of the human capital
and under-rate the importance of organisational capital (6).
When EBCN was asked to
prioritise between monetary, human, relationship and organisation resources, the
distribution showed an organisation focused on relationship and human resources,
with low focus on monetary and organisation resources. This depicts a consultant
organisation dependent on its brilliant individuals (human resources), who are
not governed by pre-determined processes and concepts (organisation resources).
After discussing
the consequences and performing a number of iterations in the Delphi Process, a
new picture of the company emerged. Organisation resources were identified as
most important, followed by relationship resources, human resources and monetary
resources. This depicts a traditional consultant company, focused on selling
pre-packaged concepts and processes performed by skilled consultants.
Focusing on human
resources and focusing on organisational resources represent two fundamentally
different management philosophies, hence the importance of thoroughly discussing
and analysing this exercise, as was done at EBCN.
Utilisation of the
resources
Depending on the process, value can either be created or destroyed when
one resource is transformed into another. For example, selling a process could
mean transforming an organisation resource into a monetary one. The challenge
for an organisation is therefore to define how resources should be transformed
to optimise future value creation - in other words, to define the flow between
the resources. Adding this process to the resource stocks is much like adding a
profit and loss statement to the balance sheet in accounting - a combination of
the two provides much more information than any one of them alone (Dragonetti
& Roos, 1998).
In performing this exercise, EBCN completed a grid using the fixed
sum distribution for the different transformations. Because of its
context specificity, the navigator may not make much sense to an external
observer without explanation, but for the organisation in question it paints a picture
of its fundamental business recipe - which resources are important, and how they
should be used to create value in that particular organisation.
The navigator
showed the perceived relative importance of both the organisation's tangible and
intangible resources, and how they should be utilised to maximise value at a
future point. The navigator shown at the generic level visualises an overall
picture of the organisation's recipe, but when it is shown at the more detailed
and business specific level, it provides a solid foundation for taking better
managerial actions.
At EBCN, the navigator revealed a somewhat unfocused
though inherently profitable recipe. The navigator showed a good understanding of
the business fundamentals, but when the more detailed aspects of the navigator
were studied (at the second level - not shown in this article due to onfidentiality),
it became clear that the company tended to invest in various unrelated
resources with no articulated purpose in the business, generating little or no
output. EBCN has already initiated activities to improve the focus of the
organisation. One of the managers said: "We will change our operations to get a more unified
business recipe that focuses on the important value drivers, as perceived by the
customers."
The insights from running the IC Process at EBCN resulted in one of the divisions -
Business Platforms - being liquidated, because of its lack of correlation with
the business recipe.EBCN has decided to continue working with IC and will
continue to incorporate key elements from the IC Process in the strategic
planning process.
The future
EBC's
efforts to measure and manage IC has evolved in different phases, and the company
still has several steps ahead of it. Arne Richtnér, Intellectual Capital Manager at Ericsson
Business Consulting Sverige, argues the importance of continuing the IC development (7):
"Obviously, IC navigation is still more an art than a
science. But it is no abstract, unprofitable game. Just compare the profits of a
company that uses all its resources, to one that exploits only 20-30 % of
them - that is, mainly the financial capital. Restricting our focus to cash
may weaken the impact of other critical factors. Cash is just the enabler, the
start - or the end - of the value-creating process."
Behind the change:
The IC-index
Managers have a specific and unique formula for managing their company,
but they might not be conscious about what it contains. They seldom
systematically formulate goals, asses their worth, evaluate the chances of
reaching them and choose the path that maximises expected return. Rather, they
frequently bypass rigorous analytical planning, especially when facing very
entangled problems.
EBC relied on the ICS's IC-index "! in order to help the managers to
bring out their business recipe and to visualise all the knowledge that exists
in their heads.
The IC-index* is a tool for measuring an organisation or business
unit's performance of the value creation process. The model is based on research
findings primarily from the fields of strategy and finance. It was developed as
a means for managers to uncover and articulate hidden value creating resources
and processes, and create a structure for measuring the achievement of strategic
goals at a consolidated level.
The process relies on the
company's value definition and strategic intent as the point of departure for the
two separate processes that will subsequently merge to generate the IC-index*.
The first process is
a rational and analytical process based on the strategy as stated in official strategy
documents and aims to extract the tacit knowledge from insightful managers
of how value is actually created in that particular unit of study. This includes
identifying not only the resources necessary to create value (stocks) but
their utilisation, or the transformations from one resource into another (flows)
as well as their relative importance for attaining the desired future position.
The outcome of this process is finally visualised in a context specific
'Navigator' . The second process aims to develop relevant, precise and
robust indicators of the key success factors identified for achieving the
strategic intent. Thereafter the indicators are weighted and sorted according to
their relative importance as determined by the navigator and its underlying
structure.
Because of the non-additive aspect of IC, the final consolidation
cannot merely be a weighted average, but has to be designed in a way that
acknowledges this special feature. The IC-index* employs methods developed in the field of
experimental physics for this purpose.
The end result is two sets of indices;
one for stocks and one for flows. The first shows the changes in the resource
base and the latter shows how well the organisation has managed to utilise the
resources to create shareholder value.
*The IC-Index is a trademark owned by
ICS Ltd, a London based research and consulting company.
References
1. Roos, G. & Jacobsen, K. 'Management
in a Complex Stakeholder Organisation: A case study of the application
of the IC-Process to a Branch of the Commonwealth Public Service' .
Monash Mt. Eliza Business Review, Vol. 2, No.1, pp. 82-93, 1999.
2. Arthur, B. (1996): 'Increasing
Returns and the New World of Business' ; Harvard Business Review;
July-Aug., pp. 100-109.
3. For a more thorough description of the IC Process at Ericsson
Business Consulting Norrköping AB, see Roos & Lövingsson (1999).
4. More information:
Roos, J., Roos, G., Dragonetti, C. D., and Edvinsson, L. (1997) Intellectual
Capital: Navigating the new business landscape. (1997). London:
MacMillan.
5. As
defined by Leif Edvinsson, Vice President and Corporate Director of Intellectual
Capital, Skandia AFS
6. Roos, G. & Lövingsson, F. (1999) 'El Proceso CI En El 'Nuevo Mundo De
Las Telecomunicaciones' : Experiencia De Ericsson Business Consulting Norrköping'
, in Güell, M. A. (Coord.) 'Homo Faber, homo sapiens: La gestión del capital
intelectual' . ESADE.
7. The whole interview is available
on: www.ericsson.se/intellectualcapital
Peter Baladi is the Knowledge
Management Program Director at Ericsson Business Consulting. He can be contacted
at:
peter.baladi@edt.ericsson.se
Stefano Dell'Orto is
a Management Consultant at Ericsson Business Consulting. He can be contacted
at:stefano.dellorto@edt.ericsson.se
Fredrik Lövingsson is
a Management Consultant at Ericsson Business Consulting. He can be contacted
at:fredrik.lovingsson@edt.ericsson.se
