Chapter 4

Measuring intellectual capital

It is tempting to try to design a measurement system equivalent to double-entry

bookkeeping with money as the common denominator. It is an established
framework with definitions and standards and therefore common sense. But this
is precisely the reason why we should break with it. If we measure the new with
tools of the old, we won’t be able to see the new (Sveiby, 1997, p 155).

4.1
4.1 Introduction

It is said that what is measured in companies is also what is managed. What is not
said is that very often what is important is too difficult to measure and therefore it
does not get measured and neither does it get managed. The crux of the matter is
that time needs to be spent on identifying items that will provide tangible proof that
intangible growth (or decline) is taking place. The best way of measuring is by
ensuring that goals and strategy are known. Without that it becomes very easy to
either measure for measurement’s sake or to measure only those items for which
measuring tools can be found.

Industrial age companies needed balance sheets to show their value to investors. In
the knowledge economy the balance sheet, as tool, is no longer sufficient to provide
the assurance that a safe investment is being made. However, alternative methods
of measuring and evaluating intellectual capital have been slow to develop. This is,
in all probability, because investors, through ignorance or short sightedness, have
continued to value balance sheet information.

To facilitate the process of managing intellectual capital, there have been several
attempts to create formulae that will capture and measure the real value of
intellectual capital in the organization's balance sheet (Filios, 1991, in Zickner, 1996,
p 42-43; Stewart, 1996, in Zickner, 1996, p 37 and Sveiby, Lloyd and Joubert, 1995,
in Zickner, 1996, p 41). Kaplan and Norton introduced the ‘Balanced Scorecard’
technique to help managers combine performance measurements from different
perspectives. Building on the Balanced Scorecard approach, Skandia is seen as one
of the pioneering companies in developing and implementing a systematic way of
visualizing and measuring intellectual capital (Roos and Roos, 1997, p 415).

Accountants are not yet ready to make significant changes to a 500-year-old system
(Robson, 2000, p 13). It is therefore not strange that it is generally seen as an
enormous step forward that efforts to capture intellectual capital more appropriately
are being made from the accounting domain. According to Robson (2000, p 15), the
movement away from the black and white balance sheet information is known as the
‘colourizing’ of balance sheets, which in today’s world of colourful multimedia
appears to be a very apt description! It is however also worth noting Kaes’ (1999, p
140) concern. She is of the opinion that so much emphasis is placed on measuring
intellectual capital that some forget it is actually about managing the intellectual
capital.

The Gartner Group estimates that intellectual assets are worth approximately three
to four times an enterprise’s book value (Smith, 1998, p 8). The dilemma remains
that, even though intellectual capital can outweigh physical assets enormously, it is
very difficult to find measures that will accurately reflect their value within an
instrument such as the balance sheet. Physical and intellectual capitals have
different properties and should therefore have different valuation methods. When a
company has mainly physical assets, output is more predictive than for those with
mainly intellectual assets. (For example a mine produces ‘x’ tons of ore annually.
The probability that it would produce a similar amount of ore is fairly predictable.

4.2
When an advertising company launches ‘x’ number of successful marketing
campaigns one year there is very little that can be used as an indication that the
same would happen in the following year.) The dot.com valuation problems can be
closely associated with the fact that inappropriate predictive measures were and are
being used to value these companies.

Fortunately if, as Roos and Roos (1997, p 417) indicate, the growth or decline of the
intellectual capital of the company is increasingly interpreted as an early warning
signal of subsequent financial performance, most managers will eventually realise
that it is of the utmost importance that appropriate measures of performance, other
than balance sheets, are developed. In support of Roos and Roos, Lank (1997, p
408) is of the opinion that the interest in intangible assets gives the opportunity to
develop new and creative business measures that are much more likely to be
indicators of future business success than the traditional rear-view mirror financial
measures. However, knowing that new measures are necessary does not necessarily
mean that these measures are developed. Despite the feverish interest and
exponential growth in literature relating to knowledge management and intellectual
capital management, Bontis and Girardi (1998) state that the majority of literature
relating to the development and measurement of the subject:

• has an introductory flavour;

• lacks substance; and
• tends to be repetitive.

Research for this project confirmed the statement. It was therefore not strange to
find that intellectual capital research done at South African universities stems from
the Business departments where many MBA candidates are and have investigated
the options available. To date no results indicate that an absolutely reliable solution
to the problem has been found. There are, however, a number of different angles
from which the measurements challenge has been approached. It was also found
that, despite the fact that intellectual capital management reflects the human aspect
of business, most research is being done in the financial or business administration
sectors of business. When measures are given, the measures as a rule relate to
means to improve balance sheet information. Convinced of the importance of
managing knowledge, intellectual capital, or intangible assets, one is still none-the-
wiser as to what practical measures can be utilized to prove the value and the
changes brought about by intellectual capital management practices.

Liebowitz and Wright (1999, p 99) established that there are two schools of thought
in terms of measuring knowledge. They are of the opinion that researchers either
try to find the appropriate metrics for knowledge or they (such as Davenport and
Prusak (1998, in Liebowitz and Wright, 1999, p 99)) are of the opinion that
knowledge in itself cannot be measured and therefore they look for indicators of
knowledge. They support the latter school of thought as in their opinion only the
outcomes of knowledge activities are measurable. The opinion, expressed within the
context of this research, follows suit as there will be an attempt to identify metrics
that will prove that knowledge is being harnessed to improve the wider company’s
value chain, which is the creation of knowledge.

4.3
Before measuring intellectual capital, four pieces of advice should be taken seriously.
First of all Stewart’s advice (1997, pp 243-244), as supported by Roos and Roos
(1997, p 419), was seen to contain one of the most important lessons to learn.
Stewart is of the opinion that no single measurement will ever describe a company’s
full quota of stocks and flows in intellectual capital. Therefore, when devising
measurements, instead of developing one ultimate measuring tool, one should:

• keep it simple;
• measure only what is strategically important; and
• measure activities that produce intellectual wealth.

A second piece of advice comes from Bontis (1998, p 73). He is of the opinion that it
requires people to rethink their attitudes on intangible assets and to start recognizing
that measuring and strategically managing knowledge may make the difference
between mediocrity and excellence. This change in attitude was seen to not only
reflect the change necessary in the eyes of the clients (in this case the senior
managers within the CSIR) but also within the IMPS programme itself. Put
differently, it is very difficult to convince others that an item holds value when the
owner does not believe in that value himself. The way to see and experience value
increase is to find an appropriate ‘mirror’ where growth and decline can be seen. It
is anticipated that a personal scorecard may be an appropriate tool to do this.

The third piece of advice was that of Demarest (1997, p 378). Demarest remarked
that the only reasonable purpose for organized knowledge management practice in
an organization is to increase the quality and quantity of the company’s
marketplace performances. Measuring should therefore target those activities that
achieve at least one of the following:

• enable the organization to sell more and sell better (relating to activities that
encourage human capital development);
• support more and support better (relating to activities that encourage
structural capital development); or
• create and keep more/ better customers (relating to activities that encourage
customer capital development).

Duffy’s (2000, p 13) advice, that the risk of miscommunication is reduced when there
is a common understanding of the jargon used and the processes followed, was also
embraced.

The last piece of advice is twofold and came from Kaplan and Norton (2001a, p 102).
They state that measurement is not only about reporting what happened in the past.
More importantly it is about creating focus for the future. Finally, their reminder that
ownership and active involvement of the executive team is the single most important
condition for success (Kaplan and Norton, 2001b, p 155) is taken for granted.

To recap: although advice on devising measures is available, intellectual capital and

knowledge managers find it difficult to identify useful measures because the key
question for many firms has been how to exactly measure, reflect and communicate

4.4
the impact of knowledge management on business results in financial terms.
However, when dealing with knowledge economy assets, one should not get caught,
in the short term trap of looking at the bottom line only. At the same time heed
shoukld be taken of the warning iterated by Zickner (1996, p 36) unless the value
created by the intellectual asset can be measured (the intangible asset leads to a
tangible result) it is difficult to understand the significance of intellectual capital. The
rest of this chapter will therefore review a variety of meaningful methods through
which an attempt could be made to measure the impact of intellectual capital
management practices on information services. Within the CSIR’s IMPS
environment, identifying such measures appears to be challenging. There is,
however, also a significant opportunity to be forward thinking and creative when
designing measures that would be able to convince internal business managers to
invest in a programme that should be developed and grown for their own
sustainability.

4.2 Measuring the impact of intellectual capital management

Sveiby (1998c) uses the metaphor of a natural fountain or well to explain the use
and the measurement of a knowledge body. Supposing one is tasked to measure
the water in a spring, the solution to the task will depend on the purpose of the
measurement and also on whom the measurer is and his/her values. To top it all,
one would always, while endeavouring to measure, run the risk of altering and even
killing off the source of the ‘water’. The question, therefore, is what the purpose of
measuring the intellectual capital activity should be. Hackett (2000, pp 50-51)
reports that customer satisfaction or customer value is the primary measure most
often cited by senior executives. He continues to say that, as is the case with
training and other forms of investment in human capital, too many variables can
prevent the development of a formula that leads to a proof. Therefore, most firms
rely on the evidence such as cost savings, speed to market and customer
satisfaction. Recording the number of hits on knowledge databases or activity on a
corporate intranet can also be a useful proxy. A standard measure of success for
knowledge management efforts: improved productivity at the individual and the
organizational level, remains difficult to identify.

Although actual measures may be lacking, authors recognise that in order to

measure intellectual capital effectively, a framework to guide the analysis needs to
be developed. Robinson and Kleiner (1996, p 36) states that meaningful measures
are a prerequisite to measuring the effectiveness of programmes designed to
increase intellectual capital. They opted to develop a structure based on the work of
Leif Edvinsson. Their structure has general categories:

• The first category refers to ‘structural capital’ and includes that portion of
intellectual capital that is left behind when the workers leave the company -
the documented or captured knowledge. This is also where patents, licenses,
trademarks and trade secrets reside and it is the part of intellectual capital
that is probably the easiest to measure because it is tangible and is very often
seen as a source of income generation. A start could therefore be to count
the number of patents and licenses in a firm. The first complication arrives

4.5
 when it is realized that, to be of value to the firm, the patents must have
market value. The market value of patents and licenses will continue to
change as market conditions change. This complication has meant that
Robinson and Kleiner have accepted that, within their framework, any
measurement of intellectual capital will always be subject to change.

• The second, and more difficult side of intellectual capital measurement, refers
to ‘human capital’ and includes the human skills of know how, problem
solving, technology development, decision-making and learning.

A point of concern is that Robson (2000, p 81) reports that the experts he
interviewed came to the conclusion that the valuation of intellectual capital is more
of an ‘art’ than a ‘science’. In true knowledge era style, they believe the person
doing the valuation reflects the value of the valuation. This is an indication that
subjectivity is accepted as an integral part of intellectual capital measurement. As
such it could be expected that consultants specializing in the field of ‘subjective
measuring’ will become sought after. It is, however, ideal that more objective ways
in which to establish value should be developed.

Whether objective or subjective, when designing measures it is important to

remember that it is not sufficient to be a smart employee. One needs to be an
effective member of the firm (Robinson and Kleiner, 1996, p 38). Rather than
measuring an individual’s ability to deliver products, the most important aspect to
measure is rather how well the knowledge workers communicate with the company’s
customers (Sveiby, 1997, in Ramosedi, 2000, p 14). In order to communicate well
with customers, staff members have to communicate well with each other and
therefore contribution to and usage of the internal network becomes the next
important issue to measure.

Measuring intellectual capital does not only ensure that important issues receive the
attention they deserve, it is also seen as an important step in determining how to
measure general productivity improvement appropriately. Joia (2000, p 68) was able
to show that, although knowledge may be intangible, it does not mean that it cannot
be measured. Even so Zickner (1996, p 84), through her research on South African
companies, Ramosedi (2000, p 77), in his research at a large financial institution,
and Robson (2000, p 68), through his interviews with 10 senior executives,
established that, notwithstanding the fact that a concerted effort is made to
understand the impact of intellectual capital, evaluators still fall back on valuing and
wanting to measure tangibles/hard numbers. No true accountant would, by merely
listing indicators of intangible value, be able to bypass the generally accepted
accounting practices and simply add intellectual capital to the company’s balance
sheet. None of the authors consulted suggested that the balance sheet be totally
ignored but, if the balance sheet is not the answer to the problem, the questions to
ask are the following:

• What is a more appropriate tool?

• What alternative structures for value reporting are available?
• What does one measure?

4.6
 • How does one measure?
• How does one calibrate the results?

This chapter attempts to answer these questions. However, before discussing the
alternatives to balance sheets it is perhaps useful to briefly pause and look at the
developments where intellectual capital becomes part of the balance sheet.

4.3 Financial formulae and measures

The accountancy-profession is guided by generally accepted accounting practices

(GAAP). These practices can be seen as universal ‘rules’ according to which a
company’s books are balanced. GAAP tend to be very conservative and treat items
like R&D and human capital as expenses. It is accepted that if the return on capital
is greater than the cost of capital, then value is created and a project should be
implemented. If one then wants to pursue the financial statement avenue, this
financial theory of capital should be used as a model from which to develop the
measurement of intellectual capital.

Trying to put intellectual capital into a company’s balance sheet may sound logical
and the research documented by, for example, Joia (2000, pp 68-83) showed that it
could theoretically be factored in quite easily. Joia (2000, p 70) claims to base his
findings on research carried out by a number of experts (Edvinsson and Malone
(1997); Roos et al., (1997); Sveiby (1997); and Stewart (1997), in Joia (2000, p
70)). He reports that it is proposed that a corporate capital taxonomy be used when
determining intellectual capital value for the sake of reflecting it in the balance sheet.
Edvinsson and Malone (1997, in Joia, 2000, p 74-75) suggest that intellectual capital
is the arithmetic mean of all its components. Intellectual capital components are:
human capital, innovation capital, process capital and relationship capital. To change
all this information into a financial formula one can say that:

BV + IC = MV

Where:

MV = Market Value
BV = Book Value = (MC + PC)
MC = Monetary Capital
PC = Physical Capital
IC = Intellectual Capital = (HC+IVC+RC+SC)
HC = Human Capital
IVC = Innovation Capital
RC = Relationship Capital/Customer Capital
SC = Structural Capital/Process Capital

This equation shows that MV has a tangible portion BV, in addition to an intangible
component IC. Hence, supposing MV minus BV is greater than zero (MV - BV > 0), it
shows that the company needs to make provision for managing and measuring its

4.7
intellectual capital. It can be assumed that the more knowledge-intensive the
company is, the greater the IC value will be.

Differing depreciation policies might of course influence the book value calculation of
a company, which is where the Tobin q value comes in. This ratio measures the
relationship between a company’s market value and its replacement value (i.e. the
cost of replacing its assets) and was developed by the Nobel Prize-winning economist
James Tobin. In order to circumvent the differing depreciation policies used by
accountants world-wide, Tobin in 1969 suggested the use of replacement cost - q.
He defined q as (market value)÷(replacement cost of the assets). If q is greater
than one, the asset is worth more than the cost of replacing it; thus it is likely that
the company will seek to acquire more assets of this kind. When using Tobin’s q, a
company with a stock market value of R100 million and a book value of R25 million
will have a Tobin’s q ratio of 4.00. In the long run, this ratio will tend towards 1.00,
but evidence shows that it can differ significantly from 1.00 for very long periods of
time. For example, companies in the software industry, where intellectual capital is
abundant, tend to have a Tobin’s q ratio of 7.00, whereas firms in the steel industry,
noted for their large capital assets, have a Tobin’s q ratio of nearly 1.00. According
to Joia (2000, p 70), the formula becomes:

MV + (MV/q) = IC

As was seen with the depreciation of BV, it also needs to be considered for the IC
part of the formula. Joia (2000, p 83) quotes the work of Argote, et al., (1998) and
Jelle (1979) to inform the reader that there is a substantial component of
organizational knowledge that depreciates rapidly. More research is necessary to
identify the factors that affect the rate of learning and ‘forgetting’ in organizations.
Similarly, Yelle (1979, in Joia, 2000, p 83) also indicated that identifying factors
favouring an accelerated rate of learning is a promising area of future research.
Knowing more about these two issues could allow investments on training and
innovation to lead to better and quicker results than those achieved at present.
Neither knowledge acceleration nor depreciation form part of this research and will
therefore not be taken into consideration but it should be researched within the
information services environment.

Fortunately Joia (2000, p 74) suggests that it is not important to try and establish an
absolute monetary value for intellectual capital. Rather variations should be tracked
within its component values over the course of time. Joia did however test his
intellectual capital measurement model in a case study with actual data. He found
his model more accurate than that of Edvinsson and Malone. Yet he came to the
conclusion that A long and arduous road still needs to be negotiated before we have
reliable measurements for intangible capital (Joia, 2000, p 82). His results did
indicate that a lack of investment in the development of more efficient and effective
internal processes plus a disregard for the players involved (customers, suppliers and
banks) lead to the fact that the intellectual capital score is jeopardized. In addition,
the effects of heavy investments in human and innovation capitals take a while to be

4.8
fully implemented and felt. A ‘snapshot’ measuring methodology does not take these
aspects into account.

The Joia research reiterates the fact that the current balance sheet and income
statement tools are able to present an X-ray or ‘snapshot’ of a firm. Balance sheets
provide indications of how the company appears within a specific period, but are not
reliable tools to perceive a company’s future performance. From further literature
consulted, it is clear that the measuring of and reporting on intellectual capital should
be seen as a tool separate but complementary to the balance sheet. Robson’s
(2000, p 91) research also confirmed that financial experts do not see it as a feasible
option to include intellectual capital on the balance sheet of a company within the
current accounting framework. It confirms Stewart’s observation about the balance
sheet not being the right instrument to record intellectual capital. This opinion is
supported by Kaplan and Norton (2001a, p 88). Their argument is specifically
directed at the fact that balance sheets usually reflect those items that have a direct
impact on revenue and profit. Where intangible assets are concerned, there is
usually no direct link between cause and effect and the time variation also depends
upon uncontrollable circumstances. They see the balance sheet as an additive tool.
In contrast, they are of the opinion that intangible assets need a multiplicative tool
(Kaplan and Norton, 2001a, p 89).

Nevertheless, it will in all probability still take a long time before both financial
managers and investors take note of Stewart’s remark that balance sheets and
income statements are part of the framework that fits the industrial enterprise, not
the intelligent one (Stewart, 1997, p 58). Until then it will remain important that
additional measures exist side by side with the traditional. These measures need to
make provision for the facts that, within a knowledge era company:

• The most valuable employee is the one who is capable to perform at an

expert skill level and is able to transfer that expertise to appropriate
colleagues. Capturing or embedding that expertise within a system that is
independent of the individual is ‘first prize’. If it is to be successful the
measuring system needs to take into consideration all the stages between
embarking on new learning experiences and transferring knowledge to
appropriate systems.
• Customers are the engines of growth (Duffy, 2000, p 10) and success begins
and ends with customer satisfaction (Fine, et al., 2002, p 72). No measuring
methodology or tool is more important than providing a product or service
that the customer is willing to support. Measuring customer capital and
making use of the results of the measurement to ensure growth is
fundamental in ensuring long term sustainability.

In line with these two facts, Garrick and Clegg (2000, p 280) report that although
measures for intellectual capital have grown from dissatisfaction with conventional
economic measures of value, the most desirable results remain in terms of profit
margins or observable (measurable) outcomes. They stress that financial objectives
represent the long term goal of the organization: to provide superior returns based
on the capital invested in the unit. De Gooijer (2000, p 303-304) warns that most of

4.9
the solutions offered are geared towards profit-making commercial firms. She is of
the opinion that solutions have had limited application for public sector management,
especially when applied to measuring cultural change within an organization. As a
last comment Lank (1997, p 409) asks: Would an investor put his money in a
business that didn’t keep track of its financial assets? The answer to the question is
quite obvious. It is therefore anticipated that, before too long, investors may be
asking, as a key aspect of their due diligence process, how intangible assets are
managed and this will indeed focus management attention onto this invisible and
intangible source of value. The bottom line is therefore that appropriate
measurements need to be established and developed urgently.

A large number of measuring methodologies, where both balance sheets and

intangible assets are evaluated, do exist. Fortunately Sveiby (2001a) identified 21 of
these and provided structure in terms of what the aim of each method is. A table
reflecting all the methods (Table 4.1 on page 4.13) is provided but, in short,
according to his categorization there are four approaches to measuring intangible
assets, namely:

• Direct intellectual capital methods (DIC) – where components are identified

and valued.
• Market capitalization methods (MCM) - where the difference between market
capitalization and stockholders’ equity is calculated.
• Return on assets (ROA) – where tangible assets and the annual financial
growth figures are compared to the industry average. Above average
earnings are then utilized to estimate the value of intangible assets.
• Scorecard methods (SC) – where the various components of intellectual
capital are identified and reflected in terms of scorecards or graphs.

The purpose of measuring intellectual capital growth within the context of this
research, in all probability, differs vastly from that of a listed company with investors.
Listed companies would want to provide proof that the company is viable and that it
would continue to make a handsome profit. Within this research the aim is rather to
provide proof of sustainable, efficient service and that the investment made by the
company is to the benefit of all the knowledge workers within the company as a
whole. It is also to establish ultimately where the service fits into the company’s
virtual structure: is it purely support or truly an indispensable part of its learning
cycle. Taking the context of this study into consideration, it is especially the
scorecard-type methods of measuring intangible assets that were found to be of
interest.

4.4 Available measurement methodologies

It was thought that the work done by Robson (2000), where he investigated the
internal valuation of intellectual capital, would contribute largely to this research.
Unfortunately this was not the case. He did confirm the opinion that internal
valuation forces management to acknowledge that they are responsible for more
than just the company’s tangible assets. Management is in effect ‘forced’ to focus on
the real drivers of value in a knowledge-based organization. However,

4.10
disappointingly he came to the conclusion, from the experts he consulted, that the
valuation of individual components is seen as too time consuming and intensive to do
regularly. The experts would base valuations on the interaction of all the company’s
assets, rather than value individual assets and then aggregate these values into an
implied valuation for the entire company (Robson, 2000, p 94). The same valuation
of tangible assets was therefore still being used irrespective of the company’s asset
base. In effect the difference between physical and intellectual assets were ignored.
Robson ascribed this tendency largely to the absence of reliable measuring methods,
which of course is a useful excuse to fall back into comfort zone techniques.

In reporting on the results of his research, Robson (2000, pp 84-85) indicated that,
notwithstanding the fact that experts see the danger of over-simplifying complex and
inter-related concepts when trying to take advantage of the opportunity inherent in
intellectual capital management, they also believe that instinctive judgement of the
value of intellectual capital was sufficient as a basis for making management
decisions relating to the value of internal intellectual capital. In his opinion a broader
understanding of intellectual capital as a concept should improve the situation but,
for the present, an instinctive ‘gut-feel’ to decide if one is creating or destroying
intellectual capital was thought to be sufficient for ‘day-to-day’ management of a
company. Again the complexity of the valuation methods was seen to prohibit the
collection and recording of intellectual capital values over time. He acknowledged
that there is a need to establish how to value ‘potential’ if there is no historical data.
He acknowledged the danger of speculation about either the future earnings or the
future market size as both have the risk of flawed and biased judgement. He
conceded that if it is not possible to improve the valuation, the answer was to
establish a method to evaluate the valuation and the evaluator rather than evaluate
the company. This may be logical but it appears to be an academic exercise rather
than finding a simple solution.

After the initial brush with balance sheet type measures and the disappointing
conclusions from Robson’s research, it was decided to follow the advice given by
Sveiby (2001a) and Bontis, et al., (1999, p 392) and start at the beginning. This
meant gaining an overview of all the available techniques before attempting to
identify any one reliable technique. Fortunately the task was less daunting than
expected. Authors such as Bontis, et al., (1999) and Sveiby (2001a) had already
attempted to collect and evaluate all the available measuring techniques and the
exercise was therefore a fairly easy one. Kaes (1999) gave in depth insight into the
rationale, purpose, approach, tools, advantages and disadvantages of a number of
the measuring techniques. Sveiby’s (2001a) list of possible measuring techniques is,
however, more complete and is reflected in Table 4.1 on page 4.13. Although
Bontis, et al., (1999) identified only four of the groupings (their research was
published two years prior to Sveiby’s), they did provide the advantages and
disadvantages of some of these techniques. As a further enhancement of Sveiby’s
work, the activity based costing methodology for human capital valuation, identified
by Leibowitz and Wright (1999, p 102), was added. Lastly, Table 4.1 also gives an
indication of the elimination process followed to establish which methodologies to
investigate/not investigate any further.

4.11
Table 4.1: Overview of intangible assets measures (modified1 version of Sveiby (2001a))

DIC - Direct Intellectual Capital Methods

MCM - Market Capitalization Methods
ROA - Return on Assets
SC - Scorecard Methods

Label Major Proponent Category Description of Measure Suitability within the research
context
Technology Broker Brooking (1996) DIC Assesses the value of the intellectual capital of a firm Has possibilities but appears subjective. The
based on a diagnostic analysis of a firm’s response to questions will have to be evaluated for
20 questions covering four major components of relevance. It also appears to require an
intellectual capital. advanced stage of development that is not
realistic within this research.

Not suitable

Citation-Weighted Bontis (1996) DIC Calculates a technology factor based on the patents No patents were or are being developed.
Patents developed by a firm. Intellectual capital and its
performance is measured based on the impact of Not suitable
research development efforts on a series of indices,
such as number of patents and cost of patents to
sales turnover, that describe the firm’s patents.

Inclusive Valuation McPherson (1998) DIC Uses hierarchies of weighted indicators that are Appears to be too complex for the context of
Methodology (IVM) combined, and focuses on relative rather than the research
absolute values. Combined Value Added = Monetary
Value Added combined with Intangible Value Added. Not suitable

The Value Explorer™ Andriessen and Tiessen DIC Calculates and allocates value to five types of Taking the context of the research into
(2000) intangibles: (1) Assets and endowments, (2) Skills consideration, accounting methodologies were
and tacit knowledge, (3) Collective values and not seen to be suitable.
norms, (4) Technology and explicit knowledge, (5)
Primary and management processes. Not suitable

1
The work of Liebowitz and Wright was not reflected in Sveiby’s (2001a) version of this Table.

4.12
Label Major Proponent Category Description of Measure Suitability within the research
context
Intellectual Asset Sullivan (2000) DIC Methodology for assessing the value of Intellectual Supporting literature was not retrieved but
Valuation Property. based on Sveiby’s categorization this
methodology will in all probability be too
complex within context.

Not suitable

Total Value Creation, Anderson and McLean DIC A project initiated by the Canadian Institute of Taking the context of the research into
TVC™ (2000) Chartered Accountants. Uses discounted projected consideration accounting methodologies were
cash flows to re-examine how events affect planned not seen to be suitable.
activities.
Not suitable

Accounting for the Nash H. (1998) DIC A system of projected discounted cash flows. The Taking the context of the research into
Future (AFTF) difference between AFTF value at the end and the consideration, accounting methodologies were
beginning of the period is the value added during the not seen to be suitable.
period.
Not suitable

Tobin’s q Stewart (1997) MCM The q is the ratio of the stock market value of the Taking the context of the research into
Bontis (1999) firm divided by the replacement cost of its assets. consideration accounting methodologies were
Changes in q provide a proxy for measuring not seen to be suitable.
effective performance or not of a firm’s intellectual
capital. Not suitable

Investor assigned Standfield (1998) MCM Takes the company's true value to be its stock Stock market value is not an appropriate
market value (IAMV™) market value and divides it into tangible capital + measure within the context of this research.
(realised IC + IC erosion + SCA (Sustainable
Competitive Advantage) Not suitable

Market-to-Book Value Stewart (1997) MCM Considers the value of intellectual capital to be the Stock market value is not an appropriate
Luthy (1998) difference between the firm’s stock market value and measure within the context of this research.
the company’s book value.
Not suitable

4.13
Label Major Proponent Category Description of Measure Suitability within the research
context
Economic Value Added Stewart (1997) ROA Calculated by adjusting the firm’s disclosed profit Bontis, et al., (1999, p 392) report that
(EVA™) with charges related to intangibles. Changes in EVA complicated adjustment procedures are
provide an indication of whether the firm’s required, governance structure in the interest of
intellectual capital is productive or not. shareholders only is assumed and that net
assets are set up versus the market value of the
assets. These aspects are not appropriate for
this research.

Not suitable

Human Resource Johansson (1996) ROA Calculates the hidden impact of HR related costs, Financial measures and formulae are not
Costing and Accounting which reduce a firm’s profits. Intellectual capital is appropriate within the context of this research.
(HRCA) measured by calculation of the contribution of
human assets held by the company divided by Not suitable
capitalised salary expenditures.

Human capital valuation Liebowitz and Wright ROA Based on activity based costing. Uses the No proof could be found that this method has
(1999) accounting convention of historical costs. Enables been applied successfully within similar
the valuation of human capital to be integrated into circumstances. Within context it is not deemed
traditional accounting models. sufficient to only concentrate on human capital

Not suitable

Calculated Intangible Stewart (1997) ROA Calculates the excess return on hard assets, then Too complex for the requirements and context
Value Luthy (1998) uses this figure as a basis for determining the of the research.
proportion of return attributable to intangible assets.
Not suitable

Knowledge Capital Lev (1999) ROA Calculates knowledge capital earnings as the portion Too complex for the requirements and context
Earnings of normalised earnings over and above expected of the research.
earnings attributable to book assets.
Not suitable

4.14
Label Major Proponent Category Description of Measure Suitability within the research
context
Value Added Intellectual Pulic (1997) ROA (does Measures how much and how efficiently intellectual Does not make provision for customer
Coefficient (VAIC™) not quite fit capital and capital employed create value based on /stakeholder capital.
any of the the relationship to three major components: (1)
categories) capital employed; (2) human capital; and (3) Not suitable
structural capital.

Human Capital Jac Fitz-Enz (1994) SC Collects and benchmarks sets of human capital No benchmark database is readily available.
Intelligence indicators against a database. Similar to HRCA. The context of the research does not warrant
the effort in creating such a database. Within
context it is also not deemed sufficient to only
concentrate on human capital

Not suitable

Skandia Navigator™ Edvinsson and Malone SC Measures intellectual capital through the analysis of May be too complex but further investigation is
(1997) up to 164 metric measures (91 intellectually based required.
and 73 traditional metrics) that cover five
components: (1) financial; (2) customer; (3) Possibly suitable
process; (4) renewal and development; and (5)
human.

IC-Index™ Roos, Roos, Dragonetti SC Consolidates all individual indicators representing May be too complex but further investigation is
and Edvinsson (1997) intellectual properties and components into a single required. Bontis, et al., (1999, p 392) report
index. Changes in the index are then related to that this method is flexible; dynamic; allows for
changes in the firm’s market valuation. partial external comparison; and can also be
utilized by not-for-profit organizations

Possibly suitable

Intangible Asset Monitor Sveiby (1997) SC Management selects indicators, based on the Appears to be applicable within the context of
strategic objectives of the firm, to measure four this research.
major components of intangible assets: (1) growth
(2) renewal; (3) efficiency; and (4) stability. Possibly suitable

4.15
Label Major Proponent Category Description of Measure Suitability within the research
context
Value Chain Lev B. (forthcoming) SC Arranges a matrix of non-financial indicators in three Holds promise as its fits in with the strategy of
Scoreboard™ categories according to the cycle of development: the mother organization.
Discovery/Learning, Implementation,
Commercialisation. Possibly suitable

Balanced Kaplan and Norton SC Measures a company’s performance through Appears to be applicable within the context of
Scorecard (1992) indicators covering four major focus perspectives: this research. Bontis, et al., (1999, p 392) claim
(1) financial perspective; (2) customer perspective; that the methodology has powerful logic; clear
(3) internal process perspective; and (4) learning correlation between indicators and financial
perspective. The indicators are based on the performance as well as well-developed and
strategic objectives of the firm. consistent literature.

Possibly suitable

4.16
4.5 Selected measuring methodologies

What appeared to be a fairly superficial evaluation - as reflected in Table 4.1, proved

to be valuable in deciding to investigate only the scorecard methods of evaluation.
As a group, within the context of this study and taking the wider CSIR into
consideration, these techniques were deemed more appropriate.

4.5.1 Skandia Navigator™

Skandia regards its Navigator as a future-orientated business-planning model. The

Skandia Navigator, which shows similarities with the balanced scorecard, was
developed in 1994 to provide Skandia with a measuring and reporting tool. It makes
provision for historical measurements (financial focus), present day measurements
(customer and process focus) and the measurements required of a future
organization (renewal and development focus) (Skandia, 1998, p 5). According to
Edvinsson (1997, p 366), Skandia makes use of the same model when it does
employee performance appraisal and rewards assessment. This ensures that the
reward system is balanced: that both the financial and the non-financial aspects
feature as focus areas. This information was confirmed in their 1998 annual report.

To develop their Navigator, Skandia identified almost 200 indicators to take a

snapshot of the six different subsets of their intellectual capital (human, structural,
customer, organizational, innovation and process). Some of these are reflected in
Table 4.5 on page 4.39. From the Skandia intellectual capital report it appears that
subsidiary companies each select the indicators that are relevant to that specific
company, which is appropriate when considering the reason why the Navigator was
developed.

Leibowitz and Wright (1999, p 101) and Kaes (1999, p 137) criticise the Navigator
for the following reasons:

• There is an amalgam of both quantitative and descriptive measures without a

common basis of measurement.
• The measures are infused with subjectivity that is difficult to generalize over
organizations. Kaes goes as far as to say that the use is limited because of
the unstandardized approach that underlies the index.
• There is an inadequate treatment of the external environment, i.e. the
exclusive focus on customers.
• The static intellectual capital flows are not incorporated.
• The index was designed specifically for a service company which limits its
applicability to other industries.

In addition to the criticism expressed by Kaes and Leibowitz and Wright, it is also
necessary to add that, although the Navigator is seen as the benchmark in
measuring intangible assets, the multitude of measuring elements is not appropriate
in the given environment. It also does not appear to make provision for the full
picture within the context of this research, which is in all probability due to the fact
that the company backgrounds differ to the extent that they do.

4.17
4.5.2 IC-Index™ and its related activity digital IC-landscaping

Skandia, recognising some of the weaknesses in the Skandia Navigator, developed a

method through which to manipulate and display the results. Basically it requires
that a number of indicators be devised or identified. The indicators are then
consolidated to form a measurement tool that can dynamically describe intellectual
capital and its development over time. It allows for the comparison between
changes in intellectual capital and changes in the company’s market value, thereby
gaining a prognosticating value (Skandia, 1998, p 5). With the exception of the
reference to digital landscaping, no literature referring to the IC-Index published
after 1998 could be traced. Sveiby’s (2001a) description of the methodology, the
disadvantages identified by Bontis, et al., (1999) and the definition provided by
Skandia pointed to this being a methodology that concentrated on growing
shareholder value. As such the methodology would not be suitable and as a result
further investigation was abandoned. For interest sake, it was, however, decided to
briefly look at the development of digital landscaping as it is based on the IC-Index™
methodology.

Digital IC-landscaping

Digital IC-landscape is a methodology based on multi-dimensional scaling and

mathematical statistics. It supports the pedagogical display of IC complexity,
migration of IC-affecting knowledge, exploratory retrieval of high IC efficiency,
investment planning and forecasting (Edvinsson, Kitts and Beding, 2000, p 263). To
illustrate their point, these authors investigated 11 companies using 20-40 essential
variables and a number of free parameters. In contrast to the value chain
methodology, which is described in section 4.5.4 on page 4.21, Edvinsson, Kitts and
Beding (2000, p 264) are of the opinion that value addition no longer occurs in a
linear fashion. In classical value chain style, a product moves from the supplier, to
the company, to the customer and finally to the customer’s customer. In the
knowledge economy, the value chain turns into a value cluster constellation where all
are interlinked. Figure 4.1, below, represents the formations graphically.

Fig 4.1: Value chain and value cluster constellations

Traditional value chain constellation

Supplier Company Customers Customers’

customers

Cluster constellation
Customer’s customers

Company
Customer
s

Suppliers/Partners

4.18
The purpose of digital IC landscaping is to collect ‘flat’ information and to put it into
the digital environment where it is possible for managers to play ‘what if’ games in
terms of their intellectual capital development. The result strongly resembles a
geographical map where the peaks and valleys are depicted by contour lines.
Fascinating as these 3-D graphs are, they were seen to be far too complex for
application within the context of this study and as a result were not investigated any
further.

4.5.3 Intangible Assets Monitor

The Assets Monitor framework makes provision for both tangible and intangible
assets. Intangible asset indicators are then grouped into three subsets, namely
external structure, internal structure and individual competencies. Each of these
framework items requires that the growth rate, the renewal activities, the efficiency
and the associated stability or risk be investigated (Sveiby, 1998c). In contrast to
the common assumption, Sveiby (2001b) claims that the intangible asset monitor
was conceptualised, independent of the balanced scorecard concept, in Sweden
between 1986 and 1987. He argues that the measure should not be seen as yet
another control mechanism and that the results of the measure should be used to
learn and to enter into dialogue. He admits that the asset monitor shows the
following similarities with the balanced scorecard:

• it suggests that financial indicators need to be complemented with non-

financial indicators to measure sustainability;
• it categorises the non-financial indicators into three components;
• it argues that the non-financial indicators must be moved from being
operational in nature to the strategic level;
• it sees strategy as the key driver of the metrics that are designed;
• it sees change should be seen as the most important aspect of the measure;

The theoretical differences between the two systems lie in the following factors:

• The assets monitor is based on the notion that people are an organization’s
only profit generators. People are not seen as a cost but as revenue creators
and the source of wealth creation.
• The Asset Monitor treats profits generated as signs of success and not as the
originator of success;
• The Asset Monitor acknowledges that intangible ‘structures’ are created as a
result of human actions. These structures can be directed outward (contact
with customers and suppliers) or inward (work teams). The structures in
themselves also have value.
• The assets monitor is based on the stock-flow theory, which is the basis of
traditional accounting theory. As a result the monitor sets out to measure the
change in assets such as development, growth, renewal, efficiency and the
risk associated with losing the assets.
• The external structure includes customers, suppliers and other external
stakeholders. Especially not-for-profit and public sector companies find it

4.19
 difficult to see their ‘customers’ in the same light as commercial companies
do.
• The assets monitor requires that companies go through a redesign process.
The purpose would be to be more knowledge focused. The company is
therefore not just rolling out its strategy better but is also improving the
quality of the strategy itself.

The latest development in Kaplan and Norton’s (2001a, p 101) balanced scorecard
for public sector companies, where the value creation component and stakeholders
were added, was in all probability an effort to compensate for at least some of the
differences identified by Sveiby. It does appear though that the main difference
between the Asset Monitor and the Balanced Scorecard lies in the focus of each. It
appears that the Intangible Asset Monitor focuses on human capital while the
Balanced Scorecard focuses on strategy. In terms of the disadvantages of the
Intangible Asset Monitor, Kaes (1999, p 137) did point out the following:

• the strong focus on employees might lead to neglect of important areas of

structural capital;
• inadequate treatment of the external enviroment, i.e. the exclusive focus on
customers;
• the explicit focus on service and know-how companies which makes it less
relevant to other industries;
• the static intellectual capital flows are not incorporated; and
• there is no link to financial capital performance.

Notwithstanding the weaknesses, the Intangible Asset Monitor did appear to be a

suitable methodology for measuring progress within the context of this research.
Because it is already visible that there are overlaps in what is required for
measurement and because of the clear advantages in the next two methodologies to
be discussed, it is already anticipated that it would in fact not be one single
methodology that would be appropriate for use but rather a combination of
methodologies that would provide the most suitable solution.

4.5.4 Value Chain Scoreboard™

The idea behind the value chain scoreboard is to find and score appropriate
measures for each of a number of value chain stages. The purpose is to ensure that
growth occurs to ensure that the company is able to keep pace with the increase in
speed requirement of the new economy. The original work could not be traced but,
according to Sveiby (2001a), Lev’s value chain identifies discovery, implementation
and commercialisation stages. These stages are similar to the discovery,
investigation and consumer testing phases identified by Czerniawska and Potter
(1998, pp 74-85). Because their work particularly refers to a typical research
environment, which is the context of this study, it was decided to use that rather
than to refer back to Lev.

Evaluation or scoring of the value chain cannot be done at leisure. Speed (of
delivery) is the single most important factor that impacts on knowledge economy

4.20
businesses. Therefore, the company’s value chain also needs to allow for the
acceleration of delivery of products and services (at least at the same level but
preferably an improved level of quality) to its customers. If this is not possible, the
company has not yet made the shift into the knowledge economy competitive arena.
Without that basic understanding, it will be even more difficult to understand
intangible value chains.

Napster, a web service that allowed for the sharing of music in MP3 format, is often
used as an example to illustrate value chains within the e-business environment. It
is also often quoted as an example to illustrate that, if one does not understand the
impact of the changed environment upon your value chain, you could, as the music
industry has done, lose all control over the really valuable portion of the supply
chain. By succeeding to close Napster down, the industry opened the opportunity for
a number of anarchists who are now devoted to making music files available free of
charge and who are causing huge losses to the formal industry (Fine, et al., 2002, p
69).

The identification of a virtual (or intangible) component to value chains comes from
work that was published in 1995 by Rayport and Sviokla (in Czerniawska and Potter,
1998, p 67). They argued that within physical value chains, information is part of
the supporting infrastructure. Once the value within the virtual value chain is
understood, it becomes an asset to be managed just as a physical value chain. The
reason why the virtual value chain is, more often than not, not valued is that both
the processes (making connections between disparate pieces of data and selecting,
analysing, extracting and distributing data) as well as the customers (staff members
within your own organization who need the information for their own processes) are
virtual. To explain the concept, Czerniawska and Potter (1998, p 67) provided an
analogy of the modern school. The physical value chain refers to the children
moving through the system from one grade to the next until they are able to leave
having attained an expected minimum standard of education. When analysing the
virtual value chain, the strengths and weaknesses of both teachers and children are
assessed. The state of knowledge within the children is established prior to class
and the effect of the teaching is measured afterwards. The aim would be to change
and improve the teaching to the class as a whole and to individual children. The
overall effectiveness of the school could then be measured and benchmarked against
other schools. The first step is therefore to monitor and improve the virtual process.
Within the information services this would refer to personalization of both end user
training and access to information sources.

When the intangible value within the chain has been maximised, the next step is to
replace processes where necessary. A library example of this is where patrons, who
were previously expected to visit the library to gain access to information, now have
desktop access to electronic full text which was scanned from a physical document
and forwarded electronically, or where the information specialist has negotiated
access to a publisher’s full text content and taught the member of staff to help
himself.

4.21
As a third step in value chain methodology utilization, it is also possible to create new
products for new customers, if the value chain is exploited to its full potential.
Linking back to the library example, the information gained from patron feedback
could be sold to (or exchanged with) suppliers to improve their products. Needs that
are expressed could be sold to other role players so that new products to address
those needs could be created. Once the benchmark identifies your service as the
best in the market, it is of course also possible to sell the service to customers
outside the company walls. Perhaps what is most valuable from the whole process,
is the continuous positive, active cycle (or chain) of innovation and improvement that
works to the benefit of all parties involved in it.

The faster the development is in underlying technologies of a product or system, the

more likely it is that the relevant section of the value chain will be prone to rapid
innovations. It is therefore more likely that one would require higher ongoing
knowledge investments to maintain technological competency (Fine, et al., 2002, p
72). The best growth position to be in is when a section of your value chain has
competitive advantage in an area where there is high customer importance
evaluation and technologically there is a relatively fast rate of development. The
trick is to identify and take advantage of such a niche area. Similarly, if it is cheaper
to outsource a section of the supply chain, where the company does not hold
competitive advantage, to a reliable supplier, the company should do so.

As was mentioned at the beginning of this section, Czerniawska and Potter’s work
(1998, pp 74-85) is of particular interest because they identified an intangible value
chain within a research environment. Their value chain refers to the discovery or
creation of a new idea, the investigation of the feasibility of that idea and then lastly
the testing of the idea on the consumer. This value chain could easily be adapted to
indicate the significance for and the impact of information services on the various
stages of both the tangible and intangible value chains of a research organization.
Figure 4.2 on the next page is an attempt to illustrate the significance of the value
chains for information services.

4.22
Fig 4.2: Value chains in information services

Tangible chain Intangible chain

Project
Identify sources Making connections Discovery
acquisition

development
Accelerated speed of
Project Acquire and maintain information Analysis and comparison
Investigation
research products

Project Maintain intellectual property Co-develop enhanced products Consumer

delivery products testing

Looking at the physical value chain of a research organization and the contributions
information specialists/librarians make to it, it can be clearly seen that much of the
visible or tangible contribution is reactive-proactive. The customer is not aware of
any activity prior to the identification of a project. The researcher requests
information and only then does the information specialist start identifying appropriate
sources of information. During the research phase, the information products are
acquired and maintained while some assistance is given to maintain and or develop
intellectual property products (typically research reports) after the research is
completed. Within the intangible chain, the information specialist pro-actively
ensures that connections are made and maintained not only to sources but also to a
variety of minds (knowledgeable people). During the investigation phase, the
information professional compares and analyses sources of information in order to
recommend the most reliable or most suitable when the researcher needs to gain
access to it. During the consumer testing phase, the information professional either
co-develops with the researcher or prepares products and services that can be
utilized as direct input by the researcher. This idea is developed further through
Table 4.2 on the following page. The table was created from a combination of
Czerniawska and Potter’s ideas and the skills identified by Marshall, et al., (1996).

4.23
Table 4.2: Information specialist contribution to the intangible value chain
activities of a typical research organization

Intangible Activities Methods IS Inputs to the Skills required

value chain new value chain
stage
Discovery • Synthesise your Old • Assess and • Overview (balcony
own and others’ • Read evaluate vision)
ideas • Attending information • Critical evaluation
• Take an existing conferences supply chains • Technical/ICT
approach and • Hold discussions • Enable access to manipulation
modify it for a with colleagues reliable • Negotiation – with
new situation information suppliers and
• An idea that was New sources users
introduced in • Communication • Negotiate • Ability to make
one context can technology is favourable deals connections –
be applied in utilized to with reliable connecting minds
another accelerate the information and data
• Experiment with exchange of ideas suppliers • Sifting, sorting,
a definite goal • The Internet allows • Provide staff with maintaining
to see what will the researcher to access to push, information
happen choose his sources pull and push- collections –
where previously pull information virtual and
he depended upon • Provide access to physical
an intermediary to information
choose on his generated
behalf internally
• Information is • Transfer
always on tap – information from
one just needs to the physical
identify the source (paper) to the
virtual
(electronic)
domain

Value created
• Client
experiences an
increase in speed
and scope of
information
• Increased
productivity of
the researcher
• Increase in
efficiency of the
researcher

Investigation • Experiment to Old • Maintain • Database

find feasible • Laborious, labour databases of creation,
solutions intensive laboratory possible solutions maintenance and
• Develop tests • Identify and manipulation
drawings • Expensive (and track experts • Communication
• Develop proto- sometimes risky) • Capturing lessons skills
types in-situ tests learnt • Training
• Automating • Facilitating
New literature communities of
• Mathematical searches practice and cross
models are run • Teach users to functional teams
against a database exploit the full • Expert searching
of possible capacity of skills including the
solutions available creation and
• Making designs commercial maintenance of

4.24
Intangible Activities Methods IS Inputs to the Skills required
value chain new value chain
stage
available for information SDI and alerting
comment and products facilities of
improvement by • Monitor new databases and the
peers – in a 24 developments Internet
hour working shift and pushing the • Expert indexing,
of global information to reducing retrieval
participation the researchers of noise
• Virtual testing in
simulation Value created
environments • Access to ‘free’
• Cross functional solutions for the
teams researcher (cost
saving)
• Re-invention of
the wheel
minimized
(increased
productivity)
• Reduced lead
time (time
saving)

Consumer • Exposing Old • Pro-active • Analytical skills for

testing customers to • Marketing to clients identification of needs
the result of the after prototype has potential identification and
research been tested customers analysis
conducted • Variety of attempts • Building • Identification and
• Turning an to gain funding customized selection of
experiment into portals and relevant
a viable New extranets and information to be
business • Co-development by identifying/main- shared between
opportunity known customers taining content in all partners
• Inputs from collaboration with • Skills to use
unknown customers and relevant
customers (via the consumers technology
Internet for • ‘Market scanning’ effectively –
example) and analysis includes expert
• Individualization or • Maintaining a knowledge of web
personalization of database of and database
consumer goods records of applications
• Physical domain interactions,
testing is the very actions taken,
large test at the lessons learnt
end of the process
Value created
• Adding to the
efficiency and
professional
image of the
researcher

Both Figure 4.1 and Table 4.2 provide valuable insight into the intangible aspects
that needed to be considered when developing human capital.

4.25
4.5.5 Balanced Scorecard and its sub-entities

If literature volume was the only criterion to use, this methodology would easily be
judged as the most popular. This is in all probability part of the reason why the sub-
entities: knowledge management performance scorecard and balanced scorecard
strategy maps, came into being. The balanced scorecard approach, to measure
corporate performance, was developed and introduced in 1992 because Kaplan and
Norton realised that companies, even though they may understand the value of non-
physical assets, were not able to reliably measure the non-tangibles (Kaplan and
Norton, 2001a, p 88). They saw that there was a widening gap between the short
term financial goals and the longer term strategic goals and identified a scorecard
that they felt would give companies a means to bridge the gap. In addition Kaplan
and Norton (1996, pp 75-77) identified four ‘new’ business processes for those who
introduced their balanced scorecard methodology. These processes were:

• Translating the words in the company’s vision and strategy into an integrated
set of objectives and measures that all executives could and would agree on.
• Communicating and linking the company’s vision and strategy so that the
organization as a whole could understand the long term strategy.
• Integrated business planning, which allows for the allocation of finance and
other resources to initiatives that work towards realising long term goals.
• Feedback and learning not only from the short term financial point of view but
from three additional perspectives, namely customers, internal business
processes and staff learning and growth.

Keeping the above in mind, it is possible to say that the crux of the balanced
scorecard methodology is that it provides management with the tools to learn at
executive level – where strategic learning needs to take place. It provides the
opportunity to translate company vision and strategy into measurable objectives with
targets and initiatives. Mooraj, Oyon and Hostettler (1999, p 484) confirm this by
stating that, even though it can be regarded as a control mechanism, they regard the
balanced scorecard as part of the planning cycle of management science. Kaplan
and Norton saw it fit to identify four areas in which to develop these objectives,
namely:

• financial (to succeed financially how to appear to shareholders);

• internal business processes (to satisfy your customers and shareholders what
business processes should you excel at);
• learning and growth (to achieve the vision how to sustain ability to change
and improve); and
• customers (how to appear to customers).

Figure 4.3 on the next page provides a graphical representation of the above.

4.26
Fig 4.3: Balanced scorecard framework (in Mooraj, Oyon and Hostettler, 1999,
p 481)

Financial
s
ive

es
or
t s
et

r
ec

su
ica
bj rg

ea
Ta

d
O

M
In
To succeed
financially, how
should we appear
to our
shareholders?

Internal business Customer

processes
es s
tiv ive

es
s
Vision and Strategy
es

ec
s

or
s t s
or

r
bj et ec et

su
r

t
su
t

ica
bj rg
ica

rg

ea
O
ea

Ta Ta

d
O
d

M
In
M
In

To satisfy our To achieve our

shareholders and vision, how should
customers, what we appear to our
business processes customers?
must we excel at?

Learning and
growth s
e
tiv es
s
or

ec et
s r
su
bj
t
ica

rg
ea

O
Ta
d

M
In

To achieve our
vision, how will we
we sustain our
ability to change
and improve?

The intention is that management sets objectives for each of the four business
objectives. Indicators to measure are then identified for the objectives. Targets are
set for each of the indicators and initiatives are identified to ensure that targets are
met. The balanced scorecard is meant to be more than just developing a checklist to
measure managers’ performance. Kaplan and Norton (2001a, p 87) are of the
opinion that the only way to ensure that the scorecard does not become a checklist
is to continually emphasise the linkage with strategy. It is easy to recognize that the
scorecard encourages the development of human, structural and customer capital.
This technique therefore appeared to be very suitable for measuring the impact of
intellectual capital activities on the development of a service such as that provided by
CSIR IMPS.

Kaplan and Norton (2001b, pp 147-155) identified five principles to be upheld when
using their methodology. These principles are the following:

• translate the strategy into operational terms;

• align the organization to the strategy;
• make strategy everyone’s everyday job;
• make strategy a continual process;
• mobilize leadership for change.

4.27
It is a good start to define and communicate vision and strategy throughout the
organization. However, to ensure that each individual aligns with the activities
Kaplan and Norton (1996, p 80) advise that each employee is informed and receives
education as to what the scorecard activities really mean, that each and every
employee sets goals in alignment with the company’s strategy and that the company
links rewards to performance measures. When this is managed correctly, each
individual’s responsibility towards the company achieving its goals can be identified.
Looking at the matter from another angle, the contribution of each individual to the
company reaching its goals can be identified and, in effect, his/her reward
determined. The danger/risk lies in the fact that, as soon as reward is linked directly
to a measure, the measuring instrument becomes more important than the
contribution, that is being measured.

A further point of concern, which is directly applicable for this study, is that in a
commercial company where financial gain is the goal, the customer who pays for and
receives the service is usually one and the same. In not-for-profit organizations this
is usually not the case. In not-for-profit organizations those who pay do not, as a
rule, directly reap the benefits derived from the investment. Because of this, these
not-for-profit organizations usually put the stakeholders instead of financial gain at
the top of their ‘scorecard’.

De Gooijer’s work, reflected in the next section, is an example of this. Kaplan and
Norton (2001a, p 99) suggest that, instead of placing the stakeholder in such a
prominent position, the mission should in such cases rather be placed at the highest
level. (For example a law enforcement agency will have a safe and crime free
environment as the highest level of the scorecard or an information service could
have the development of an informed, information literate body of staff members as
its mission.) As a result of their observations, Kaplan and Norton adapted the
original scorecard framework specifically for not-for-profit organizations as indicated
in Figure 4.4 on the next page.

4.28
Fig 4.4: Adapted balanced scorecard framework (Kaplan and Norton, 2001a, p
100)

The Mission

Customer
Financial
s
ive

rs
es

s
rs
s

to

re
tiv ct et

to

ca

su
s je

s
c et rg

ca

re
je

di

ea
rg Ob Ta

su
di
Ob

In

M
Ta

In
To achieve our

ea
If we succeed,

M
vision, how should
how will we look we look to our
to our financial customer?
donors?

Internal Business
Processes ves
i

s
ct s

rs
et

re
to
To satisfy our je

su
rg
Ob

ca
Ta

ea
di
customers,

M
In
financial donors,
and mission,
what business
processes must
we excel at?

Learning and growth

s
rs

s
re
To achieve our ive
to

s
et
su
ca

ct rg
ea

vision, how must je

di

Ta
M
In

our people learn, Ob

communicate and
work together?

Kaplan and Norton realised that, even when the scorecard framework is adapted, the
advantage of having the service does not get sufficient attention. They therefore
developed a model through which public sector agencies could develop their
objectives. This model (Kaplan and Norton, 2001a, p 101) was utilized to create the
model reflected in Figure 4.5. The model makes provision for the development of
objectives and measures in terms of the four items identified previously (finance,
customers, processes and growth) but brings in the notion of value addition. It also
places the customers and the stakeholders at the same level.

4.29
Fig 4.5: Framework for the evaluation of information services (adapted from
Kaplan and Norton (2001a, p 101))

Mission

Stakeholder Customer/
strategy/ Supplier capital
Financial development/
support External structure

Value/Benefit of
the service

Structural capital
Human development/
capital Internal
development structure

From Figure 4.5 one can determine that the development of both human and
structural capital is subordinate to the value of the service. Value should be
measured against the mission of the service. The model makes provision for the fact
that not all human capital can and should be transferred to structural capital and,
similarly, customers are also able to add value by providing feedback and engaging
in interaction. Stakeholders may not benefit directly from the value provided by the
service but, by ensuring that the mission of the service is in line with stakeholder
strategy, stakeholders ensure alignment with their own focus. Customers benefit
from the value created with stakeholder support (usually in monetary format) but
need to be in direct contact with stakeholders as well. Such contact ensures that
stakeholders are aware of their needs when providing input to the development of
the service mission.

In general, literature consulted was very positive about the use of balanced
scorecards. Mooraj, Oyon and Hostettler (1999, p 484-486) identified the following
advantages of using the methodology:

• a dramatic increase in productivity;

4.30
 • a significant increase in an individual’s ability to identify his role in the success
of the business;
• communication and understanding of the holistic system;
• balanced information in a concise way;
• an environment which is conducive to learning;
• elimination of the uncertainty of which control system to use in what situation;
• a good tool to define and disperse core values; and
• prevention of conflict where each employee knows what to do as well as the
reason behind what needs to be done.

However, of particular interest was the warning that culture has an influence over
the success of a balanced scorecard. Mooraj, Oyon and Hostettler (1999, pp 487-
488) identified the following three types of culture to take into consideration:

• National culture (for example the Americans are very much focused on
creating shareholder value, the Europeans for rewarding all who have an input
and the Japanese on creating long term relationships).
• Professional culture (some professions have unwritten or informal rules.
When an attempt is made to turn these into formal rules it apparently causes
problems.)
• Organizational culture (a scorecard that is not congruent with the
organizational structure and management style will cause confusion
throughout the organization).

Should a balanced scorecard methodology be deployed, it will be necessary to ensure

that it is in line with the existing CSIR scorecard or basket of measures. Professional
culture was not seen as a particular threat as none of the employees affected by this
study belong to a profession other that that of information services. No proof could
be found that any research has been conducted where the impact of African and
specifically South African culture on the use of a scorecard had been measured.
Because of the staff mix (White females and Black males), it is anticipated that there
would be an indication of this aspect coming through. This should, however, be a
research study of its own.

Other points of concern identified by Mooraj, Oyon and Hostettler (1999, pp 484-
486) are that:

• There is a lack of the unplanned. The scorecard ensures so much focus that
employees are inclined to ignore new opportunities.
• The employee is given no room for spontaneous reflection. This can be
extremely debilitating to creative individuals.
• No place is provided for the management of the unintended strategy. This
links to the facts that nothing is unplanned and that employees are given little
room to reflect on what they are doing.

Fortunately these disadvantages can be managed and Mooraj, Oyon and Hostettler
(1999, p 489) came to the conclusion that the balanced scorecard could be both a
necessary and a useful tool for the knowledge economy company. They are of the

4.31
opinion, however, that each organization needs to create its own unique scorecard
with its own unique priorities. It is also useful to remember that a balanced
scorecard on its own will not necessarily ensure competitiveness and profitability. It
is the setting of goals and identifying suitable initiatives and measures that will do
that.

The balanced scorecard appeared to be the most suitable measurement methodology

but it was thought appropriate to identify a similar situation (not-for-profit company
or a library or an information service) that had utilized it successfully. The literature
search lead to the work of De Gooijer, which is reported on below.

4.5.5.1 Knowledge Management Performance Scorecard as sub entity

of the Balanced Scorecard

The Knowledge Management Performance Scorecard is an adapted version of the

balanced scorecard approach. It is of interest because it was developed for the non-
commercial environment. Just as with Kaplan and Norton’s balanced scorecard, the
Knowledge Management Performance Scorecard measures performance in four key
result areas:

• financial performance;
• internal business processes;
• ‘stakeholders’ instead of ‘customers’; and
• ‘people’ instead of ‘growth’.

De Gooijer (2000, p 305) did her research in a not-for-profit governmental

department. She made some assumptions about a knowledge management
performance management system. These are:

• A Knowledge Management Performance Framework is not in isolation from the

organization’s business performance framework.
• There is clear and direct alignment between individual work plans, team goals,
business unit objectives and the organization’s key result areas.
• There are clear benchmarks against which performance can be measured.
• Performance indicators are unambiguous.
• Knowledge management is a business principle and is embedded in all aspects
of the organization’s work.

She also used as input the knowledge management map concept that stems from
the information ecology framework (which was discussed in section 2.4.2.3 on page
2.24 of this report), the tacit to explicit knowledge transfer processes as well as the
notion of sense making which comes from electronic mediated communication. For
very valid reasons, De Gooijer (2000, p 306) changed the Balanced Scorecard’s
categories of customers to stakeholders and growth to people.

In order to design the scorecard, she then asked the following three questions:

• What business processes do we need to excel at?

4.32
 • How should we appear to our stakeholders?
• How will we sustain our ability to learn and develop?

For each of these questions the expected outcome, the initiatives and the
performance indicators were identified. Indicators included items such as the
number of times a frequently asked questions (FAQ) list was accessed as well as how
well the staff room was utilized. The ‘concerns-based-adoption-model’ was utilized
to identify the various levels or stages through which behaviour could be classified.
In an adapted version of the classification system, the levels of skill and associated
roles can be indicated as follows:

Table 4.3: De Gooijer’s levels of skill and roles to play

Level Skill Role at this level

0 Awareness but non use Maintainer of status quo
1 Actively seeking information Early learner
2 Personal experimentation Follower
3 Personal implementation Implementer
4 Refining the impact and consequences of Problem solver
implementation activities
5 Active integration into all aspects of work Leader
6 Refocusing skills on new business opportunities Innovator/Investigator

Theoretically this classification system makes much sense, as it should be possible to

categorize each of the identified scorecard items in any of these six categories.
However, practically, based on experience, any classification system with as many
variations causes confusion and unhappiness. For example, the difference between
levels three, four and five are rather subtle and, similarly, the difference between
levels zero and one are negligible. Within IMPS it was decided to opt for a three
level classification system.

Table 4.4: IMPS roles and skills classification

Level Skill level Expectations for this skill level

1 Beginner/Learner Needs assistance.
2 Experienced/Worker Able to work/implement independently.
Able to identify alternatives.
3 Mentor Able to teach and train others.
Able to implement alternatives and
enhancements.

This classification was used as the basis upon which skills levels were determined
during the skills audit, as discussed in section 5.4.3.1 on page 5.34.

In terms of the tools and infrastructure required to enable and monitor the
scorecard, De Gooijer (2000, p 309) identified Lotus Notes, team rooms, the
Intranet, access to internal and external information, an electronic library of internal
documents and objects, and community of practice participation.

4.33
This research still needed to be implemented and unfortunately no further reference
to it could be traced.

4.5.5.2 Balanced Scorecard strategy maps

As an extension of their original work and as a result of extensive scorecard

consultancy, Kaplan and Norton (2001a, p 90) are able to create strategy maps that
specify the critical elements and their linkages to an organization’s strategy. They
claim that a strategy map should be seen as a diagnostic tool that can assist in
finding and remedying flaws in balanced scorecards. This work is of significance
because they also found that not-for-profit organizations in general concentrate on a
key performance or operational excellence strategy rather than looking at the total
strategy. To them it is typical that a scorecard for a not-for-profit organization would
indicate attempts to

• work more efficiently;

• at lower costs;
• with less defects; and
• faster.

They believe that such a method of working is very inward looking and limited in
scope. (This cycle of continuous improvement of existing processes is also very
typical of the situation within libraries.) To break out of the inward looking cycle,
they (Kaplan and Norton, 2001a, p 88) suggested that one takes note of the
following linkages in what they refer to as the service management profit chain:

• investment in employee training improves service quality;

• improvement in service quality leads to higher customer satisfaction;
• higher customer satisfaction leads to increased customer loyalty; and
• increased customer loyalty generates increased revenues and margins.

Taking the service management profit chain into consideration, it was decided to
adapt the strategy map created by Kaplan and Norton (2001a, p 92) and to create a
map that could fit in with the framework for information services. The map is
reflected in Figure 4.6 on the next page.

The map sets out to, at the highest or strategy level, recognise that staff, customer
as well as stakeholder satisfaction are the objectives and a prerequisite for success.
Staff satisfaction depends upon setting targets for a motivated workforce and the
continuous improvement of structural capital. Customer satisfaction requires
activities or targets to address product/service attributes, the relationship with the
customer as well as the image of the products/services the customer pays for.
Lastly, in line with the CSIR IMPS situation, stakeholder satisfaction depends upon
healthy financial management that includes reliable supply chain selection and
improvement in customer productivity.

The overview of the methodologies mentioned lead to the conclusion that a

combination of the Balanced Scorecard, the Asset Monitor and the Value Chain

4.34
Scoreboard types of methodology would be the most appropriate to follow. It also
became clear that measurement should be done at both an operational (or personal
level) as well as at a strategic or organizational level if it is to be truly useful. Once it
was decided which methodology to use, the questions still remained what actually
had to be measured, what measuring tools should be utilized, and how measuring
should be done.

4.35
Fig 4.6: Balanced scorecard strategy map for information services (based on the Kaplan and Norton (2001a, p 92) model)

Staff satisfaction Customer satisfaction Stakeholder satisfaction

Human capital Structural Customer capital perspective Financial capital
perspective capital perspective
perspective
Appropriate Build the Price Decreased

Customer acquisition
skills and service Quality dependency

productivity strategy
Improving customer
competencies (innovation

Product/Service
process)
Increase Time Improve asset

Productivity

Fulfilling our mission

customer value Products/Services utilization

attributes
(customer
management
process)
Appropriate Operational Service level Improve cost
Motivated and prepared workforce

resources excellence efficiency

(operations

Reliable effective supply chain

Relationship
Positive work and logistics Relations Efficient financial

Customer value proposition

Customer value proposition

Customer value proposition

environment processes) management
Continuous improvement

operational excellence

Customer retention
Product leadership
customer intimacy

Cost effectiveness

selection strategy
Increase Brand Increase value for
supplier customer
reliability
(supplier Image
management
processes)

Continuous improvement of all four capitals is a prerequisite to fulfilling the mission of information services

4.36
4.6 The ‘what’ and ‘how’ of measuring

Bontis, et al., (1999, p 392) suggested that it might be useful to ask the following
questions before starting to identify the most suitable measuring tools:

• How possible is it for accounting tools, that were developed 500 years ago to
help merchants in the feudal era, to make the key success factors of the
knowledge economy possible? This question prompted the decision in
principle to ensure that suitable measuring elements should be identified so
that all focus areas are addressed at both the operational and strategic levels.
• How does one choose among the many alternatives suggested by different
authors? Keeping the context of the research in mind, this question led to the
decision to, in principle, identify measures that are known within the
environment, that are simple and easy to use but that gives results that could
be graphically displayed. (In other words it should be possible to put numbers
to the results so that graphs can be drawn.)
• How can the urge to jump from one faddish instrument to the next be
prevented when all promise success and competitive dominance? This
question led to the decision to, in principle, create a measuring instrument
(with the assistance of the staff members) that was unique to our own set of
circumstances. The rationale is that one is much more loyal to one’s own
creation than to any adopted methodology/instrument.

Bontis, et al., (1999, p 400) came to the conclusion that no single method of
evaluation is perfect. One can only attempt to find a measuring tool that is most
appropriate within the set circumstances. They warn, for example, that a good tool
used in the wrong circumstances can do more harm than good especially in terms of
the undesired side effects. This statement led to a fourth principle, namely to design
a measuring tool that was unique to CSIR IMPS but that had ample staff input
continuously.

Having identified the guiding principles, the next important aspect of the exercise
was to identify what exactly should be measured. It was taken for granted that
possible measures, within the context of this study, have to address all of the
following: human capital growth, structural capital development, customer focus and
financial health. Again available literature was researched to find both suitable
indicators to be measured and the appropriate tools to use.

Roos and Roos (1997, pp 417-423) stated that the vehicle for measuring intellectual
performance is a set of indicators used for each intellectual capital category. Their
advice, which was also re-iterated by Duffy (2000, p 14), in terms of indicators
includes the following:

• To be a useful measurement mechanism, the indicators should be grounded

in:
o the drivers of the vision and/or direction expressed;
o the intellectual capital categories selected; and
o inter-capital flows.

4.37
 • The intellectual performance system must be rooted in the language of the
company or unit. Important concepts used in conversations and texts around
the vision, mission, strategy and success factors must be identified, and the
meaning of these concepts must be uncovered.
• To be measured, intellectual capital obviously needs to be categorized.
Categorizing must be more of a top-down than a bottom-up process.
• Any intellectual capital model must be scaleble; it should make sense for large
as well as small companies, and for organizations, parts of organizations as
well as individuals.

They also identify the fact that there are many difficulties in dealing with indicators.
Examples of these difficulties are:

• selecting the right indicators among the almost limitless number of potential
ones;
• ranking the importance of indicators for a specific category;
• ensuring high precision for indicators;
• establishing reliability of numerical values of indicators;
• tracing all sources of error or noise in the logic used to identify indicators,
which may otherwise lead to erroneous or irrelevant indicators; and
• tracking the high multi-co-linearity among many of the indicators, meaning
that the indicators are not reciprocally independent.

Looking more at specific indicators to use, Robinson and Kleiner (1996, p 38)
advised, in terms of human capital development, that if a direct measure of a skill is
not available, the use of an ‘indicator’ of the skills will need to be used. There are
various counts and ratios that have been and are being used as a means of
assessing intellectual capital. But again the presence of these practices is probably
best thought of as an indication of intellectual capital, not as a measure of
intellectual capital: just as the measure of training is really just an indicator that
intellectual capital is being created or maintained (Robinson and Kleiner, 1996, pp
37-38). Indicators include:

• the numbers of patents, good ideas or articles published per person;

• various ratios of employee output;
• the value-chain support activity called technology development;
• benchmarking studies to identify the best decision-making practices in a R&D
setting;
• the use of cross-functional teams;
• the use of post-project audits; and
• analyzing best practices including charts where quality of execution is plotted
versus frequency of use.

Liebowitz and Wright (1999, p 101) created a table (see Table 4.5) of sample
indicators, as used within the Skandia Navigator.

4.38
Table 4.5: Sample of the metrics developed for the Skandia Navigator
(Leibowitz and Wright, 1999, p 101)

Capital asset Example indicators

Human • Replacement and acquisition cost
• Generalized training and employee development cost
• Percentage of outsourced personnel resources
• Development of cross-functional team structures
• Internal control and ethics

Customer • Creation and development of external relationships

• Brand loyalties
• Customer service expectations
• Market share

Process • ICT infrastructure

• Logistical efficiencies
• Administrative procedures

Innovation • Renewal and development costs

• Change in product development and delivery cycle
• Adoption of industry quality standards

Peters and Waterman (1982, in Robinson and Kleiner, 1996, p 39) identified further
traits that can be used as indicators. These are:

• ‘management by walking around’ or ensuring that the manager/leader is

visible and available;
• lack of barriers to communication flow;
• toleration of failure and experimentation; and
• the concept of a champion.

In terms of the valuation of customer capital, Duffy (2000, p 12) suggested the
following:

• to use anything that would indicate that you are really keeping your
customers happy;
• monitor your competitive position;
• monitor which customer-related investments were showing a better return
than any other;
• establish what type of customers were best for your company; and
• measure the effectiveness, the efficiency and the return on investment of the
tools and techniques that were designed to improve the relationship with the
customers.

In further work Liebowitz and Suen (2000, pp 55-62) compiled a complete list of
indicators identified by a variety of authors. For their research, the metrics work
conducted by some of the most prominent intellectual capital authors (Edvinsson,
Lev, and Bontis) was correlated. Unfortunately, their work did not include that of
Stewart, Sveiby or Kaplan and Norton. They came to the conclusion that the metrics

4.39
identified were perhaps not sufficient within the knowledge era and as a result they
complemented their list with that of the KPMG online assessment tool called The
Value Enhancer. From the comprehensive list, it was clear that all items would not
be applicable within the context of this study. Below is a selection of the items they
identified as metrics:
Human capital

Training expense per employee

R&D investment in basic research
Years of service with the company
Revenues per employee
Profits per employee
Percent of employees with advanced degrees
IT literacy
Motivation index
Savings from employee suggestions
New solutions/products suggestions
Training efforts
Competence development
Employee satisfaction
Age distribution
Time in training
Re-use of available knowledge
Number of ideas that were turned into projects
Number of apprentices that staff mentor
Interactions with academics, consultants and advisors

Structural capital

Processing time
Contracts filled without error
Number of new products
Number of lessons learnt and best practices applied

Customer capital

Number of new customers

Sales per customer
Time from customer contact to sales response
Average customer duration with the company
Customer satisfaction index/customer rating
Productivity index
Number of processes renewed
Market share
Customers lost
Customer size

Financial capital

Profits/total assets
Revenues resulting from new business operations
Profits per employee

4.40
In all probability, the lack in background knowledge of/or experience in utilizing the
available scorecards and monitors leads to the perception that the listed indicators
would not be of particular use (as a directly transferable group) within the context of
this research.

All of the information within this section of the research did not make the selection of
appropriate measures any easier. It was therefore decided to utilize the strategy
map (Figure 4.6 on page 4.37) and to use it as a point of departure to at least focus
the measuring activity. It was anticipated that if the correct questions were
identified within such a strategy map, the correct indicators would follow. The
following were identified as further principles to note in compiling a measuring tool if
it were to be useful within the context of this study:

• It is not possible to measure a department or organization’s ‘combined’ score

if you have not established a ‘score’ at an individual level. The tool should
therefore make provision for the easy integration of personal scores into a
departmental or organizational monitor/scorecard.
• Provision needs to be made for growth at an individual level as well as for
contribution at a team level if you do not wish to fall into the internal
competition trap.
• A review of the current rewards and recognition system will need to form an
integral part of the study.
• It would be necessary to benchmark skills levels and to set appropriate
standards before attempting to measure an individual’s human capital ‘value
score’.
• Some system of weighting or point allocation, which will have to be
standardized, would have to be established for ‘intangible’ contributions (for
example positive feedback from a customer).

Keeping these principles in mind, the following two tables were developed.

Table 4.6: Substance for an organizational/departmental value monitor: testing

against mission and measuring leadership (see page 4.43); and
Table 4.7: Substance for an operational or personal value monitor: measuring human
capital development (see page 4.44).

In Table 4.6, on the next page, measuring is looked at from the departmental point
of view. Here, specifically the aim would be to measure growth in terms of human
capital development, customer satisfaction and stakeholder commitment. It also
should measure the enhancements and growth in terms of structural capital. Growth
in all these areas could be regarded as an indication that leadership is moving in the
right direction. Alignment with the mission should be tested in terms of human,
structural and customer development. The items evaluated as part of the financial
capital component all have a direct link to the mission of the service.

4.41
Table 4.6: Substance for an organizational/departmental value monitor –
testing against mission and measuring leadership

Measurement category What needs to be measured Tools to use

Human capital growth or Motivated and prepared workforce. Personal monitor.
staff satisfaction. Alignment with mission. Staff satisfaction monitor.
Action on staff satisfaction
survey results.

Structural capital Continuous improvement of available Infrastructure quality monitor.

enhancement or infrastructure. Content review.
infrastructure utilization. Alignment with mission. Action on review results.

Growth in customer Operational excellence perception. Customer needs identification.

capital or customer Customer intimacy perception. Customer satisfaction analysis.
satisfaction. Product leadership perception. Action on customer feedback.

Customer retention. Customer statistics.

Customer acquisition.
Alignment with mission.
Growth in financial capital Reliable and effective supply chain Benchmarked preferred supplier
or stakeholder selection. list.
commitment.
Improving customer productivity. Independent usage statistics
from the suppliers.
Healthy financial management. Balance sheet.

Table 4.7, on the next page, formed the basis of the personal monitor that was
developed to measure individual contribution to the success of the service (see
section 5.4.3.2 on page 5.38). What became evident while compiling Table 4.7 is
that it should not be the aim to measure each and every component (answer each
and every question identified in Table 4.7) at every evaluation or measuring
opportunity. It is rather a case of ensuring that each of the broader categories
(human, structural, customer and financial capital) is addressed and that one
category is not forgotten or receives considerably more attention than the others. As
was established with the personal monitor (see section 5.4.3.2 on page 5.38-41), the
process of introducing monitoring systems is not achieved perfectly the first time
round. The introduction process also needs to go through a learning cycle.

When initiating the monitoring process, it is better to start small, use technology as
far as is possible and, most importantly, to test results against reality. The last piece
of advice would be to follow-up on feedback received. If such a stage is not built
into the measuring process, one is simply measuring for the sake of measuring!

4.42
Table 4.7: Substance for an operational or personal value monitor (measuring human capital development)

Measurement What needs to be Personal contribution to both the tangible Contribution to IMPS/Value added
category measured and intangible value chains
Human capital - Appropriate skills and What skills do I need to do my job? What did I teach to whom?
motivated and competencies What additional skills do I need to learn? How did I contribute to benchmarking our
prepared workforce At what skill level am I functioning? competencies and skills
Appropriate resources How well am I able to utilize the resources I am What role did I play in identifying appropriate
supposed to be using? resources for our group?

Positive work What did I do to make work a pleasurable What did I do to our shared work environment?
environment experience for me?
Structural capital - Build the service What am I doing to identify new and better ways to What am I contributing to our overall innovation
continuous (innovation process) do my work? process?
improvement Increase customer What am I doing to ensure that my customer is What am I contributing to the best value for money
value (customer getting the best price for what he is buying? benchmarking exercise?
management process)
Operational excellence What am I doing to ensure that the customer is What am I contributing to our overall operational
(operations and getting the best service as fast as is possible? success?
logistics processes)
Increase supplier Did I continuously check that both the supplier and Did I contribute to improving the relationship
reliability (supplier I adhere to the agreement between the supplier between the supplier and us?
management and IMPS? What did I do to identify our most reliable
processes) suppliers?
Customer capital - Price Am I utilizing our pricing schedule correctly? Did I assist in benchmarking and calibrating the
customer acquisition pricing schedule?
Quality What do I do to ensure good quality work? Do I share my quality improvement lessons with
How often do I need to re-do work? my colleagues?
Did I share the learning gained from re-work?
Did I capture the learning gained from re-work?
Did I assist in benchmarking and calibrating the
quality of our service?
Time What is my turn-around time for difficult solutions? What am I contributing to improve / maintain the
What is my turn-around time for easy solutions? customer’s perception of our turn-around time?

4.43
Measurement What needs to be Personal contribution to both the tangible Contribution to IMPS/Value added
category measured and intangible value chains
Product/Service What do I do to ensure that I know my customers What is my contribution to establishing the
are getting what they need? customer’s needs?
Do I know what products and services my What is my contribution to analysing the customer’s
competitors provide? needs?
What is my contribution to enhancing our current
products and services?
What is my contribution to identifying new products
and services?
Do I assist in analysing our competitors?
Customer retention Service level What feedback am I getting with regards to the What do I contribute to the improvement of our
service I am providing? service to customers?
Relations What contact do I have with my clients outside my What did I contribute to finding new ways to
normal duties? improve our relationship with our clients?
What have I done to improve the customer’s
perception of IMPS?
Brand What do I do to ensure that my customers are What did I contribute to enhancing and enforcing
familiar with our brand? our brand?
Financial capital - Improve cost efficiency Am I using the appropriate suppliers? What contribution am I making in identifying the
reliable and effective right suppliers?
supply chain selection Efficient financial Are my timesheets completed? How much income did I generate for IMPS?
management Are my invoices done in time?
Am I buying supplies that make me more efficient?
Increase value for What am I doing to identify new, better or more How am I contributing to the selection of products
customer effective products and services for my customers? and services IMPS is providing to our customers?
Improving customer Decreased dependency Am I assisting and training my customers? What am I contributing to decrease the customers’
productivity dependence on our physical presence?
Improve asset Am I exposing customers to products and services How am I contributing to ensure that all the IMPS
utilization other to my own? assets are utilized?

4.44
4.7 Summary

Measuring the impact of intellectual capital management is difficult, especially when

there is very little tangible proof of a service’s value. In the introduction of this
chapter it was said that the crux of the matter is that time needs to be spent on
identifying items that will provide tangible proof that intangible growth (or decline) is
taking place. The purpose of this chapter was therefore to determine if appropriate
measuring tools are already available to utilize. The specific intent was to establish if
available tools and methodologies were appropriate to measure the impact of
intellectual capital development activities within the CSIR IMPS environment.

The complete list of available methodologies, as identified by Sveiby (see Table 4.1
on page 4.13), was used as a starting point. Keeping in mind the context of this
study, all the methods closely associated with financial measures were then
eliminated. This resulted in an evaluation of the scorecard-type methodologies. The
methods investigated (see section 4.5 on page 4.18) were the following:

• Skandia Navigator™ which was found to be too complex to be realistic within

the given environment.
• IC-Index™ and its associated digital IC-landscaping. These were found to be
too complex for the context of the study.
• Intangible Asset Monitor. It was found that the philosophy behind the
methodology is appealing and should be integrated.
• Value Chain Scoreboard™ which could hold much potential if integrated with
the balanced scorecard and/or intangible asset methodologies.
• Balanced Scorecard. The later developments which focus on public sector or
not-for-profit type organizations appear to be especially useful.

The words of Kaplan and Norton (2001b, p 158) It is not only what is measured but
also how the measurements are used that determines organizational success led to
the conclusion that it also does not matter what the methodology being followed is
called. In the case of the CSIRIS IMPS, the most suitable methodology should be
designed as a hybrid of Kaplan and Norton’s Balanced Scorecard with the individual
measured elements as well as the application rather linking back to the philosophy of
the Intangible Asset Monitor and including aspects of the Value Chain Scoreboard.
The opinion was expressed that monitoring needs to take place at both the
operational/individual and the strategic/organizational level if monitoring is to be of
objective value.

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