Intellectual Capital and Benchmarking – introduction

It is widely accepted nowadays that since the end of the 20^th century the Economy has become significantly different from the industrial economy previous to the mid-tweniteth century. The share of traditional industries such as railroad transportation, coal-mining, and steel production in the GDP of European economies has been decreasing steadily. Economists consider that the main explanation for the shift is the increasing importance of intangibles as a fundamental determinant of value creation in business companies. During the last two decades most industrialised economies have moved progressively towards a new macro-economic reality. The structure of employment in these economies is such that 70-80% of the labour force produce intangible economic goods such as information, knowledge, social capital etc. Manual work is becoming less and less valuable than knowledge-based work. Despite high costs of man-hours Europe and the USA are still, despite the competition from Asian economies, able to compete globally due to their high productivity of knowledge-based work.

In countries such as Germany, Sweden and the United Kingdom the total investment in intangible assets since the mid 1980s has outstripped investment in physical assets. Even in less developed European economies such as Poland more than half the labour force is employed in service industries. More and more businesses rely on intangible assets. Success in both commercial and non-commercial activities increasingly depends more on the development and deployment of intellectual resources than on the management of physical assets. Intellectual Capital, which includes customer loyalty, unique organisational processes, networks and, finally, a well-educated, creative workforce, is what drives the economic growth of today. The mainstream economic theories in use now helps us understand and manage the production and exchange of tangible goods but is poor at explaining the dynamics of intangible assets.

There are important macro-economic reasons for interest in measuring Intellectual Capital (IC). Governments of all persuasions are concerned with promoting economic growth, especially in the high-tech and service sectors. Encouragement of innovation in knowledge-intensive firms, dissemination of ‘best practices’ and investments in education have become hot political issues.

Nowadays there is overwhelming recognition among academics, researchers and practitioners about the importance of managing knowledge to survive in the marketplace. A recent study survey of large enterprises in North America and Europe (Gartner Group, 1999) revealed that of 811 firms, 90 %were aware of knowledge management and the most will have some Knowledge Management related activity underway in the next year or two.

Intellectual Capital is knowledge that can be converted into competitive advantage, profit and wealth. Here, the focus is on ‘Intellectual Capital’ rather than ‘Knowledge’ because, of the two almost synonymous terms, Intellectual Capital evokes connotations with management and value-creation. J. Brian Quinn points out that the capacity to manage human intellect – and to transfer intellectual output into a service or a group of services embodied in a product – is becoming the critical executive skill of our era.

The Intellectual Capital management movement can be traced to three distinctly different origins. The first occurred in Japan with the work of H. Itami, who studied the effect of invisible assets on the management of Japanese corporations. The second was the work of a disparate set of economists seeking a different view or theory of the firm. The views of these economists (Penrose, Rumelt, Wemerfelt and others) broadened IC theory. Finally, the work of Karl-Erik Sveiby in Sweden, published originally in Swedish, addressed the human capital dimension of IC.

Benchmarking Intellectual Capital

In Europe, familiarity with benchmarking is still relatively limited. Substantial differences in understanding still exist across the European Union. The rationale for the European Commission’s involvement in benchmarking is the promotion of the common approach to benchmarking throughout Europe. During a benchmarking conference in Athens on 17 and 18 January 2003 European Ministers stressed the importance of benchmarking in policymaking. Research Commissioner Philippe Busquin said: “Benchmarking is about learning through comparison [...]. By identifying and disseminating best practices in co-operation with Member States, we can help improve R&D conditions in Europe and foster creation of the European Research Area”. There was a consensus at the conference that benchmarking was an effective tool in addressing the Lisbon and Barcelona objectives on economic competitiveness and research spending.

With so much interest vested in Intellectual Capital, surprisingly few studies have been conducted with the aim of investigating the opportunities for benchmarking IC. Benchmarking is when an individual organisation, case, project or network identifies and measures its own methods, processes, procedures and the results these lead to,against the best practice thus revealed. This enables the organisation to compare its own operations and achievements with the best available and thereby to design and implement its own strategy for change.

Benchmarking is defined as a process of improving performance by continuously identifying, understanding and adapting outstanding practices and processes found inside and outside the organisation. IC measurement concerns the discovery of complex relationships between its different components. Utilising Intellectual Capital in benchmarking applications, in turn, goes further – it focuses on how to improve any given organisational process by exploring “best practices” rather than merely measuring the best performance: “Benchmarking doesn’t support abstract postulations about arcane management concepts. It promotes the discovery of systems that embody the concepts in real-world situations” (Bogan, 1995). Many European and US companies and other large organisations have embraced benchmarking as an important, systematic methodology for achieving the organisation’s strategic objectives. Benchmarking is reflected in The Malcolm Baldridge National Quality Award criteria more extensively than any other management concept.

It is apparent that reporting models for the acquisition and application of IC are at an embryonic stage of development compared to those for physical and financial resources and this study investigates ways in which intellectual capital can be measured in benchmarking projects. It attempts to discover what IC artifacts are visible to managers and which of these artifacts can be articulated in such a manner as to enable collaborative learning in organisations.

If IC measurement theory and practice can add to the quality of benchmarking studies, they may be effective catalysts for discussion on and action to improve both the management of these intangible knowledge-based assets and the outcomes that flow from their acquisition and application.

The author’s participation in the meetings of the RECORD network (two conferences and one workshop) was another valuable source of insight into the issues pertaining to IC measurement.

Benchmarking has been present in management textbooks for at least twenty years. Since the literature on the subject is rich and diverse, only one chapter is dedicated to explaining some of the essential issues related to benchmarking. Chapter 1 is the review of current body of literature concerning benchmarking. It describes its theoretical background, defines it as a collaborative process of learning through reflection and typifies its benefits.

Some practical issues in benchmarking, such as benchmarking etiquette, are presented in Chapter 1.

The second chapter tries to clarify how the different categories of Intellectual Capital (IC) are understood and defined. It also describes current developments in the field of accounting relating to intangible assets.

As far as Intellectual Capital is concerned, there are two basic questions in which the managers are interested:

-   What is it,
-   How to measure it.

This report examines both issues. In chapters 2 and 3 current  developments in the measurement of  IC are explained. Chapter 3 also includes the results of author’s own research studies. They include the Learning Organisation survey and the summary of three workshops conducted by the author.

In the third chapter an overview is presented of the many IC measurement models and issues pertaining to IC measurement in the context of benchmarking applications are discussed. In this chapter the findings recorded in secondary literature are combined with author’s own empirical studies. In the course of the project the author conducted four research studies into the measurement of Intellectual Capital. The first study comprised fifty-two interviews with research managers and researchers, mainly from the field of social sciences area in Austria, Poland, Spain and the U.S.A. Nearly half the interviews were conducted in the host institution – the Centre for Social Innovation, Vienna. The result of this study is a report, “Human Resources in CSI – ZSI Backstage” (Appendix 2). The second study was a series of three workshops in the host institution. The participants were recruited from the CSI staff. The aim of the workshops was to collect opinions and suggestions from the Social Science researchers about the three chosen methods of IC measurement (Balanced Scorecard, Intangible Assets Monitor, and Core Competency – KPMG model). Another objective was to investigate whether the workshop can be an efficient method of collecting and measuring information on IC in an organisation. The workshops provided a valuable pool of information on the appropriateness of the three methods in the context of Social Science research organisations.

A certain number of organisations have decided not only to measure IC in a systematic manner but also publicise the results in the form of an Intellectual Capital statement or report. Chapter 4 gives a concise explanation of IC reporting.

The third study, presented in Chapter 5 is the most comprehensive one. It consists of a survey addressed to managers of Social Science research affiliated with universities and independent research organisations across Europe. The survey covers issues concerning utilising IC methodologies (as described in Chapters 2 to 4) in benchmarking applications (as described in Chapter 1).  Chapter 5 of this report describes the opinions of research managers from thirty-four Social Science research institutions across Europe. The survey was based on the questionnaire (Appendix 1), which in itself provides added value. The questionnaire is a structured evaluation tool for IC measurement in the context of benchmarking applications.

The last few years have seen a growing interest in knowledge management and Intellectual Capital. Authors worldwide tend to use seemingly synonymous terms, e.g. information and knowledge, to avoid tedious repetition. This practice brings about confusion among the researchers, especially those not well acquainted with the subject. Serving the need for clarification, the last chapter is devoted to explaining the definitions of the most vital terms and concepts. Chapter 6 contains a glossary of terms enriched with narration. It can be used as a manual for introducing Intellectual Capital and benchmarking to practitioners.

Acknowledgements:

The author would like to gratefully acknowledge the following people for their help in the production of this book: Professor Stefan Kwiatkowski for his valuable critique and insight; my international Sokrates programme students, especially Mr Michael Clauser and Mr Jan Tewrey; Dr Josef Hochgerner with whom I enjoyed rich intellectual discussions during 2002–2003 in Vienna (the birthplace of Karl Popper and Peter Drucker; and Dr Klaus Schuch for his equally insightful debates and support for my professional career.

I would also like to thank Professor Marian Gorynia for maintaining my faith by showing me that friendliness, professional managerial attitude, and old European scientific tradition can coexist.

Finally, thanks are also due to Damian for his help with preparing Excel charts, Professor Ann Simons for meticulously proof reading the whole book; and other people who proof read parts of the book at earlier stages — Dr Cloyd Beasley, Melissa Freeman, and Freyja Lockwood.

About the author:

The author is a lecturer and researcher in The Chair of Service Management in Poznan, Poland at The Poznań University of Economics. His research interests in intellectual capital started in 1994 when preparing his master thesis analysing the condition of a state-run company he discovered that financial indicators do not tell much of the current condition of a company. Later, in 1998 he started the first Polish language website dedicated to Knowledge Management. He has published over 100 articles and papers on knowledge management and intellectual capital. In the years 2004-2005 he worked on the project The Poznan University of Economics Intellectual Capital Report”. Although not fully completed, it was the first initiative of this kind in the world. His current (2006) research interest concentrates on Knowledge Management in the education sector in Poland and the reporting of Intellectual Capital.

“Amir Fazlagic has written an insightful book on the intersection ofintellectual capital and benchmarking practices that is intellectually valuable as well as pragmatically useful. He brings conceptual clarity and rigor to complex issues, and outlines research testing his ideas. The book should be read by both management/organizational researchers and practical executives of knowledge-based firms, whether public orprivate. I particularly hope that my U.S. colleagues will become familiar with this work that is increasingly relevant for today’s economy.”

Stephen D. Nelson
Associate Director, Science and Policy Programs
American Association for the Advancement of Science
Washington, DC

“Dr. Amir Fazlagić is one of the leading thinkers in Poland on modern management. His innovative and well-written book is an excellent contribution to the intellectual capital/knowledge management movement. It is the first ever publication where the concepts of benchmarking and intellectual capital measurement are combined. It is a good textbook for both management practitioners and researchers. Highly recommended reading.”

Dr. Mariusz Strojny
CKO Coordninator, KPMG Poland

“This book is an important milestone in European IC research. Dr. Amir Fazlagic provides not only an excellent summary of the existing research on Intellectual Capital, he additionally proves that there is a strong link between benchmarking and Intellectual Capital measurement. An absolute ‘must read’.”

Dr. Patricia Wolf, Fraunhofer IAO, Germany

“It is infrequent to get an opportunity to learn about the linkages between philosophical and conceptual frameworks of creating and managing intellectual capital and the practice of benchmarking. The book by Dr. Fazlagic fills this void by offering the reader an innovative and intellectually stimulating presentation. This unique book should be on a “must read” list for the business managers, consultants, intellectual property lawyers and academicians.”

Dr. Tom Bramorski
Professor of Management
University of Wisconsin
College of Business and Economics
Department of Management
Whitewater, WI 53190

“This is an excellent manual for managers. Find out how you can increase the productivity of knowledge work through benchmarking – learning from others – and how to boost benchmarking effectiveness using Intellectual Capital methodology.  You will discover what Intellectual Capital is and how to measure it in order to better manage your knowledge to survive in the marketplace. You will learn how to use benchmarking, which is about learning through comparison, in order to find innovative ideas to improve the performance of your organization. This is a unique and comprehensive study including the tools to implement its findings.”

Dr. Edna Pasher
Pasher & Associates Management Consultants
Israel
www.pasher.co.il

• “Intellectual capital will ultimately determine the success or failure of both for-profit and non-profit organizations. What Fazlagic has developed is a manual for corporations, businesses and even governments to use to benchmark intellectual capital. Leaders will find this text useful in developing programs and policies that have the potential to transform the organizations to becoming better able to deal with the chaos of reality. Must reading for scholars and practitioners. This manual captures and explains the theories behind the issue of measuring intellectual capital.
• Well organized, useful, and well written manual that provides a synopsis of research on measuring intellectual capital. Includes practical forms and suggestions for organizations wanting to benchmark their intellectual capital. A brilliant study that translates theory into useful strategies for improving an organization’s effectiveness.
• A real contribution to both academic research and business management…”

Professor Charles R. B. Stowe MBA, JD, PH.D,
College of Business Administration, Sam Houston State University, Texas, and Leon Kozminski Academy of Management and Entrepreneurship, Poland.”