October 2002

Intellectual Capital

CIDMIconNewsletter Bill Hackos, Vice President, Comtech Services, Inc.

Recently, we at Comtech had some difficulty with a client’s purchasing department. The purchasing agent said that he was hesitant to hire us, not because of concern about our work or credit but because we didn’t have enough capital! All we have at Comtech are a number of depreciated computers and some office furniture. Not much to brag about. What could we do of any value for his company?

Lucky for us, JoAnn called and explained to him that our value is not in our hardware but instead exists in the data we’ve collected and in the knowledge we’ve gained. As always, JoAnn is very convincing, and we were able to carry on with the project.

This event sent me to buy two books by Thomas A. Stewart, an editor of Fortune Magazine and a senior writer for Business 2.0. His first book, Intellectual Capital: The New Wealth of Organizations (Doubleday 1999), defines intellectual capital and how it affects us as employees. His second book, The Wealth of Knowledge: Intellectual Capital and the Twenty-First Century Organization (Doubleday 2001), is a twenty-first century update.

The idea of intellectual capital was developed in 1958 when analysts Morris Kronfeld and Arthur Rock began to notice that some science-based companies (Hewlett-Packard and others) had overvalued stock market valuations compared to other companies. At that time, HP had annual sales of only $28 million. They concluded that “The intellectual capital of such companies is perhaps their single most important element.” The idea was revisited in 1989 by Karl-Erik Sveiby and his group as they were developing a model to value initial public offerings. They found that their model broke down for valuing high-tech companies. Sveiby and his group proposed that intellectual capital could be found in three places within companies: the competencies of its people (human capital), the internal structure of its information (structural capital), and the relationships with its customers (customer capital). In his first book, Stewart develops these ideas.

Human capital is the knowledge that employees have that can be used to make money for their company. Accounting, programming, technical writing, and law are not related to intellectual capital because these skills, while essential to the success of a company, are likely to be the same among all competitors. However, innovative business analysis, creative hardware and software design, and user-centered information design are competitive advantages and the knowledge to accomplish these skills is human capital. You may have the world’s expert in wine working for you, but unless you sell wine, that knowledge has no value to your company.

Structural capital is the value of explicit information owned by a company. Structural capital includes not only copyrights and patents but also written information available to people in the company. Stewart points out that only information that is organized and available is intellectual capital. This information may be in a knowledge-management system, content-management system, database, or a hard copy library. Computers are not necessary for structural capital although they vastly expand the ability of companies to make information widely available. Stewart suggests, however, that we shouldn’t dump everything we can find into a repository. Information that is unused impedes access to useful information and actually lessens the intellectual capital of a repository. Structural capital is explicit information organized in a way that gives your company a competitive advantage.

Customer capital involves customer relationships but is not the same as “good will.” Good will is commonly considered to be the collection of current customers and potential customers of your product. It is brand loyalty. Consider all the people who drink only Coca-Cola, rather than other brands of cola, and are willing to pay more for that brand.

Instead, customer capital is the body of information you have about your customers. Stewart doesn’t mean their names, addresses, and phone numbers. He means information about how your customers use your product as well as competitor’s products, how you may better fit your customers’ needs, and how you group and classify your customers. Customer capital includes knowledge about customers who will partner with you and serve as beta sites. Customer capital is information about your customers that gives your company a competitive advantage.

I’ve been thinking about what the ideas of intellectual capital mean for information developers. Do we bring human capital to our companies? Do we create structural capital? Do we obtain customer capital for our companies?

What about human capital? Of course, all but the newest of us have considerable knowledge about technical writing. We certainly know grammar and spelling. And we should know the products and services we write about inside and out. Unfortunately, knowing our products and services is not always the case. We have all seen manuals that have perfect grammar and spelling but little coherent information about the product or service. But even having expertise in writing and understanding our product doesn’t represent human capital. All of our competitors also know grammar, spelling, and how their products work. There’s no competitive advantage in this knowledge.

What must we do to bring competitive advantage to our organizations through human capital? We must immerse ourselves in the business of our company and in the technology of our discipline. I’m always surprised at how few information developers read books about their discipline. Many rarely attend training sessions and conferences. Many work in isolation within their companies or work at home. We’re not bringing in much human capital when we treat our discipline like a job.

When we do bring in human capital, we begin to add to the competitive advantage of our company’s products and services. We begin to get noticed and get the respect that all information developers crave.

We can also make important contributions to structural capital. Many times, the task of creating repositories falls to the IT departments. They really know their bits and bytes but don’t have a clue about usability and making information accessible. We as information developers can really help develop structural capital because we know how to organize information and how to make information usable for our customers. That is, if we really know about our customers.

Knowing about our customers brings us to the issue of customer capital. As information developers we, along with training and customer service, are in the best position to develop customer capital. But how many excuses do we have? “There’s no money to do customer studies.” “The developers already know everything about the customers.” “They won’t let us talk to customers.” “We’re too busy getting out the next release to do customer studies.” Unfortunately, what we do so often is trade our efforts to gain real competitive advantage for easier mundane tasks that don’t add to our company’s intellectual capital and don’t get us the respect we want.

Stewart’s books give us a lot to think about.

In his second book, he describes how knowledge-management systems have helped modern companies gain competitive advantage. If you are involved in developing a knowledge-management system, the second book provides you with many case studies. In fact, Stewart wrote both books almost exclusively as a series of case studies. These case studies, though, make understanding the book’s organization difficult. Also, Stewart’s writing style sometimes makes the books a chore to read through. He loves to play word games with the reader that are cute at first but eventually get a little tiring. There’s some unintended humor in Stewart’s books. His first book was written before the bubble burst. Back then, he was impressed with how the dot.coms used their intellectual capital to create massive stock valuations. In his second book, he describes the mistakes of the dot.coms but has a case study where he praises Enron for its superb management and use of intellectual capital to rapidly increase its stock valuation. These examples show that you should read books about corporate management as soon as they’re published, before the case studies go out of date!

These books are a little difficult to read, but intellectual capital is a concept worth learning about. CIDMIconNewsletter

Bill Hackos