Member Blogs

Narrative formats have both risk and benefit to report upon.

Investors chase for a better understanding of what is actually going on within organizations. Organizations push back, yet attracting fresh and on-going investment is the life blood, so some form of ‘uneasy dance’ takes place while you have no regulatory guidelines or enforcement.

Information gaps are increasing, sometimes for both the investor and the manager fail to be identified and recognized, as serious warning signals. Many get caught in this inability to identify ‘what makes up’ the organizational capital and lose their investments or jobs from this lack of appropriate understanding.

Strategic and operational weaknesses need to be ‘jumped upon’ very quickly, if spotted, yet the more intangible ones often remain hidden to investors and even management and what effect this might have. High profile people, when they leave create these tensions and performance concerns. Can you imagine if you have a real drift of your talent walking out of the door, what that does to future performance?

Achieving a greater transparency

We need to have a more transparent understanding of the value of people, of the systems, dependencies, relationships and these make up intellectual capital. The push for achieving better board governance and effectiveness does push the board to question more and more, in the depth and breadth of information they receive and act upon.

The arguments for putting in place more effective narratives of performance that connect across the business in more coherent and effective ways, surely reputations are enhanced? By thinking about ways to align reporting and communication strategy, the ‘being forced’ to collate a coherent set of narratives and contextual information has market attractiveness advantage. It gives growing confidence. So where should the unit of assessment take place?

Stating value creation and business models has the narrative potential

One view I particularly favour has been outlined by Vivien Beattie and Sarah Jane Smith in their academic paper “Value Creation and Business Models: Refocusing the Intellectual Debate” We should focus on the business model, even for our intangibles or by extension our knowledge-based capital. I think this is absolutely right.

The business model and how we can describe it has become more ‘top of mind’ and significantly improved in its place through visual tools like the Business model canvas by Alexander Osterwalder and Yves Pigneur- Equally a number of other visualizing techniques, caught up in this canvas modelling movement, such as the culture mapping canvas, business opportunity canvas or the different value proposition discovery methods, have the incredible potential for the most powerful way for narrative reporting to make a business come alive.

Today the people side, or the articulating of the value of the intangibles, is not adequately addressed in these canvases we have. We need to bring them into telling the business model value story far more.

Are we advancing our understanding of knowledge-based capital?

The good news today, is we are seeing some advances on capturing and measuring knowledge-based capital. Recently the OECD produced one of its usual 300 page plus reports – so few read them – on “Supporting Investment in Knowledge Capital, Growth and Innovation”

This report summarizes OECD’s attempt to provide the evidence of the economic value of knowledge-based capital and to help meet the policy challenges it raises. These are across the areas of innovation, taxation, entrepreneurship, competition, corporate reporting and intellectual property. Something that is not easy to summarize at all, as all have simmered away under different ‘doctrines’ and ‘churches’ of denomination, pursuit and faiths.

Learning to communicate our understanding of our real internal value needs a concerted unitied effort

We do need to find better ways to unite and describe the value creation that knowledge-based capital brings. In particular our intellectual and organization capital and the importance this has to have sustaining investment put into it for future wealth creation

Part two of a two part blog

Were you aware that the value of many of the world’s most successful companies resides almost entirely in their KBC. In 2011, for example, physical assets accounted for only about 13% of the value of Nestlé, the world’s largest food company. (source OECD)

What is knowledge-based capital?

OECD describes it as such: Knowledge-based capital comprises a variety of assets. These assets create future benefits for firms but, unlike machines, equipment, vehicles and structures, they are not physical. This non-tangible form of capital is, increasingly, the largest form of business investment and a key contributor to growth in advanced economies.

One widely accepted classification groups KBC into three types: computerised information (software and databases); innovative property (patents, copyrights, designs, trademarks); and economic competencies (including brand equity, firm-specific human capital, networks of people and institutions, and organisational know-how that increases enterprise efficiency) (Corrado, Hulten and Sichel, 2005).

Knowledge-intensive is the new wealth creator

As products are becoming more knowledge-intensive, educations have produced knowledge aware and savvy employees. We are pushing outside our one organization into growing networks to collaborate where this is this consistent acceleration of new information and use of communication technologies all intensifying the need to manage knowledge. Knowledge is today’s valuable commodity, yet we poorly measure it.

Equally, knowledge-based capital is essential to investment decisions and where the potential for growth can lie. The use of data analytics, external networks, outsourced R&D and our changing management practices are reinforcing that organization change is needed, yet we are not sure on where to invest or how to structure these. We are poking around a little bit too much. More like searching for the needle in the haystack, rather than controlled experimentation and exploration.

Ben Bernanke, the chairman of the United States Federal Reserve, suggested within his speech at a conference on the New Sources of Growth project in 2012 : “As someone who spends a lot of time monitoring the economy, let me put in a plug for more work on finding better ways to measure innovation, R&D activity, and intangible capital. We will be more likely to promote innovative activity if we are able to measure it more effectively and document its role in economic growth”

Two parts to this. Here is the first part.

We all know that innovation is hard to measure.

Assessing innovation capabilities can be particularly hard as they are made up of so many intangibles. We need to frame these capabilities in much better ways, as they mostly remain shrouded in mysteries to render it difficult to know what each business actually needs to  invest in, to achieve their goals. Knowing what and where they need to improve their innovation capabilities becomes a critical need to know point for gaining unique competitive advantages.

So much of innovation activity is left to chance and it leaves all involved as vulnerable, open to being beaten to the next ‘big’ innovation breakthrough. I would strongly argue that organizations should build their innovation capabilities in systematic ways, yet few do, let alone understand what this truly means. We simply need too.

Understanding the ‘beating heart’ of organizations

One of the biggest gaps is trying to put a finger on the pulse of what makes up innovation. So much of the capabilities are intangible, locked up in those intellectual capitals of the organizations. Those that center on  people, their networks and relationships, the make-up of the structures that support their activities or restrict them, the ability of applying good or bad practices, the every day routines of each of the individuals that work within the organization.

These touch the very nerve center of organizations; you are striking at the very core of organizations, those intellectual combinations they make up so much that determines organizational performance. They expose or they enhance organization performance.

To some degree management wants to be able to measure these intangibles but it also can provide some ‘chilling and damning’ evidence of inefficiencies and managements lack of ability to really improve internal performance, let alone market performance. It is usually the external factor, of poor market performance, kicking in that galvanize the need for internal change. This then becomes reactionary, often too late and market advantages can quickly dissolve.

Where the future beckons is that Knowledge-based capital needs fully capturing.

The critical need today is to capture the rise in the importance of all the knowledge-based capital aspects. Business organizations are recognizing knowledge-based capital.

Knowledge-based capital is critical. As shown above it is becoming more important than the product. Organizations are recognizing the value of knowledge. How do we capitalize on this grwoing recognition in ways that the management of organizations can relate?

Part two outlines one specific suggestion

My reading pile has grown and gotten a little out of control in the past few weeks. I promise to dig in more on some of these many developments. However, many of them the continuation of issues/approaches we have discussed before and change still isn’t happening.

The pile includes new information about Shared Value (Porter), Knowledge-Based Capital (OECD), IIRC, Shift Index and Cultures of Purpose (Deloitte), End of Shareholder Value (Drucker Institute). They are all talking about the need to think long term. To fuel innovation, solve the world’s problems and create more sustainable results for companies, regions, countries and the global economy.

All of these assume a different kind of organization and different approaches to management than generally exist today. To me, one of the biggest barriers to achieving these ideals is to give people inside organizations tools that help them see what’s important. Most people recognize that people are important, relationships are important, culture is important, knowledge is important. That innovation is necessary but that it is driven by a different dynamic than the traditional industrial views of top-down strategies and imposed changes by managers.

But most people don’t have a way to show how and why these things are important, how they are linked to the financial and quantitative metrics that dominate most conversations about what’s important inside the organization. In my mind, all of these calls for change and longer-term thinking are calls for a new kind of measurement system. For me, the calls ultimately lead to ICounting.

ICounting focuses on the measures that matter to an organization and its stakeholders. It measures the intangibles like people, knowledge, processes, relationships, culture, reputation and purpose. It reverses the perspective on measuring. Instead of using inside-out quantitative or financial measures, ICounting uses outside-in stakeholder assessments. Putting stakeholders first is one of the ties binding together the calls for long-term thinking. So it’s only natural that key corporate measures should be based on stakeholder feedback.

I believe we are on the cusp of an extraordinary era in human history. That there exists the possibility to drive innovations that solve problems of environment, health, education and create greater shared prosperity. But it’s not going to happen by optimizing quarterly results. Businesses will ultimately make more profits than they ever could have by thinking short term. ICounting is a part of the solution. Join our movement for measures that matter.

 Another great article on the emerging reporting framework under IIRC. While the approach moves us into a new environment on statutory reporting I think it would benefit from a closer tie in with the work on intangibles. The potential links are there when you look at the six "capitals" that are discussed.  http://www.theguardian.com/sustainable-business/finance-reporting-evolve-integrated-rating

I tend to use the elephant analogy a lot. I’ve used it a number of times in the last few weeks. I used it when I was at the Unycom conference in Graz and just used it again in conversations with John Dumay, our academic collaborator from Australia (who happens to also be a big Red Sox fan and has been at Games 4, 5, and 6). And I just used it again on a career panel for Columbia grad students.

The analogy refers to the poem by John Godfrey Saxe

It was six men of Indostan
To learning much inclined,
Who went to see the Elephant
(Though all of them were blind),
That each by observation
Might satisfy his mind…

On the career talk, some of the other panelists were recommending that the students develop deep technical expertise. It’s good advice as far as it goes. But it’s also dangerous advice. Because technicians who can’t see the big picture can easily become the blind men. And it happens to everyone at some time.

Because most people and most organizations have specific areas of expertise and are focused on a specific point of view. Specific areas of expertise are necessary for the success of organizations. But if you don’t can’t talk about how the pieces relate to the overall goals of the organization, you’re not going to add nearly as much value within your team, your organization and your external ecosystem. Unfortunately, very few are prepared to see the whole picture, the whole elephant if you will.

This is such an acute problem because of the shift to the intangible knowledge economy. The core assets and operations of a company are literally invisible and neither measured nor managed in a disciplined way. It’s reached the point where 80% of the corporate value of the average business in the U.S. is intangible.

For me, intangible capital is the tool through which we construct a shared understanding of all of the elements of an organization and teasing out a picture of the whole elephant, how it all works together as an ecosystem—human, relationship, structural and strategic capital—and most importantly, how the ecosystem creates value for both stakeholders and shareholders.

Use your expertise but don’t forget to open your eyes to the big picture. Work to understand how what you do fits into the bigger picture and develop a shared picture with your colleagues.

Our open source ICounts visualization tools are a great place to start.

An X, Deng H, Wang Y, et al. (2013)An Integrated Model for Effective Knowledge Management in Chinese Organizations[J]. Program: electronic library and information systems, 47(3): 320-336.

An, X. et al.  (2012) Knowledge Management Methods and Technologies. Nanjing,  Nanjing University Publishing House.(monograph, Chinese)

An, et.al.      (2013) Knowledge Management: An Integrated Approach. Beijing, Renmin University of China Publishing House (Chinese version). ( English version  by Ashok  Jashapara)

There were people from 40 countries who attended International Conference on Intellectual Capital and Knowledge Management (ICICKM) in DC last week. As always, it was great to see old friends from our community.

Our contingent included Xiaomi An, LinLin Cai, Paul Okeke, Dan Paulin and Paul Tolson who all presented great papers. Jon Low and Debra Amidon gave the keynotes. And the current, past and future co-chairs of ICICKM were all present: Annie Green, Vincent Ribiere and John Dumay. Our ICountants Melanie Sutton, Jodie Cohen-Tanugi and I were there carrying the ICounting flag (Melanie gave an amazing presentation that we filmed and will share later). [if I missed anyone, please let me know and I'll get you in the list!]

The thing that I always come away from these events with, especially so this year, is the thought that there are so many people all trying to tackle the same challenges all across the globe. These occasional conferences are good. But to really change the world, we need to turn it into a more continuous conversation (don’t ask how many times I asked people to post their work to our community:)

Some papers that caught my eye:

• IC of universities (especially because we have a Graphs project starting with a university in November)
• A paper about Collective Intelligence (CI instead of IC!) that examined the workings of three on-line citizen communities in Lithuania—glad to see this line of thinking in the IC world.
• An individual-centred model of intellectual capital
• And many more that all continue to contribute to the overall conversation about IC.

I had a number of great conversations with John Dumay about his plans for next year’s conference in Sydney. He plans to encourage more practitioner cases and Melanie Sutton’s great presentation made it clear that we practitioners bring a lot to the discussion.

The best thing about these conferences is that I return to my work energized that we are a much bigger movement than any of us (or anyone else) realizes. Let’s keep working!!

(apology to readers and note to self: you’re carrying around several devices with cameras. please take pictures next time)

There’s been quite a firestorm on the web started by Chris Heuer declaring Social Business Is Dead – Long Live What’s Next.  I’m interested because I see social business as a parallel and overlapping concept with intangible capital and new forms of measurement.

Basically, Chris say that the words and the concepts of social business have not been embraced by large corporations:

Through my conversations with colleagues and executives at large enterprises, the words Social Business have not struck the right chord with leaders. The movement has failed to earn their faith, trust and budgets in a significant way. While the ideas behind the moniker are invaluable in defining the future of work, most large companies simply aren’t buying into or investing in Social Business transformation efforts in more than a piecemeal sort of way

The underlying assumption here is that for an idea to succeed, it has to be accepted by big business. But this assumption contradicts everything we know about innovation. All of us in the business of disrupting management practices have to understand that the people we are disrupting are managers who are comfortable in their positions at the top of the pyramid. Large companies are full of such people. And, as Chris points out, there aren’t a lot of immediate motivations for the kind of wholesale change that social business implies.

This assumption in itself shows a bit of an industrial mindset—the idea that change can and must come from leaders and bosses—even though the concept of social business clearly would say otherwise. And that consultants can co-opt the power of managers and make broad changes in an organization. This is the irony of our era. All of us, even at the vanguard of change, are creatures of our upbringing. Every one of us in the workforce (and unfortunately even my sons who are in college) is the product of an education system that was, like all the rest of our institutions, optimized in the industrial era. We are industrial beings trying to cope with a post-industrial reality.

One of the basic concepts of that reality is that disruptive change comes from the bottom of markets—in this case, from the bottom of the management pyramid and the external environment of a company.

This means that the hard work of selling new ideas has to be done at the grassroots level. Our work is to empower people with tools that they can use to do their work better. It has to succeed there and filter up. The days of top-down, legislated change are over (as if they were ever that successful to begin with). When the success of your business depends on a smart, engaged workforce, you need for your people to be part of any change.

I’m heading to DC later this week to an academic conference, ICICKM. On Thursday I’ll be presenting a paper with John Dumay that basically says that practitioners have to get out of the cathedral and stop legislating how next generation business should be measured and managed—and get into the streets as missionaries to help empower people with the skills and tools they need to be successful.

Everything that Social Business and Intangible Capital are about tells us that power comes from the people: from your employees and customers and communities and stakeholders of every kind. Social Business isn’t dead. The idea that’s dead is that big business will show us the way to create social businesses. Don’t get to the people through the bosses. Get out and sow change in the streets.

Latest data and publication from McKinsey reiterates the fact that successful companies manage and develop their intangible capital more effectively. McKinsey has coined it as TCR, Tangible Capital Ratio

Oct 2013, McKinsey: Intangible Capital

Check exhibit 2 which highlights the difference in intangible capital between top and bottom quintile companies

Awhile back, I developed a free tool for evaluating IP using IC concepts. A number of people have asked me to bring it back so I am providing it here (see terms of use below). Let me know what you think. Maybe we’ll automate it again….

Background

Most companies develop intellectual property for their own use. In this situation, the ultimate success and value of a specific piece of IP ends up depending on the success of the business supporting it. This QuickScan allows you to test the strength of the business resources that your organization intends to use to exploit your IP. It examines the four elements of intangible capital that are necessary for any business:

IP Mangement QuickScan

The tool was designed for a four-point scale: 1-Below Average, 2-Above Average, 3-Average, 4-Best. Once you score your IP, use the scoring table below to interpret your results.

Human Capital

• How would you rate the management team’s understanding of what it will take to commercialize this technology?
• How would you rate the management team’s knowledge of the industry related to this technology?
• How would you rate the employees’ competencies related to production/delivery of this technology?
• How would you rate the employees’ competencies necessary to renew and continue to build this technology?
• How would you rate the employees’ competencies necessary to support customers of this technology?

Structural Capital

• How would you rate the company’s ability to create an effective process for producing the technology?
• How would you rate the company’s ability to create marketing processes appropriate for creating demand for this technology?
• How would you rate the company’s ability to create sales processes appropriate for selling this technology?
• How would you rate the company’s knowledge base related to this technology?
• How would you rate the company’s access to related technologies that it will need to commercialize this technology?

Relationship Capital

• How would you rate the company’s understanding of the target market for the technology?
• How would you rate the fit between this technology and the company’s existing customers?
• How would you rate the company’s access to the right prospect group for this technology?
• How would you rate the company’s access to the right partners to produce and deliver this technology?
• How would you rate the company’s brand as consistent with this technology?

Strategic Capital

• How would you rate the fit between this technology and the company’s existing business model?
• How would you rate the company’s ability to create an appropriate business model for this technology?
• How would you rate the opportunity in the marketplace (strong opportunity usually means fewer incumbent competitors)?
• How would you rate the outlook for the market need that this technology is addressing?
• How would you rate the level of freedom from regulation in the market for this technology?

As mentioned above, this was designed for a four-point scale: 1-Below Average, 2-Above Average, 3-Average, 4-Best. This scoring sheet has some ideas on how to interpret your results.

This is obviously a tool used as a first level analysis of your IP. Our ICounts Graphs platform provides a much more robust analysis. If you are interested in understanding the Graphs or any of our other methodologies, we’ll put you in touch with one of our ICountants.

Terms of Use: I developed this approach initially for IPR Plaza, Amsterdam, Netherlands as a free on-line tool (which is no longer available). I make it available here under a Creative Commons Attribution-NonCommercial-ShareAlike license 

1. They are humble
2. They seem to lack ego because they are comfortable with who and what they are.
3. They have opinions but never push them on others
4. They don’t care about titles or prestige but they don’t exhibit false or unnecessary modesty either
5. They are committed to principles but are detached from outcomes 
6. They live the “Serenity Prayer”
7. You trust them, unless you are a troublemaker. Then they unnerve you
8. They don’t insist upon being heard yet are willing to speak if you are willing to listen
9. They support growth 
10. They don’t sweat the small stuff. But they seem to see “everything” and understand most things.
11. They are kind. But don’t mistake their kindness for weakness. Few are stronger in spirit or character.
12. They listen more than they speak and understand more than they show.
13. They are committed to creating the next generation of elders but do not seek followers.
14. They have strong, steady moral compasses that are not affected by the “group consciousness”
15. They are, at all times, students, teachers and learners about life.
16. They believe in a power greater than themselves.
17. They are wise enough to be forceful and powerful when it is in the best interest of the greater good
18. If they had a motto it might read something like: I am what I am and I will be that with as much honor and grace as I can muster.

Leif Edvinsson sent me a link to this article last week entitled The Long View: Why “Maximizing Shareholder Value” Is On Its Way Out by Rick Warzman, the Executive Director of the Drucker Institute at Claremont Graduate University. I support this movement and think we in the IC movement are working in the same direction.

I was a young banker in the 1980’s when the dogma of “shareholder value” as it is currently conceived started to take hold. I remember what an attractive idea it was. It’s a deceptive term because it sounds like a noble cause, building value for those invested in a company. In practice, it has lead to dangerous distortions in corporate thinking and justified all kinds of bad behavior. You see, the thesis that it is the job of a corporation and its management is to maximize the fruits going to the shareholders ignores what makes a company successful--engaged employees who are motivated to do their best work and focus on solving problems for customers and other stakeholders of their organizations.

And the application of the concept has been measured by tracking short-term movements in the stock price of the company. Traders on Wall St. tend to have a short-term perspective and drive this short-term thinking. (By the way, the widespread use of stock incentives for management teams, which sounds like it would promote long-term thinking actually serves as an incentive for the managers to adopt the trader mentality)

There are a couple ways that intangible capital (IC) thinking and ICounting can be part of the cure for this.

First of all, IC uses a detailed inventory of the key drivers of corporate success. The financials used as current measures of success were designed to show the operational cycle of a manufacturing business. If you are buying raw materials and converting them to finished goods, the income statement, balance sheet and cash flow statement are powerful tools for understanding how things are going.

If you are solving problems and innovating using computers, data and knowledge, these financial statements are worse than useless. Yes, they show the ultimate profit number, but they totally miss the operations of the knowledge factory driving those numbers, including the strength of your people, relationships, knowledge base and culture. And the financials treat investments in these intangibles as expenses, leading many managers to cut expenses and wipe out their most important productive assets at the first sign of trouble. (See open source tools to conduct and present these inventories here)

This skewed accounting has lead us to the point where 80% of the value of the average business is intangible. But no one has good data about where this value comes from. This leads to the second contribution of ICounting: it generates measures of these intangibles to support thinking about long-term value creation. When business was dependent on tangible assets on the balance sheet (equipment and factories), it was possible to “see” the value of the productive assets. Companies were held responsible for taking care of their physical plants. Today, business is dependent instead on intangibles assets (human, relationship, strategic and structural knowledge). But since none of this value is measured or tracked, no one holds management teams responsible for the care of their intangible productive capacity.

How do we in the ICounting movement measure intangibles? It’s an answer that I think Drucker would like since he often said that the most important thing for a company is to create and keep a customer. He also wrote about the importance of people in knowledge-based businesses (which today is just about every business). ICounting considers this entire ecosystem.

ICounting measures intangibles by listening to and tapping the wisdom of corporate stakeholders: managers, employees, customers and partners. These stakeholders know better than anyone how well a company is doing. If you have consensus among all these varied stakeholders, you have a very compelling measure of the strength of the organization (lack of consensus brings its own message).

Listening to all the people invested in your success is a powerful path to long-term thinking.

This approach is a primitive proxy for what I believe will ultimately be the future of enterprise resource planning (ERP) measurement systems: continuous outside-in stakeholder metrics. In today’s social technology-fueled markets, companies are vulnerable (as they should be) to the reactions of stakeholders at every touch point between the their operations and their customers and communities. In this world, outside-in metrics are much more important that the traditional inside-out corporate measurement systems used today based on financial and quantitative metrics.

It’s still right for an organization to return value to its shareholders. But this should be sustainable, long-term value. That kind of shareholder value can only come by thinking first about stakeholders. So what better way to build this kind of value than by measuring stakeholder experience with the organization?

I hope that we can continue this conversation. Many, many people know in their minds and hearts that the future of our companies and our economies will require greater long-term thinking. The ability to measure and manager intangible capital is a key part of this conversation. Do you agree? I look forward to hearing feedback.

I just got back from another trip to Europe. This time I was at the Smart Insider user conference for Unycom, the software company that’s been doing exciting work for IP departments of many European (an now U.S.) firms.  The conference opened with a really fun conversation with Peter Florjancic, a 95-year-old local inventor who has had more than 40 successful patents that he monetized. His talk energized everyone about the power of invention and innovation.

I was up next talking about IT-IP-IC, the triple threat of the modern business. It was a great theme for my keynote and I was really encouraged by the reception. In the past, many in the intellectual property space have tended to think very much inside the box of IPR (IP rights), just the IP that is protected by specific laws (mostly as patents and trademarks, some as copyrights and trade secrets). But it was clear to me as I spoke with the Chief IP Officers (CIPO’s) of some of Europe’s major companies that there is a growing appreciation of IP more broadly. I even had a great conversation with one CIPO about the key importance of process as a corporate asset.

Unycom set up three half-day sessions on big themes where IT meets IP: collaboration, big data and security. Of course, IC thinking contributes to each of these topics. To be implemented successfully, each requires systemic, holistic thinking--you can’t think about any of them without balancing human, relationship, structural and strategic capital.

I have to say that it was also very cool to visit Graz, a city in southern Austria that I’ve never reached in past trips. It is a beautiful combination of old and new with buildings from the 12th and the 21st century, and wonderful local foods including the locally-produced pumpkin seed oil which is my favorite new salad ingredient!

Finally, I was thrilled to be able to catch a cup of coffee with Manfred Bornemann and Karin Grasenick, two practitioners who have a lot of experience with IC thinking and consulting. They promised to share more of their work with our community in the future!

Now we’re hard at work getting ready for ICICKM next week in Washington DC. I’m looking forward to catching up with friends and colleagues there from all over the world. It’s conversations and connections like these across the globe that help build momentum for our global movement to change how companies are managed and measured—and unlock the potential of people and organizations for greater prosperity.

Thanks to my hosts in Unycom and Graz. It was a great trip!

Today, the OECD released its new report on Supporting Investment in Knowledge Capital, Growth and Innovation. This final report of their project on New Sources of Growth: Knowledge-based Capital. (See also an OECD video describing the research).

I have a special interest in this report as the project kicked off at our New Building Blocks conference in 2011. For more on that conference see the Intangibles Conference Report September 2011 and my white paper New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value -- Conference Observations. A one-page summary of the paper is also available and more materials are available at the conference archives. The report also references a number of Athena papers on the use of intangibles in financing.

We will be posting more on the report later, but here is a summary. To begin with, OECD is using the term "knowledge-based capital" (KBC) to describe intangible assets including R&D, data, software, patents, designs, new organizational processes, business models, workforce skills and firm-specific skills. The report looks specifically at public policy in the areas of innovation, taxation, entrepreneurship, competition, corporate reporting and intellectual property. Their findings and recommendations are as follows:

Key findings
•  Business investment in KBC helps boost growth and productivity. Studies for the European Union and the United States show business investment in KBC contributing 20% to 34% of average labour productivity growth.
•  KBC is transforming what makes firms competitive. For instance, in the automotive sector, software is increasingly prominent in the cost of developing new vehicles, with high-end vehicles relying on millions of lines of computer code.
•  Countries that invest more in KBC are also more effective in reallocating resources to innovative firms. As a share of gross domestic product (GDP), the United States and Sweden invest about twice as much in KBC as Italy and Spain, and patenting firms in the United States and Sweden attract four times as much capital as similar firms in Italy and Spain.
•  Overall tax relief for R&D, when factoring in cross-border tax planning by Multinational Enterprises (MNEs), could well be greater than governments foresaw when their R&D tax incentives were designed. Countries may be losing tax revenue on the output from subsidised R&D and also losing out on domestic knowledge spillovers associated with production. We also need to recognise the risk that increasing countries' reliance on tax incentives to boost R&D could increase the amount of foregone tax without a commensurate rise in innovation.
•  Furthermore, firms that are not part of a multinational group of companies - often small and young firms - may be placed at a competitive disadvantage, relative to MNEs, in undertaking and exploiting R&D. In addition, more data are needed to estimate the amounts of income being shifted to low and no-tax countries through MNE tax planning involving KBC.
•  Industries founded on KBC raise new issues for competition policy, particularly in the digital economy, where competition differs in some respects from other sectors.
•  Intellectual property rights (IPR) are an increasingly important framework condition for investing in KBC. But IPR rules have not always kept pace with technological change - many copyright systems, for instance, were designed for a world of paper and print and may inhibit new digital services.
•  Across countries, there is a positive correlation between the market value of firms and investment in KBC. But corporate financial reports provide limited information on companies' investments in KBC. This may hinder corporate finance and impair corporate governance.
•  A fuller understanding of innovation and growth, and better policy, require better measurement of KBC and common measurement guidelines.
•  Growing business investment in KBC amplifies the importance of getting human capital policies right. Human capital is the foundation of KBC: software, for example, is essentially an expression of human expertise translated into code.
•  The rise of KBC also has profound implications for employment and earnings inequality. A KBC-based economy rewards skills and those who perform nonroutine manual and cognitive tasks, but may also reward investors (who ultimately own much of the KBC) over workers.

Key policy recommendations
•  Getting the key framework conditions right for investment in KBC is essential and can be a low-cost step for policy makers in fiscal terms. Appropriately crafted framework conditions are important for the creation and retention of high-value jobs in global value chains (GVCs).
•  Well-functioning product and labour markets, and systems of debt and early-stage equity finance, are essential to encourage KBC investment. Bankruptcy laws that do not overly penalise failure are also important. Reducing the stringency of bankruptcy legislation from the highest to the average level in the OECD could raise capital flows to patenting firms by around 35%.
•  Policy makers should adopt an enlarged concept of innovation, beyond the conventional view in which R&D is pre-eminent. Other forms of KBC, such as design, data and organisational capital, should also be policy targets.
•  Policy should make it easier for firms to develop and commercialise new ideas by lowering the costs of failure and encouraging firms to experiment with potential growth opportunities.
•  Improved design of R&D tax credits, such as greater targeting to stand-alone firms without the cross-border tax planning opportunities available to MNEs should be implemented, alongside reducing the unintended tax relief for MNEs on KBC use.
•  Governments can take steps to facilitate companies' reporting of investments in KBC. In the near-term, countries are encouraged to develop additional measures via satellite accounts so as to maintain the international comparability of GDP.
•  Competition policy should: properly account for competition among platform providers; eliminate unnecessarily anti-competitive product market regulation; and effectively enforce competition law, which will protect and encourage innovation.
•  Creating economic value from large data sets is at the leading edge of business innovation. OECD governments must do more to implement coherent policies in the fields of privacy protection, open data access, information and communications technology (ICT) infrastructure and ICT skills.
•  In economies increasingly based on knowledge assets, IPR systems must be coupled with pro-competition policies and efficient judicial systems. Steps should also be taken to address the erosion of patent quality (whether patents reflect genuinely novel innovations, for example). There is a need for greater mutual recognition and comparability across IPR systems internationally.

There is a lot more detail in the full report. As I mentioned above, we will be posting more on the report in the coming days. But for those who care about economic growth (and that should be everyone), a full reading of the report is recommended.

(Cross posted from The Intangible Economy)

Everything you read about the Twitter IPO is talking about pieces of its intangible capital. Not a big surprise—it’s a perfect example of a social technology company built almost completely of intangibles.

But as someone interested in the field, I get frustrated that the holistic view that IC brings is often lacking. In an effort to gain such a view, I've brought together some pieces of the puzzle:

• Human Capital: Twitter has 2,000 employees. Interestingly, managers/employees own much smaller percentages than seen in comparable young tech companies (could be a good thing—see my comments on shareholders below). There’s no clear leader like Zuckerberg at Facebook or Page and Brin at Google. There’s also no woman in senior leadership (definitely a bad thing).
• Relationship Capital: Twitter has over 100 million Daily Active Users, over 218.3 million Monthly Active Users. The NY Times article explains that the whole business depends on users posting interesting things that attract readers and other users. Other forms of relationship capital includes Advertisers, 3 million websites that integrate Twitter, 6 million Registered Twitter Apps.
• Structural Capital: 6 patents, the platform software itself, 300 billion Tweets and related data about use of the platform
• Strategic Capital: Revenue model is based to date 85% on advertising (65% of which is mobile—better than Facebook) and 15% sale of data. But the model still isn’t profitable. Will it be in the long run? In the S-1, management explains their purpose as follows:

  The mission we serve as Twitter, Inc. is to give everyone the power to create and share ideas and information instantly without barriers. Our business and revenue will always follow that mission in ways that improve–and do not detract from–a free and global conversation. 

(Sources are listed at the end of this post)

I assembled the above summary using the inside-out kind of data we are used to seeing from and about companies. This approach uses financial and quantitative data to describe the essentials of a company. But there’s no consolidated view, like we used to have with the tangibles-based balance sheet.

Categorizing the data by intangible type and looking at how it’s connected can be interesting. In this case, it shows that not much is understood about the people behind the company’s success. It also shows how dependent the company is on its relationship capital—the primary structural and strategic assets are directly related to the relationship capital. And, you could make the case that the relationship capital is dependent on the continuing strength of the culture (strategic capital) and the people (human capital). But if we don’t know about management,  we don’t have a complete picture

How could we get clarity? That’s where I’m left wanting an outside-in measurement. How do the company's stakeholders view it?  Maybe the number of active users is a proxy for that. But that’s going to be a lagging indicator. If I had to choose, I would want to monitor the people and the culture as leading indicators. Catching a problem there would be far preferable to waiting to see it in the user data. This is why we recommend that companies proactively measure their key intangibles through stakeholder feedback. Meeting your stakeholder needs is the path to success for just about every company.

And this begs the final question about the IPO. If Twitter puts itself in the position of being beholden to Wall Street to extract more value from its intangible capital, what happens to its power to attract those all important users? In other words, how much alignment will there be between the shareholders and the stakeholders?

This is why I continue to believe that future Twitters and Facebooks will turn to their users rather than the capital markets for liquidity. In the Slate article referenced below, Matthew Iglesias makes the point that IPO’s today aren’t about raising capital, they’re about liquidity for early investors. This IPO replaces an interested, more engaged investor group for a more fickle, demanding investor group on Wall St, not the kind of relationship capital I would choose for a company whose value is so strongly based in intangibles like people, users and partners…

Sources:

NY Times: Twitter’s Biggest Risk is Losing You 

Tech Crunch: Twitter IPO by the Numbers

BusinessWeek How to Read Twitter’s IPO Filing

Slate Twitter’s S-1: Four Interesting Points

NY Times Curtain is Rising on a Tech Premiere With (As Usual) a Mostly Male Cast and story about management’s response on Twitter

I was sitting on my couch flipping through Fast Company last night and found two articles back to back in the Next section that are like a double punch for any businessperson who isn’t already thinking about how social technologies will change their world. (I was so struck by the double whammy, I looked to see if the editors noted the link between the two...I guess they just let them speak for themselves)

The first, You Sign, Companies Listen is about change.org where anyone can make a petition about anything:

Disgruntled customers have used Change.org to pressure insurance companies into covering denied treatments and force mortgage lenders to halt foreclosures. A 2012 campaign launched by 10-year-old Mia Hansen convinced Jamba Juice to ditch Styrofoam cups for an eco-friendly alternative. Another, started by 14-year-old Julia Bluhm, persuaded Seventeen magazine to stop Photoshopping models. In May of this year, 18-year-old Benjamin O'Keefe called out Abercrombie & Fitch CEO Mike Jeffries on the lack of larger sizes in the company's stores, and two weeks and 75,000 signatures later found himself in a meeting with Abercrombie execs discussing ways to make their brand more inclusive.

The website is providing the platform and also teaching people how to craft effective petitions that lead to real change.

The second article, Not Kidding Around, is about how young consumers are “angry, vocal and eager for change.” It quotes Umair Haque:

That stuff is really there, and we have to build different kinds of organizations. Otherwise the young are going to eat these companies alive. They don't trust them, they don’t want to do business with them. 

This is scary to many businesspeople because they are afraid that they could be blindsided at any moment by a seemingly random attack from a customer or activist. But, if you are thinking about the present and future of your company in the right way, you’ll be well ahead of this kind of “attack.” What’s the right way to think? How can you manage proactively? I have two basic pieces of advice:

First, focus your management efforts on your intangible capital. That means having and actively managing an inventory of your key intangibles (including human, relationship, structural and strategic assets) and working to keep it healthy and in balance. If tangible assets are key to your competitive advantage, include them here too.

Second, measure your intangibles from the outside in. Most companies are experienced with what I like to call “inside-out” measurement like financials and scorecards that use internal metrics of both tangibles and intangibles. But very few engage in comprehensive “outside-in” measurement exercises. This involves asking your stakeholders (customers, partners, communities, employees) how you’re doing with all of the key intangibles on your inventory (here's an example).

If you match stakeholder assessments against your inventory, you’ll create a heat map that tells you where you are doing well and where you are vulnerable. It gives you time to work on it all and communicate openly with your stakeholders about what you’re doing. Wouldn’t you rather do that rather than waiting for someone else to shine a light on your vulnerabilities when you least expect it?

That’s what ICounting is all about. It’s a set of proactive measures that looks at the intangibles that make up 80% of the value of the average business today. I guarantee you that your business is dependent on intangibles for success and competitive advantage. Measure them today and you won’t get blindsided tomorrow.