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48 INTELLECTUAL CAPITAL MANAGEMENT
credible or not is a question that requires more research before it can be answered. Still, assessing divisions on the same measurement criteria or through use of the same indicators is not something that Skandia gives priority to in its measurement system; which it sees as a big experiment.
The Navigator—Do Not Plan, Navigate
The leading feature of Skandia’s Navigator is its flexibility. The companies that comprise the Skandia Corporation, maybe even departments in these companies, are not required to adopt a set form or number of measures. They are not even required to report on the same indicators from year to year, because the Navigator is primarily seen as a navigation tool and not one that pro-vides detailed implementation guidelines. Despite its pioneering work and leadership in measur-ing IC, Skandia still believes in the value of learning through taking an experimental approach. Nevertheless, the Navigator is adopted widely across Skandia and has been incorporated in the MIS system of Skandia under the Dolphin system.
Skandia applies the BSC idea to the Navigator by applying measures to monitor critical busi-ness success factors under each of five focuses: financial, human, process, customer, and renewal. Under the Navigator model, the measuring entity—whether the organization or individual busi-ness units or departments—asks the question, “What are the critical factors that enable us to achieve success under each of the focus areas?” Then a number of indicators designed to reflect both present and future performance under these factors are chosen.
Edvinsson explains43 that the measuring entity may also have a different starting point by ask-ing, “What are the key success factors for the measuring entity in general?” The entity then asks, “What are the indicators that are needed to monitor present and future performance for the cho-sen success factors?” Once these are determined, as many measures as necessary are chosen to monitor them. Finally, these measures are examined and placed under the five focuses depending on what they purport to measure.
For example, SkandiaLink asked senior managers to identify five separate key success factors for the company in 1997. These included establishing long-term relationships with satisfied cus-tomers, establishing long-term relationships with distributors (particularly banks), implementing efficient administrative routines, creating an IT system that supports operations, and employing satisfied and competent employees. Each of these “success factors” generated a set of indicators, and a total of 24 were selected for tracking. For the satisfied customer factor, for example, this generated the following indicators:
• Satisfied customer index • Customer barometer
• New sales
• Market share • Lapse rate
• Average response time at the call center • Discontinued calls at the call center
• Average handling time for completed cases • Number of new products44
These indicators are then grouped under the various focuses. As key success factors change, the overall set of indicators for a certain period (strategic phase) that the Navigator model monitors also changes. Not only does the Navigator allow this high level of flexibility in the choice of indi-cators from time to time, but it also encourages individual employees to express their goals and monitor their own and their team’s performance.
THE INTELLECTUAL CAPITAL MODEL 49
In one example, the Navigator model was used by Skandia’s corporate IT to monitor its vision of making IT the company’s competitive edge. To that end, the IT department used the following measures: Under the financial focus, the department measured return on capital employed, oper-ating results, and value added/employee. The customer focus looked at the contracts that the department handled for Skandia-affiliated companies. The indicators included number of con-tracts, savings/contract, surrender ratio, and points of sale. The human focus tracked number of full-time employees, number of managers, number of female managers, and training expense/ employee. Under the process focus the department measured the number of contracts per employee, administrative expense/gross premiums written, and IT/administrative expense.45
In Skandia’s IC Supplement, published in 1994,46 each of Skandia’s companies reported and monitored a different set of indicators reflecting the strategies and key success factors of each. The number of indicators under each focus and the factors that each company attempted to mon-itor were different, with the exception of recurring generic indicators like customer and employee satisfaction. But even with generic measures, the same measures were not used consistently. For example, two out of five companies looked at employee turnover, as an indicator of employee sat-isfaction under the human focus, while the other companies focused on the number of full-time employees in addition to or instead of training hours. As a result, the number of indicators gen-erated for the whole organization was enormous.
Compared to the BSC model, where the measures are more or less prescribed, the Navigator’s underlying philosophy allows for multiple variations. The underlying philosophy is to provide the highest level of flexibility within a defined framework. Skandia wants the Navigator to be a tool for plotting a course rather than a detailed guideline. The details can be filled in later as man-agement steers the business toward meeting its strategic goals. Being flexible and idiosyncratic to the needs of the measuring unit, the Navigator ensures that the whole organization talks IC, while at the same time allowing each measuring unit to develop its own dialect.
Despite inconsistencies and the huge number of indicators generated,47 Skandia automated the Navigator, through the Dolphin system, and incorporated it into its management information sys-tem (MIS). With time the Dolphin system will probably lead to streamlining the various “navi-gators,” and give rise to a more consistent set of indicators through sharing and communication. It seems that Skandia is serious about communication despite the inconsistency of the measures used; to an extent that it reported these measures to external stakeholders. In 1993, Skandia appointed an IC (as opposed to financial) controller to “systemically develop intellectual capital information and accounting systems, which can then be integrated with traditional financial accounting.”48 Though IC reporting requires more consistent measures, or a well-defined model, Skandia appears determined to balance between its desire to provide transparency on how their organization is being run while continuing to experiment with the Navigator.
THE VALUE OF IC MEASUREMENT SYSTEMS— WHERE DOES ALL THIS LEAVE US?
The IC measurement systems all serve, in their unique ways, to ground ICM in the everyday real-ity of business and to monitor the achievement of projected goals. Over time, this can transform organizational behavior and routines and equip top and frontline management to appreciate the value of IC both internally and externally. But the question remains: Does the IC model offer more than the creation of a new IC vocabulary? Does it provide more than the general contention that managementshouldgivemoreattentiontothedevelopmentoftheirIC?DoestheICmodelprovide guidance as to how IC can be managed in a business to yield results, beyond general propositions?
50 INTELLECTUAL CAPITAL MANAGEMENT
Visiting S.A. Armstrong Limited, Charles Armstrong49 showed me a desk pad depicting a three-circle IC model. Everyone in the company has access to this pad. He explained how dis-tributing the pad to all employees makes them feel their input is welcomed and valued (transfer of human to structural capital), and that they should tap into customer knowledge to perfect their work (transfer of customer to human to structural capital), which affects the overall culture and management of the company. But when it came to the measurement system that Mr. Armstrong developed (attempting to measure the flows of value creation), he explained that it is impossible to implement. (On a humorous note, Mr. Armstrong made the remark that I am welcome to apply for a patent on the method.)
The IC models at best provide a tool to communicate the importance and value of IC through-out the organization, but fail to provide any guidance to business leaders and managers on how IC should be managed. It is true that the measurement systems took the IC model from the theo-retical to the practical level by defining the outcomes and results that managers should aim for in managing IC. That may suffice if managing IC is considered as a defined procedure directed at achieving particular results, but it certainly is not sufficient to guide the development of a model for business management in the knowledge economy where IC makes 80 percent of business value. Attempting to define and manage IC without putting it in the context and reality of busi-ness management reduces the IC concept and models to an academic pursuit. ICM should be at the crux of business management and not a mere management tool. For that to happen, a com-prehensive approach that matches between the elementary functions of business management and ICM is essential, hence the comprehensive approach to intellectual capital management (CICM), outlined in Chapter 4. But first let’s explore the question of IC reporting.
NOTES
1 Merriam-Webster Collegiate Dictionary, available online at www.m-w.com.
2 J. Roos, G. Roos, L. Edvinsson, and N. Dragonetti, Intellectual Capital: Navigating in the New Business Landscape (New York: New York University Press, 1998), p. 27.
3 See L. Edvinsson and M. Malone, Intellectual Capital (New York: Harper Business, 1997), p. 146. The authors give credit for the creation of this model to Hubert St. Onge, Charles Arm-strong, Gordon Petrash, and Leif Edvinsson.
4 Haanes, K. and Lowendahl, B., “The Unit of Activity: Towards An Alternative to the Theories of the Firm,” in Thomas, et. al. (eds), Strategy, Structure and Style (New York: John Wiley & Sons, Inc., 1997).
5 Margaret Blair and Steven Wallman, Unseen Wealth: Report of the Brookings Task Force on Understanding Intangible Sources of Value, 2000, Appendix A “Human Capital Sub-Group Report,” available at www.brook.edu/es/research/projects/intangibles/doc/sub_hcap.htm.
6 K. E. Sveiby, The New Organizational Wealth: Measuring and Managing Intangible Resources (San Francisco: Berrett-Koehler Publishers, 1997). Also see www.sveiby.com.au/articles/ emergingstandard.html.
7 Supra note 3.
8 Supra note 3, pp. 34–52.
9 Roos et al. at p. 54 develop a table that lists 49 “flows” of value from one form of capital to another. The various types of capital listed including competency, attitude, intellectual agility, relationship, organizational, renewal and development, and financial.
THE INTELLECTUAL CAPITAL MODEL 51
10 D. Andriessen, “Weightless Wealth: Four Modifications to Standard IC Theory,” Journal of Intellectual Capital,Vol. 2 No. 3, pp. 204–214. Also see D. Andriessen and R. Tissen, Weightless Wealth (Upper Saddle River, NJ: Prentice Hall, 2001).
11 C.K. Prahalad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review, May–June 1990, p. 79. Prahalad and Hamel explain that organizations usually possess five to ten core competencies, which determine the sources available to them to introduce new products or enter new markets. They contend that corporations should be guided by an under-standing of their core competencies when devising their growth and innovation strategies.
12 Id.
13 For more on performance measures, see R. Eccles, “The Performance Measurement Mani-festo,” Harvard Business Review, January–February 1991, p. 131. Also refer to Chapter 5 for the Navy’s system of performance measures for knowledge management.
14 European Organization and C. Fornell, “A National Customer Satisfaction Barometer: The Swedish Experience,” Journal of Marketing, 1992, pp. 6–21. Also see American Customer Satis-faction Index (ACSI), established in 1994 by the National Quality Research Center of the Uni-versity of Michigan.
15 Skandia designed the Navigator as a comprehensive model for the management of intellectual capital. The measurement system is only part of it. For the purposes of this chapter, only the measurement system of the Navigator will be explored. Chapter 9 will examine Skandia’s ICM model as a whole.
16 R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996), p. 25.
17 Id., p. 7. 18 Id.
19 Though the authors stress that their model is one for strategic implementation and not strategic formulation, it is hard to see how asking the posed questions would not satisfy both functions.
20 Supra note 14, p. 30. 21 Id.
22 Id., pp. 25–29. 23 Id.
24 Id., pp. 92–123. 25 Id., p. 120.
26 Id., pp. 92–123.
27 R. Kwon, “A Strategic Measure of IT Value,” Baseline, October 2001.
28 Simmons, R. and Davila, A. “Citibank: Performance Evaluation,” Harvard Business School Case # 198-048. (1997).
29 J. Pfeffer and R. Sutton, The Knowing–Doing Gap (Boston: Harvard Business School Press, 1999), pp. 149–150.
30 K.E. Sveiby, “Measuring Intangibles and Intellectual Capital,” in Morey, Maybury, and Rhu-raisingham (editors), Knowledge Management: Classic and Contemporary Works (Cambridge: The MIT Press, 2000), pp. 337–354.
52 INTELLECTUAL CAPITAL MANAGEMENT
31 Supra note 2, p. 22. 32 Id.
33 Supra note 28, p. 343.
34 K.E. Sveiby, “The Intangible Assets Monitor,” 1997, available online at www.sveiby.com.au/ articles/IntangAss/CompanyMonitor.html.
35 Id.
36 Supra note 28, p. 352.
37 For all the measures mentioned, see Sveiby, “Measuring External Structure,” www.sveiby.com. au/articles/MeasureExternalStructure.html; “Measuring Internal Structure,” www.sveiby.com. au/articles/MeasureInternalStructure.html; and “Measuring Competency,” www.sveiby.com.au/ articles/MeasureCompetency.html.
38 Celemi is a Swedish company in the area of learning products. Celemi has been using the IAM model to report on its intellectual capital to its shareholders since 1990.
39 To the contrary, I believe culture warrants separate thorough treatment, as will be explained in Chapter 10, since one needs to understand the culture before attempting to monitor it for positive change.
40 A tendency that a number of organizations are moving to and will move to as the Internet and networking change the way business is done and organizations envision themselves. An example of such a business model is that developed by Cisco Systems, Inc. For more information see, Nolan, R., Porter, K. and Akers, C., “Cisco Systems Architecture: ERP and Web-Enabled IT,” Harvard Business School Case # 301-099, 2001.
41 Sveiby claims this shows how important professionals are to the firm, which can be compared with other companies or other areas in the same company. Celemi opts not to use this measure in its IAM. See Sveiby, Measuring Competency, supra note 34.
42 Id. Sveiby explains that a “very low turnover rate (below 5%) suggests a stable but not dynamic situation. A very high turnover rate (above 20%) usually suggests that people are dissatisfied.”
43 Supra note 2, pp. 70–71. 44 Id.
45 Visualizing Intellectual Capital in Skandia, Supplement to Skandia’s Annual Report, 1994. (Not all departments reported under all five focuses.)
46 Id.
47 The compilation of indicators for all of Skandia may amount to 164 or more indicators. Edvins-son undertakes research attempts to compile these measures. In L. Edvinsson and M. Malone,Intel-lectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Brainpower (New York: Harper Business, 1997), p. 164, Edvinsson explores the use of a “coefficient of intellectual capital.” In J. Roos, G. Roos, L. Edvinsson, and N. Dragonetti, Intellectual Capital: Navigating in the New Business Landscape (New York: New York University Press, 1998), Edvinsson and others explore the creation of of indices to enable comparisons over time between the various indicators.
48 R. Lusch and M. Harvey, “The Case for an Off-Balance-Sheet Controller,” Sloan Management Review, Winter 1994, pp. 101–105.
49 Charles Armstrong is the President of S.A. Armstrong Limited, a Canadian manufacturing company, and one of the authors of the IC models.
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