Intellectual Capital

Tracking a company's physical assets is straightforward enough, as long as you're counting computers, adding salaries and estimating heating bills. But managing intellectual capital is a different ballgame, and one in which few companies consistently hit home runs.

Intellectual capital involves a company's employee expertise, unique organizational systems and intellectual property. More simply put, intellectual capital is knowledge.

While the more familiar term intellectual property accounts for trademarks, patents and copyrights, intellectual capital is the information stored in our brains. Managing it means corporate executives must balance cold, hard numbers and performance measurements with more strategic concepts such as capturing knowledge in expert systems and quantifying its value to the company.

For example, if a company's book value is $10 per share and its stock is selling for $40 per share, the difference is often attributed to intellectual capital.

"[When you subtract book value from market value], the remaining is all the intellectual and knowledge and market capital. It includes all the patents they might have and all other intangibles," says Vish Krishnan, associate professor of management at the McCombs School of Business at the University of Texas at Austin.

Intellectual Capital Has Legs

Once a company identifies its intellectual capital, the next step is to maintain it. One way for IT managers to guard against losing intellectual capital is to have employees sign confidentiality agreements, which helps prevent trade secrets from walking out the door when employees do.

"The issue is, how long can you hold someone to a confidentiality agreement?" says James Burger, an intellectual property attorney at Dow, Lohnes & Albertson PLLC in Washington.

Andrew Scott, vice president of IT at Edison, N.J.-based AeroGroup International Inc., which makes Aerosole shoes, says the best way to manage intellectual capital is to keep employees happy. For its part, AeroGroup allocates $3,000 per IT employee annually for outside training and seminars.

"Very few people leave because they have more opportunity to learn somewhere else," Scott says. "It's because they gain so much they can take their salary to another level."

One of the techniques that Dollar Bank uses to manage intellectual capital is to keep employees involved in decision-making and planning, says Abraham Nader, senior vice president and chief operating officer at the Pittsburgh-based bank.

"You can't replace a human being with a computer," he says.

For example, the IT department sometimes becomes involved in marketing new products. This helps make IT employees feel like they're part of the entire process, Nader says, which is especially important because IT departments often feel isolated from what the rest of the company is doing.

Ron Griffin, CIO at The Home Depot Inc., says the Atlanta-based home improvement retailer has tried-and-true structures in place for measuring, maintaining and growing intellectual capital.

The company uses a nine-box grid system to measure each employee's performance and potential, and it offers developmental courses to bring employees up to speed on certain issues. The categories measured include leadership ability, how an employee fits into the Home Depot culture, financial acumen and project management capabilities.

Home Depot also holds business leadership programs for entry-level employees and offers a leadership development course for middle managers - all of which is aimed at expanding the company's intellectual capital.

But making sure employees are happy in order to retain them is only one way to manage intellectual capital. Creating expert systems by having employees share information - often through the use of computer systems - is another way companies can capture knowledge so it can be used once an employee moves on.

"Let's say you have an individual who knows a certain subject [such as customer relationship management] very, very well. You want to institutionalize that knowledge and to preserve it by capturing it in a computer," says Krishnan.

Building Knowledge

For its part, Home Depot posts a bulletin on its intranet with quick references on topics such as how to repair a leaky toilet or build a deck. That way, knowledge is available for employees to remain up to speed and to pass such information along to customers.

"It's not just about selling product in our business; it's a lot of the knowledge, and we train on that extensively," Griffin says.

Patents enter the picture as a more familiar way to protect a form of intellectual capital. But the demand for patents is outpacing the rate at which they can be evaluated and issued, according to Diganta Majumder and Imran Shah at Zefer Corp., a Boston-based consulting firm. This situation has resulted in what Shah calls "a patent land-grab."

In December, Majumder and Shah hosted a panel discussion on how advances in digital technology are affecting product distribution in the entertainment industry. Their case in point was the controversy surrounding Napster and the way the site allows users to download music through the Internet free of charge. The panel also discussed ways in which film and other industries might be affected by emerging technologies.

Along with experts in the entertainment and Internet security fields, Majumder and Shah discussed future business trends and the need for standards and coalitions to protect intellectual capital.

For starters, they recommended being proactive by identifying intellectual capital and implementing ways to capture it.

" 'Napsterization' would have been unthinkable five years ago, but intellectual capital is not a new thing," Majumder says. "We're being aggressive and saying you have to plan beforehand."

If you don't, be prepared for your favorite graphics to appear on your competitor's Web site when your Web designer leaves, or to train a department full of people when your company reorganizes and there's no documentation on what employees did or knew before they worked for you.

And to play it smart, be sure to enlist the help of consultants and attorneys, if necessary.

Taylor is a freelance writer in Houston. Contact her at


Copyright © 2001 IDG Communications, Inc.

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