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 What we need is to recognize is the real “nesting effect” from all of our capitals. Each of our capitals performs a particular function and the overhaul make-up of their understanding becomes our eventual code to perform innovation.

Each organizations uses it mix of capitals to accomplish and generate innovation. It is in this mixture of combinations brought together constantly in different ways , this ‘nested effect’ that innovation occurs. The capital you ‘bring to bare’  will generate the innovation outcome or does highlights the gaps and gives real clues on where it is repeatedly falling down.

Organizations can often miss the power to consistently tap into all the potential that ‘resides’ or could be added to make innovation happen. It is the unique set of capitals that offers the real potential to set each organization apart from others, it gives them the wealth-generating potential, their uniqueness and ‘chance’ to be seen as future value.

Leverage our learning capitals becomes essential

The more we strengthen our knowledge and value our people, the more we can generate new knowledge, build greater narratives, deepen discussions, make better connections and build our interactions out across growing communities. The more we discover, the more knowledge we gain and this leads up to determine a potentially better decision-making that should, in theory, give greater confidence that our invested financial capital is in ‘good hands’.

The power lies in the linkages we can forge, in acquisition, in assimilation and then into eventual transformation that allows known knowledge to become new wealth-generating innovation.

We need to know where our value creation resides – it is nested in our organizations.

By recognizing our ‘stock’ and knowledge through exploring and investing in our group of capitals we have that greater chance of value-creation. All here, reading this blog will agree, we need to move away from the bias of one capital, financial, it is not the dominating one in today’s world, it is our knowledge generating capital. It is those living capitals that can combine and  ‘capture’ the true evolving story of creating new innovation that grows our organizations.

It is the combinations of all our capitals that allows those 'new to the world' innovations to fire up our imaginations and make them combustible, often becoming overnight sensations and runaway successes.

I came across this site on Natural Capital- its fresh, getting structured on its position and value proposition and delivering its message 

http://www.naturalcapitalhub.org/

Also another worth browsing is

http://www.naturalcapitalcoalition.org/

Both are trying to create the common understanding, provide open examples of what and how to go about measuring natural capital.

One comment "Companies best positioned to compete in the future will be those that are able to decouple growth from unsustainable dependency on vulnerable ecosystems. Natural capital accounting enables companies to do just that by identifying opportunities to optimize operations, supply chains and product portfolios in line with natural resource availability and environmental cost."

Take a look as Natural Capital has become a critical part of the Integrated Reporting Framework as well.

Welcome to the Natural Capital Business Hub.
Join leading companies that are achieving bottom-line impacts by valuing nature's assets. 

It can be hard to understand corporate acquisitions, especially when they are as dramatic as this one.  Facebook bought WhatsApp for $19 billion. Like most deals of this kind, it’s hard to judge whether the price makes sense. So I won’t try to address it specifically. But I do think that it's a great moment to talk about what drives value in companies today.

There’s clearly value in WhatsApp. Google made an earlier offer of $10 billion. Many speculate that Facebook had to buy the company to ensure that Google didn't get it.

Both companies were after the 450 million WhatsApp users. The success of all three of these companies is heavily dependent on their users. This kind of relationship capital is one of the big four categories of intangible capital, the other three being human, structural and strategic.

WhatsApp actually already has strategic capital in the form of a business model where they get paid (only a dollar and only after one year but that’s more than Facebook makes from their users). I actually like this because it puts the company in less of a dilemma than many other web companies who have to find a way to extract as much value as possible from their users without driving them away. (Another alternative would be to offer equity to users. This still sounds crazy today but I'm convinced that more inclusive financial models will come in companies with models heavily dependent on free users).

Human capital is critical to any company like this even though at 55 employees, WhatsApp is a great illustration of the leverage that can be gained from structural capital, the underlying software and data in their platform. Until recently the best discussion to my mind of this leverage was Paul Romer’s discussions of New Growth Theory. But right now I’m reading The Second Machine Age and I’m loving the authors' explanation of how the right algorithm can be replicated over and over again.

Getting the right algorithm is the holy grail of our time. It’s the starting point for everyone, including the tech giants. But none of them can succeed without all four forms of capital:

• people to develop the ideas and keep them growing (human)
• technology/processes/software to make the idea repeatable (structural)
• users and customers to co-create (relationship)
• and the right business model to ensure the sustainability and profitability of the system (strategic)

Why do we call this capital? Because they are all economic assets. I can assure you that WhatsApp spent significant sums on all of them. But the accumulated investment isn’t recorded in traditional accounting.
But most people know the assets are there. And most people deal with all these elements intuitively. And if you are a runaway success like WhatsApp, you might not need a more structured approach like we advocate with ICounting—identifying and measuring the key intangibles driving the success of an organization.

Of course, most companies don’t achieve these kinds of dramatic results. And they could use a little extra help to figure out their model and explain it to potential partners and funders.

What do you think? Does the IC perspective help shed light on these value drivers? Would IC information help the markets make better decisions (not just for mega-deals like WhatsApp but also mainstream companies)?

MIT Technology Review just published their list of the smartest top 50 companies for 2014.

Here's the list.

http://www.technologyreview.com/featuredstory/524671/50-smartest-companies-2014/

The criteria for the list is not the typical nonsense used such as the number of patents or PhD's on staff but whether the innovation being done by the company is a game changer (a radical innovation) that will change an industry. The company at the top of the list is Illumina which is doing radical innovation to drive down the price of DNA sequencing to a level that will change the practice of medicine.

The interesting question is then - How does intangible capital fit in the criteria? My answer is that a special specific type of intangible capital is the essential part of the capability to  do radical innovation. For example, measurement and development of intangible capital that supports radical innovation are two of the twelve principles of the fourth generation (4G) of innovation management.

Integrated Reporting (IR) is the new international project to upgrade financial accounting to measure innovation and intangible capital. It would be great if IR could produce a list that was similar to the MIT top 50.

Over the decade or so that I have been focused on intangible capital, there has been a parallel conversation going on about sustainability. These are two broad fields with many players and approaches but I’ll try to generalize the two (excuse the shorthand versions):

• Intangible Capital – also known as IC, Intellectual Capital, Innovation Capital, Digital Capital – Focused on the changes in the core operating assets of organizations that have occurred as we move from an industrial to an IT-fueled, knowledge-based economy.
• Sustainability – also known as ESG (Environmental, Social and Governance) and Triple Bottom Line (People, Profits, Planet) – Focused on the fact that the industrial approach of not considering the human, societal and environmental effects of corporate actions are endangering our collective future.

Both conversations are about the path to prosperity—measured in both financial and nonfinancial ways. But there hasn’t been too much attempt to unite the two views. One notable exception is the IIRC (International Integrated Reporting Council). 

I admit that I resisted the IIRC approach for a long time. For one thing, we at Smarter Companies have been more focused on innovation and value creation than on corporate reporting, which appears to be the IIRC’s primary focus. And I feared that combined the two made it harder to tell the stories of each of these different fields of study—mixing apples and oranges. It’s kind of ironic because I have often talked about the new design constraints for modern businesses (many of which were related to environmental and social concerns), but I wasn’t able to make that connection. But I’ve increasingly seen the need to find a way to talk about the connection between our mission and that of my colleagues interested in sustainability, especially because IC is about the gift of new knowledge resources that we humans have been given at the moment we need them most. IT and IC hold the key to greater sustainability.

In December, the IIRC released their latest framework document. The framework is written in a purposely vague way as the intention is to start a conversation rather than legislate a solution (an approach I agree with). What spoke to me most in the report was this diagram explaining how organizations create value using what they call the “Six Capitals” (with my overlay of the IC knowledge factory):

I think this graphic does provide a framework for integrated thinking about corporate value creation that includes both IC and sustainability thinking. And it’s given me a way to talk with colleagues about the intersection between our respective work.

At Smarter Companies, we focus on three of the six capitals: Human, Relationship and Intellectual (which we call Structural Capital—read here to see why we avoid the word intellectual). We use an additional category we call Strategic Capital that actually corresponds really well to their central box with business model, external environment and culture. These four categories make up what we call the “Knowledge Factory” in the book Intangible Capital.

The Knowledge Factory is how organizations use Manufactured Capital and generate Financial Capital. It’s also how organizations build or destroy Natural Capital. So all of the capitals are important and contribute an integrated whole. So I say good for the IIRC for trying to get us all to think holistically. Maybe this is a base we can all build upon.

What do you think? Is there a convergence here that will help us advance both fields?

I was researching different aspects of Innovation, Intellectual Capital and Business Connections over recent weeks.

One comment struck me, it has been with me, nagging away in my brain for these last few days......can you help?

What do you make of this personally?

"The intellectual capital paradigm appears to be stuck at a crossroads of relevance"

Any thoughts, the context is yours, not in what or where I found it

A great case study for those of you seeking a development team to move your idea forward!

Case Study

I started this table last year and find myself going back to it more and more. It's a high level summary of the implications of the shift from the industrial to the knowledge era:

When you see it like this, it makes it clear that there is a fundamental shift in our economy and that we all need to continue to learn how to measure and manage in new ways. And why we see ICounting as the necessary complement to the accounting that continues to provide the foundation for our financial system. ICounting is still about money. But it digs deeper to map and measure the drivers of the financials.

What do you think? Does it capture the essence of the shift? What's missing?

The Polish Wikipedia not only mentions about the new branch of financial accounting. It also indicates the new forms of balance sheets for knowledge-based organizations. Just check entry for „Balance sheet (accounting)” (in polish: bilans (rachunkowość)). There you will find a point „Balance sheet for knowledge-based organizations” (in polish: bilans dla organizacji opartej na wiedzy). Here is my attempt of translation:

Traditional company’s balance sheet does not disclose the number of categories of intangible factors of production characteristic of the knowledge-based economy. Therefore, in accordance with the principles of the new branch of financial accounting for competence assets and intellectual capital, it is recommended to prepare the knowledge-based balance sheets or the full balance sheets alongside the traditional balance sheets. The knowledge-based balance sheet is a logical unfolding of the traditional balance sheet, which was completed on the asset side of the part of the "competence assets" and on the liabilities side of the part of the "intellectual capital" . Competence assets consist of the following reporting positions: knowledge, skills, experience and research projects. Intellectual capital consists of: adopted intellectual capital, generated intellectual capital and experience capital. In turn, the full balance sheet additionally includes "marketing assets" and "relationship capital". The introduction of these reporting categories does not break the balance sheet, since economic values presented in the new balance sheet positions arising from double entry records of business transactions on the corresponding accounts. The knowledge-based balance sheets and the full balance sheets are optional component of the financial statements, which can be attached in additional information. These supplement of the financial statements, although not mandatory, positively impacts on its quality, i.e. relevance, reliability, faithful presentation, prevalence of substance over form and completeness.

The Polish Wikipedia (pl.wikipedia.org) is the Polish-language edition of Wikipedia, it now has around 1,023,000 articles, making it the ninth-largest Wikipedia edition overall, the largest for a language which is official in only one country. It is also probably the first edition of Wikipedia with articles about postindustrial accounting and finance.

This is my translation of a part of the entry for „Financial accounting” (in polish: „Rachunkowość finansowa”):

Accounting for competence assets and intelellctual capital 

(in polish: Rachunkowość aktywów kompetencyjnych i kapitału intelektualnego)

The traditional financial accounting records of material wealth is not able to provide an image of intangible factors of production typical of the knowledge-based economy. This gap in the accounting system complements a new branch of accounting, namely financial accounting for competence assets and intellectual capital. Accounting for competence assets and intellectual capital allows you to enter into the books of the entity the knowledge worker competencies valued in the monetary terms and indicate their sources, then is possible to show in financial statments a true and fair view of knowledge-based enterprise. At the current stage of development of accounting it is not sanctioned legally mandatory part of the accounting system. However, its use provides a complete picture of the enterprise according to the principle of substance over form.

My english is far from an excellence, but I hope that reader is able to understand it. Is not? :-)

Source:

pl.wikipedia.org/wiki/Rachunkowość_finansowa

I was at the FMA-NH meeting on Tuesday night talking about, what else?, intangibles.

Here's an expanded version of the deck I used and thought I would share:

Organizations still stutter in their appreciating of where their true value resides. It resides in all their collective capitals.

So who is stepping up to the plate to get this nailed, buttoned down, once and for all clarified?

Recognizing where our true value resides is still a real organizational problem.

The real problem we have on most organizations is they lack the appreciation of what makes up their value, the real underlying wealth creating value, the one that truly ‘generates’. The tangible part is easier to appreciate (plant, land, material etc.) but is becoming a significantly declining part of the total sum of value of our organizations- sometimes it is only making up 30 percent.

It is our difficulties of understanding the intangibles as it is a very challenging task. Yet this has huge implications on the ‘health’ of the organizations we continue to invest in. Most organizations resort to “inferring” the value. This needs to change. The value today is in the interactions between the different components that make up our intangibles, out intellectual capital.

We are in need to identify what ‘drives’ organizations for gaining and sustaining real advantage, and showing why it has the potential for creating new wealth. This needs to be far more forwards looking; it needs to be more open and more transparent. The call is growing increasingly for a new valuation model. Static knowledge where we view financial numbers is just not good enough, we do need to understand the underlying dynamic capabilities that make-up the organization.

Conflicting signals of what makes up intellectual capital dominate still

The same old problem exists today that has plagued the concept of intellectual capital and its promotion. The community that has been arguing for this as a measuring of the real value of an organization remain divided, locked in their own interest and models; the conflicting nature of these different views has held intellectual capital back. Organization management will never invest the dedicated time and interest unless they see some level of coherence and understanding that can be translated into an actionable framework.

There have been many attempts but nothing has really changed our traditional reporting of financials with some (restricted) board discussions. Organizations are hiding under rocks, taking cover from the potential relentless sun that would force them to adapt if a community of practice came together and provided a definitive body of work that all could agree upon, it simply turns up the heat. We need to change this lack of organization focus by having a collective focus to offer.

We urgently require a common approach for measuring all our organizations capital.

Measuring often many intangibles is for many very uncomfortable territory, until the approach becomes ‘standard’. If those within the IC community continue to offer conflicting advice, organizations are very reluctant to commit.

Of course, many rile at the word standard so how about a common model or common approach?

Can the IC community come together and give them a clear model to work from? Please, or will it be eventually taken out of those existing hands, passed into the hands of a new, more business savvy group of individuals that can ‘piece together’ capitals in a way organizations will actually welcome and adopt.

To encourage acceptance you need clarity, a common understanding and approach, then the value potential begins to emerge with any adoption , because it offers clear language and common measurement instruments that organizations understand and can work with.

A growing imperative

It is a growing imperative to gain a common framework to measure the sums of all our capitals.Those that have spent many years keen to establish this, I'd suggest, or to be bolder, should find the ways and means to combine. In 2014 we need to "embrace", it is not premature to define a working model, it is the right time. Organizational adoption will remain stunted unless it 'believes' there is a good degree of certainty in what they will commit too, for investment and their learning. They need help, a common understanding that may not be perfect but sensible, practical and workable.

Standards Australia has recently announced that ISO International Organisation for Standards is considering a project for creating a Standard for KM, specifically a NWIP - New Work Item Proposal

Details of the proposal can be found here - http://www.jisc.go.jp/international/nwip/nwip_Knowledge_Management_Systems_Requirements.pdf - the ISO document acknowledges the Australian KM Standard - and includes Arthur Shelley as one of those listed as an expert in KM

found in actkm.org

Kerrie Christian [kcact@tpg.com.au]

 We are recognizing increasingly that both individuals and organizations needs to explore multiple ways to learn and find the right pathway for innovation learning as they progress.

This needs a more ‘dynamic social fabric’ to allow it to flow, it needs organizational encouragement. It needs mutual adaptions and mutual adjustment. The understanding of absorptive capacity framework significantly helps structure this. Also any dynamic social fabric needs to combine all the multiple capitals to make it dynamic.

For me these three simple rules have great intent.

This is my starting point through three simple rules I came across a while back, but presently I can’t find the reference source on this regretfully. These seem to me to have such a powerful intent:

1. Mapping organizational and project innovation processes in the context of a shared responsibility for innovation relies on the rule of taking full responsibility that allows all “to see” the space of innovation that exists.

2. Generalizing organizational and project knowledge in the context where knowledge is a central task relies on the rule of supporting routines for getting to that space and for keeping it open for all to share and explore:.

• -This helps people be collectively conscious of what they know and how they know it, build up and having expertise in are all dynamic routine activities to become competent experts or are clear on where to go to find out where it resides.

• - It also fosters respect for knowing and leaning from what others know and contributes to a growing improved skill set far more geared towards understanding higher-level conceptual frameworks

3. Spiraling across cycles of adaptation in a context of constantly looking for new opportunities relies on the rule for constantly searching for new opportunities that creates an organization in which people are used to innovation that becomes a second nature- “the chaos is that we are constantly innovating”. Also the rule provides people with vital resource of having ways to deal with inevitable surprises of innovation.

We need to find ways to combined general knowledge for wide awareness of available options, and specialized knowledge for assessing the systemic impact of specific options.We need to access knowledge consistently, assimilate what we have learnt to then translate this into new activities and new innovation. We need ‘master’ knowledge and progressively experiment to grow within ourselves and contribute to the communities we belong.

The ability to innovate is in the people, it is not in procedures. Our pressing need is to structure innovation activity into everyday work, to make it dynamic in capability and become the new routine work.  I feel these three simple rules just seem to make such good sense as a starting point for making innovation part of every person’s working day. Do you?

No way to drive a car in New York with a manual for running a steam machine.

The very base of the classic model has to be rewritten. Bug fixing is no loger enough.

http://bengin.net/nemo

Help to realize and spread the next economic model.

Here in Smarter Companies and if you'd like in Project NEMO - with its INSEDE (Institute for Sustainable Economic Development) with a lot of preliminary work - too.

We reengineer and design an economic model that is based on

(a) real human's needs

(b) human's potential to solve problems and

(c) the vision and knowledge that a better solution is possible.

and that gives Management a fundamentally new logic, arguments, metrics and tools for more sustainable - and profitably - decision making.

Interested?

Thank you for your support as we complete our first year! of operations at Smarter-Companies. 

We have already trained 20 ICountants on five continents. It's an incredibly diverse group including experts in innovation, risk management, valuation, transfer pricing, accounting, intellectual property, engineering, technology and management consulting.

For 2014, our goals are pretty focused: 

• Promote the open development of ICounting 
• Expand the network of trained ICountants
• Support our foundation ICountants in building their businesses
• Continue to develop our ICounts Graphs measurement platform

We are currently developing ICounts Graphs projects in the software, service, non-profit, education, marketing, accounting, private equity, knowledge management, healthcare and franchise industries...and we're just getting started!  

Continuing from my last post "Value Creation comes from understanding where it resides"

Where should we start in putting the value into our innovation efforts?

Our innovation value needs to come from our abilities to articulate the business case, an area of notorious weakness for most organizations and its alignment into the strategic direction and goals the organization needs to pursue.

Not a bad place to start is constructing the business case on four value creation pillars, shown here:

The Four Value Creation Pillars Framework

Need- We need to always understand the place and value of innovation from the customers perspective. They ‘attribute’ value, we in organizations then set about convincing them it meets their needs. We always need to search for the customer jobs they are looking to be done. This is where the real innovation value resides. Articulating these needs within the organization and delivering innovation to these needs makes for a more sustaining innovation appreciation.

Uniqueness- innovation to be valuable has to be new; it has to improve on the existing. To achieve this we need to value our other ‘uniqueness’ – the internal innovation capital and how knowledge is translated from the initial idea into a commercial offering. We need to build around uniqueness found in our organizations, but you firstly have to know where it is located!

Strategic direction- the imperative for innovation to be ‘seen’ as successful is to align itself to the strategic direction. We need to know this direction, otherwise innovation remains uncertain, often ad hoc and misaligned. It is incumbent on our leaders to align innovation and strategy. There is no better place to begin than using the Executive Innovation Work Mat to make this a comprehensive document to give this strategic guidance and create the conditions for innovation to thrive and get into a sustaining rhythm

Core competencies- we need to know what is needed. Firstly to understand the type of innovation we want to achieve to align to the strategic direction and goals. Again there is no better place to start than work through the “collaborative innovation framework” provided in a open commons platform. Building the core innovation competencies requires building the capacity to innovation, the capabilities and competencies to make successful, sustaining innovation to happen.

Any thoughts?

 I had a meeting last week with an organization in the desert at the foot of a mountain. Just a plain brick building in a small office park. But inside, there's a hotbed of innovation. And they’re facing a challenge I see more and more in effective companies today: they’re really good at what they do and they are trying to figure out how to scale it. Their core business involves community mental and physical health services. They do that well and can’t help themselves—they are always thinking of new ways to solve problems faced by their staff, their medical partners and their patients. A software, an electronic wheelchair accessory, a simple robot. There are some amazing things going on in that desert. But what to do with all these ideas?

I’ve seen this dilemma before. At the staffing company that was so good at training their own people that their clients wanted them to offer training services. At the software company where their clients wanted them to provide high-level services to solve their biggest challenges. At the equipment repair company whose clients wanted them to teach them how to use the equipment more effectively. In each of these cases, the combination of smart, engaged people and an innovation-friendly culture naturally lead to new opportunities. This isn’t new. Humans have been inventing and innovating throughout our history. But with information technology, it’s getting easier and easier to create innovations today. The pace and the scope of the opportunities is growing. At the human services firm, the problems they solve are almost universal. A good idea could change the lives of millions of people. But how to reach those millions?

In other words, how to scale these innovations? It takes more than good people and good ideas. That’s where intangible capital thinking can help. What are the basic needs of an organization that wants to commercialize and scale their innovations?

• Human Capital – Employees with mastery of the core competencies key to the organization’s area of focus. Management with an understanding of the business and how to nurture innovation. A board supportive of the ups and downs of innovation.
• Structural Capital – Some kind of innovation process. A balanced approach to intellectual property that protects key ideas while encouraging open collaboration. Marketing and sales processes to make the crucial connection with customers for the innovations.
• Relationship Capital – Access to a good customer base. Links with partners that can help develop and/or commercialize new ideas.
• Strategic Capital – A healthy culture. A market opportunity. The right business model to sustain and fuel the growth of the core business and new innovations.

We call this collective system the Knowledge Factory. It really should be thought of as a system. Each component is important. If you want to create your own hotbed of innovation, or scale it, think systemically. Identify the pieces you have and/or need. Then measure it, manage it, scale it. Where to start? Check out the ideas at Graph My Firm.

So to understand value you need to have a well thought through strategy. Briefly it consists of

1.  Recognizing opportunities that are going to create new value
2. You need to recalibrate your innovation radar and be selective on what offers new value, not just sustaining existing value,prune your pipeline to give additional ‘weight’ to what gives new value,
   
3. Organize the organization into having a distinct, unique and consistent innovation rhythm of research, develop and then repeating this, time-in and time-out. 
4. Lay in the essential rewiring the organization always needs for aligning innovation to strategic goals, by making important organization changes and rock- solid comprehensive governance structures and metrics that seek to measure ongoing value from cradle to grave and finally,
5. Reinforce the value by knowing the success factors within the make-up of value- exploring all the capitals and stocks.

Ultimately value creation has transformation power.

Value creation is a core need both in innovation and strategy. We do need to align our value creation story far better from our innovation activities. This is one of the critical sources of misalignment innovation leadership needs to address.

Understand the make-up of value creation, in the capital, stocks and flows and capture both the intangibles and tangibles better for the value creation story.

If this is well seen, understood and determined, it will deliver more on that promise that innovation does provide.

We do need to work on the benefits and value story so much more, otherwise innovation remains outside the core of organizations, always lagging behind the huge effort to support the business as usual

When a team of people sit down in a company today, the conversation is much less likely to be “What’s our strategy?” and much more likely to be “How are we going to become more innovative?” This is because it’s getting increasingly hard to win by setting a strategy and sticking to it. Not that innovation is easy either. But companies know they have no choice but to try to make it happen.

So how do you “make” innovation happen? Well, the first instinct that most people have is to set up a process. This can be an important step. But it’s not a cure-all. How do you get ideas into the process? How do you know which ideas to choose? How do you set yourselves up to execute on the ideas? What will it take to be successful?

For me, the short answer is intangible capital. The elements of your IC—human, relationship, structural and strategic—are also the ecosystem that makes innovation possible. You need to have the right people, the right partners, the right knowledge and the right culture to feed that innovation process.

A slightly longer answer is in this new video about growth and innovation that we created using our ICounts card game.

To become a more innovative organization, pay attention to your intangible capital ecosystem. Identify, measure and manage your resources with an eye to creating the best environment you can to inspire and cultivate the best new ideas.