ICA-1

Intellectual Capital:-Define It-Understand It-Capture It

Mary AdamsPresident

Intellectual Capital Advisors

Association for Consulting ExpertiseFriday, September 18, 2009

ICA-2

Interesting company?

• Many decades in business• Growth and profits over the years• Great people• Tough 2009 but will be OK• Industry has good outlook• Opportunities for innovation

�Good client, investment, employer?

ICA-3

Co’s main production facility

• Today is the company’s key competitive advantage

• Started as experiment in 1980’s• Mostly internally-built components• Customized for this business• Never kept track (still don’t) of cost to

build, maintain or operate

�What do you think now?

ICA-4

Economic value is increasingly intangible

Research: Ned Davis

Components of

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Market Premium

Intangible Book Value

Tangible Book Value

Components of S&P 500® Market Capitalization

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

S&P 500 Market Cap ($ billions)

Market Premium

Intangible Book Value

Tangible Book Value

ICA-5

This change touches all sectors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Energy

Materials

Industrials

Consumer Discretionary

Consumer Staples

Health Care

Financials

Telecommunications Services

Information Technology

Utilities

Intangible Value as a % of Total Market Capitalization by Sector

1975

2005

ICA-6

The clearest answers come from the field of intellectual capital

ICA-7

ICA-8

Value is created when IC elements are combined in a system

ICA-9

Human Capital

ICA-10

+ Structural Capital

ICA-11

+ Relationship Capital

ICA-12

+ more Structural Capital (that generates revenue)

ICA-13

Sponsored LinksHäagen-Dazs® Ice Cream

New Häagen-Dazs Five™ ice cream .Crafted with only five ingredients.

HaagenDazs.comEdy's® Ice Cream

New Edy's Slow Churned® Cups.Now You Can Have It All!

Edys.SlowChurned.comMassachusettsSchwan's® Official Site

Delicious Time Saving Meals.Home Delivered Meals, 866-208-1540.

Schwans.comMassachusetts

+ more Relationship Capital

ICA-14

This “knowledge factory”grossed $22+ billion in 2008

From: You Can Grow Like Google on YouTube

ICA-15

Every business has a knowledge factory

Medical

Device Co.

Specialty

Contractor

ICA-16

Implications for management

Unit or Project

Corp

Division

Knowledge Era:Collaboration/

Innovation

Industrial Era:Hierarchy/

Strategic Control

ICA-17

Management dualities

Networks �� Org charts

Orchestration �� Command/control

Innovation �� Strategy

ICA-18

Accounting dualities

Investment �� Capital expenditure

Assessment �� Balance sheet

Indicators �� Income statement

ICA-19

Implications for consultants

1. A lot of consulting involves helping companies see intangibles ad hoc

�Increase your intangibles skill set

2. A lot of consultants have weak structural capital

�Find the leverage in your firm’s intangibles

ICA-20

“Technology and especially the internet can really help you be lazy. Find the leverage in the world, so you can be more lazy!” - Larry Page

Intangibles battle cry

ICA-21

Resources

• Slides will be posted on my blog:www.smartercompaniesblog.com

• Bibliography/discussion:www.icknowledgecenter.com

• Worksheet for knowledge factory:http://tinyurl.com/you-can-grow-like-google

Mary Adams, 781-729-9650adams@i-capitaladvisors.comTwitter: maryadamsica

ICA-22

Additional Detail

ICA-23

The org is now a network

Elizabeth Reuthe, and Verna Allee, “Knowledge Management: Move the Case Model From a Snapshot to a Story,” Health Forum Journal, May/June 1999

Value Networks:

Content of connections

Social Networks:

Patterns of connections

Dietmar Offenhuber, Judith Donath, MIT Media Lab, “Comment Flow: Visualizing Communication Along Network Path, 2008

ICA-24

I-Capex* ($1 trillion/year)

• Intellectual capital expenditures are expensed under today’s accounting

• Should be tracked in a management report• Cost is actually the most concrete piece of

data available about intangibles• Internally, will help with better decisions• Externally, will help tell corporate story

* the new capital expenditure

ICA-25

IC assessment*

• Like a 360-degree review of the knowledge factory

• Review is by stakeholders (both internal and external)

• Asks whether it is working well today, outlook and risk

• Used for strategy, reporting, M&A* the new balance sheet

ICA-26

IC Rating assessment output

AAAAAABBBBBBCCCCCCD

-

R

RR

RRRA R

BB RRA

BBB

RBBBBBB

Brand

IP Processes Management Employees CustomersNetwork

Intellectual Capital

Relational Structural Capital

Business Recipe Organizational

Structural CapitalHuman Capital

BBB BBB RRBBB BBB RR

BBRBB

BBBB RRBBBRBBB BBB RBBB BBB -BB BBB

BBRBB BBB

BBRBB BBB

BBB BBB R

AA

BBB A RBBB A R

RBBB

B

RBBB BBB RBBB BBB

ICA-27

Performance management*

• Uses non-financial indicators • Examples: headcount, customer

demographics, IP mapping, process metrics

• Bottom up for learning• Top down for management and

reporting—key performance indicators (KPI’s)

* the new income statement

ICA-28

Triangulate intangible performance

Graphic from: http://amath.colorado.edu/outreach/demos/hshi/2000Sum/TaT.html

Cost

Assessment

Indicators