Intellectual Capital: Realizing Your Company's True Value by Finding Its Hidden Brainpower

by Leif Edvinsson, Michael S. Malone

One of the greatest challenges facing any business today is the gap between its balance sheet and its market valuation. This gap, representing the bulk of a company's true value, consists of indirect assets -- organizational knowledge, customer satisfaction, product innovation, employee morale, patents, and trademarks -- that never appear in its financial reports. Only in the last few years have companies and academics around the world tackled the challenge of measuring this "Intellectual Capital." And no company has taken IC measurement as far as the Swedish financial services company Skandia, which in 1995 published the world's first IC annual report. The executive who led the team, the first-ever director of Intellectual Capital, was Leif Edvinsson. Now Edvinsson has teamed up with noted business author Michael S. Malone to write the first book that explains the workings of IC measurement and its usefulness to the modern corporation. Intellectual Capital is also the first book ever to present a universal IC measurement and reporting system. And that's only the beginning. The authors also show how IC measurement can be used in any organization, including government agencies and nonprofit institutions; they present a simple new measure as a yardstick to compare the IC value and efficiency of different organizations; and finally, they propose a new kind of IC "stock market" exchange. Intellectual Capital will transform the nature of doing business by establishing the real value of enterprises for those who manage them, work in them, and invest in them. The result will be a revolutionary transformation of the modern economy. Highly readable and engaging, Intellectual Capital will prove to be one of the landmark business books of this decade.

240 pages, Hardcover

First published March 26, 1997

Reviews

[Wiedźm]

I've been told to read this book and to give a whole lecture about Skandia's method to the rest of the students. For this purpose, it was a terrible source.
The authors where trying to make it easy to read and to remember. There are many repetitions of this same explanations and many visualizations. The language is unofficial and very often just silly.
This book can be really interesting, if you read it for your own curiosity. And are not used to more academic language.

About the method itself... It takes a lot of time to implement. Many indexes to analyse. Many data to fill in. But ignoring the role of intellectual capital is a really bad idea. I think it is a good idea to read this book and to read about other methods of measuring the value of those immaterial things and to choose the best way for you.

[Daniel Trejo]

A must for every KM or CI stakeholder

[Jack Vinson]

Although I was concerned that this book would delve too heavily into accounting, I read it anyway on the strength of its recommendations from many sources in the knowledge management literature. This book describes the groundbreaking work in which Edvinsson was involved at Skandia AFS, where they developed a mechanism for measuring the "intangibles" associated with the value of a company (and any other organization, as it turns out). The book is very well written and easy to read. 

The authors do a great job of identifying the components of intellectual capital, from the way a company does things to its customers to its people and beyond. They provide a mechanism for valuing activities that either don't show up in annual reports or that show up in the wrong location. Is training a debit or a long-term credit? Is the growing collection of computers a debit or credit? They suggest many measures of various aspects of an organization to get at the roots of the organization to determine if it is ready to grow, stabilize, shrink or completely fade away. 

They use a couple metaphors for these measurements. One is the tree, where the financial fruits of the company are obvious, while the root system really tells us about the potential of the company. The other is the image of a house, where the roof provides the history (financial), the walls show the company as it is today (customers and processes) and the foundation gives some indication of the future (renewal and development). They talk about this house as their "navigator" throughout which the human aspect is deployed. 

The measurement system proposes to look at all of these aspects individually and then attempt to collapse them together in some type of numeric measurement of the intellectual capital of the company. The aspects are financial, customer, process, renewal & development and human. For each of these, they discuss the measures used at Skandia and propose additional measures that might be more appropriate at other firms. 

The whole process makes a lot of sense. There has been a decent literature on Intellectual Capital since this book, including a couple conferences a year and another book of the same title by Tom Stewart.