Intangible Capital. Intellectual Capital. Intangible Assets. Intellectual Property. These phrases get used a lot and many people think they are the same thing. This post is intended to help you understand the difference. Our objective is to provide clarity to our terms and correlation to the impact IC has on business results.
The study of intangibles emerged as a field in the 1990’s to explain the significant shift in our economy and businesses as knowledge became the key competitive advantage in the global market. This shift reversed the historical pattern of tangibles accounting for 80% of total corporate value to the exact opposite today with the value of the average company today being 82% intangible. How to describe this critical asset class? The field is still emerging and as such, there can be confusion about the meaning and usage of different words and phrases.
The terms intangible capital, intellectual capital, intangibles and intangible assets are often used interchangeably. Although we prefer the phrase “intangible capital” because it has a more precise definition (see below), “intangibles” is also frequently used. Below, for your reference, are some definitions of these and related terms:
INTANGIBLES / INTANGIBLE ASSETS
Strictly speaking, the definition of “intangible” comes from the field of accounting. Intangibles are organizational resources that do not appear on the balance sheet. On average, more than 80% of the value of today’s public corporations is intangible.
This phrase is both our friend and our enemy. It orients people that we are talking about assets and resources that are not tangible. But it also feeds into the broad misconception that intangibles are unknowable and unmeasurable. Nothing could be further from the truth (which is why we wrote Intangible Capital).
Why do we not find a different word? Well, as tempting as that sounds, it wouldn’t solve the problem. Accounting standards and norms are critical foundations of our economy. We have to find ways of orienting people within their own experience. So when talking about intangibles, let’s start with what people know and help them learn and expand their understanding from this base.
INTANGIBLE CAPITAL (IC)
This is a phrase and a concept that comes out of the study of intangibles in an organization. It takes people beyond the strict definitions found in accounting and takes a fresh look at what is going on. Basically, the rise of the importance of intangibles is part of the story of the end of the industrial economy and the rise of the new economy based on information technology and the internet. In this new economy, knowledge, connections and collaboration are the key assets driving growth and performance. To paraphrase Baruch Lev, there is no tangible asset today that is more than a commodity. The unique, the valuable part of business comes from how tangibles are used, how work is done, how the future is innovated.
The field of IC has identified four main categories of knowledge intangibles, each of which has a different character. It is important to understand individual intangibles as well as how they work together as a whole:
- Human Capital - This includes all the talent, competencies and experience of your employees and managers. This is the intangible capital that “goes home at night.” More on human capital
- Relationship Capital – This includes all key external relationships that drive your business, with customers, suppliers, partners, outsourcing and financing partners, to name a few. This kind of capital also includes organizational brand and reputation. Due to the growing importance of networks in organizational structures, this is also sometimes called Network Capital. More on relationship capital
- Structural Capital – This includes all knowledge that stays behind when your employees go home at the end of the day. There is significant structural capital in today’s organizations including recorded knowledge, processes, software and intellectual property. More on structural capital
- Strategic Capital – This is a category that is not always included in academic definitions of IC. However, in our experience, this category of knowledge is the necessary complement to the others. It includes all the knowledge you have of your market and the business model that you have created to connect with market needs. The driving force behind Strategic Capital is purpose. It also includes culture. Culture and purpose are the glue that holds the rest of IC together. More on strategic capital
INTELLECTUAL CAPITAL / INTELLECTUAL PROPERTY
Some people use the phrase intellectual capital instead of intangible capital.
We prefer to use “intangible capital” rather than “intellectual capital” for two reasons: 1-intellectual sounds too elitest–intangibles are real and practical so let’s not make them sound inaccessible and 2-people often confuse intellectual capital with intellectual property.
Intellectual property is a specific type of intangible asset that can be protected legally through copyrights, trademarks and patents. It is a subset of Structural Capital. Many people think that intellectual and intangible capital is primarily intellectual property. Hopefully, this discussion helps you understand that there's much more to the picture!