When we look at the Market Value of a company, businesses are regularly graded on the value of their assets: They report to their shareholders about the physical assets they own, their cash in hand, and revenues and profits, both past and expected. Traditional assessment of a company’s performance has relied upon traditional factors of production – land, labour and capital.
It was recognized, that in contrast to the knowledge of individual employees, such corporate memory does form part of a company’s capital. Accordingly, “knowledge” has become a key production factor, however, the financial accounts are still dominated by traditional factors of production, including buildings and machinery. Hence, there is an imperative need for developing an understanding of “knowledge capital”, or the so-called intangible assets. The topic is not only pertinent to individual enterprises, but also to national economies that are making a rapid transition to a society based on knowledge work.
As the world economies transition from the world of “atoms” to the world of “bits,” they would be expected to plan, devise and implement information and knowledge management systems that provide a differential advantage in terms of “Intellectual Capital”.
Knowledge assets may be distinguished from the traditional factors of production – in that they are governed by what has been described as the ‘law of increasing returns’. In contrast to the traditional factors of production that were governed by diminishing returns, every additional unit of knowledge used effectively results in a marginal increase in performance. The success of companies such as Microsoft is often attributed to the fact that every additional unit of information-based product or service would result in an increase in the marginal returns. Given the changing dynamics underlying international performance, it is not surprising that some less developed economies with significant assets in ICT knowledge and Internet-related expertise are hoping to leapfrog more developed economies.
But when it comes to measuring their knowledge assets — the value of those can be harder to gauge. However, the entrepreneurial management of knowledge assets can be critical to the success of any business.
Understanding the Value of Knowledge
There's no doubt that the people within an organization are valuable and in today’s technology-driven world human assets are the most valuable assets for the companies. However, we need to accept that we do not have the same intellectual capital for all our people in a company. To be able to manage knowledge capital, we need to first understand these differences and manage them accordingly.
There are three types of human knowledge capital. Each one has a different level of value, these are:
1.Commodity Knowledge
Unskilled and semiskilled labour are usually included in this type. Skills and abilities that are readily available in the market and needed across a broad range of industries fall under this type of knowledge. In simple terms, the individual performing the task is not uniquely skilled and is, therefore, less important than the task performed.
This does not mean that people fall under this category is not important, the aim is the categorise the workforce we have in different intellectual capital types and manage them accordingly.
Commodity skills usually don't add much value to the customer and are simply a labour cost for your company, not an asset. Some commodity skills can be automated so you can focus more resources on higher-level knowledge capital.
2.Leveraged Knowledge
The roles that require leveraged knowledge capital are quite varied, from quality assurance people, auditors, and testers to machinists and marketing specialists. Because of the specialized nature of the tasks, these skills are harder to replace.
People fall into this category has industry-specific skills (not company specific), has some specialisation with a longer learning curve and provides moderate value added for the customers but can generate some revenue.
We can enhance this category assets by changing the role of tasks and improve their skill set to add more value and effectively make them proprietary.
3.Proprietary Knowledge
All key companies are built on this type of skills and knowledge. An organization's intellectual capital is its proprietary knowledge and is the source of greatest customer value. The talent and expertise of the people who create the product or deliver the service are the reasons customers choose you and not your competitor.
One of the wrong assumptions of a successful company is the key management team are the reason for their success. In truth, proprietary knowledge is not reserved for only company executives, the source of this capital lies in mainly experts such as engineers, project managers, sales executives, researchers who represent unique and irreplaceable skills.
At this point, I need to highlight that all three types of knowledge are important; a company can't get rid of one type in order to increase another type of knowledge. You need people from all three categories so that while Salespeople selling your venue, Operators could plan to execute your event and cleaning team could keep the venue clean, presentable and good shape. Each has their own role and understanding the importance of each type will allow you to categorise the skills, talents and knowledge within your company.
The value of human knowledge capital is measured by the ability to retain or generate revenue
VITALS Method
"If you can’t measure it, you can’t manage it"
So far, I have explained the value of the Human Knowledge Capital it’s importance and types. When it comes to measuring the Human knowledge capital, the best method called VITALS. VITALS helps you measure your company's intangible assets with a motto "If you can't measure it, you can't manage it."
Using VITALS will help you successfully implement a knowledge management strategy for your company by giving you measurable results:
V Value for the customer: Understanding what is important to your customers and how you deliver it consistently
I - Innovation: It could be tangible such as a new product or the new ways to deliver better service to separate you from your competitors
T - Tenure: It takes two years for an employee to reach peak performance levels and be considered a tenured employee. Measure tenure using a ratio of new employees to tenured employees. The lower the ratio, the more intellectual capital your company has. For example, a new: old ratio of 1:4 indicates higher retention of intellectual capital than a ratio of 3:4 does.
A - Attitude: To measure employee attitude, administer a survey. It should include questions about a variety of company characteristics, ranging from recognition and rewards, working conditions, and communication to compensation.
L - Learning Plan: A customer-centred learning plan can compare the skills employees have with the skills customers expect them to have. This allows managers to see if the skills an employee has been meeting needs and adding value for the customer. A simple way to gather information about developing and meeting learning plans within your organization is to determine how many managers have plans for training and developing their subordinates.
S - Skills Inventory: Like learning plans, skills inventories determine what skills employees have that can be leveraged by a company. There are three types of skills inventories; 1) Self-reported skills inventories, 2) Practical skills assessments and 3) Competency certifications.
Managing Human Knowledge Capital
Managing human knowledge capital requires hiring the best people for the company, building lasting relationships with them, and creating a place where learning is rewarded.
Acknowledging that people we have the most important asset for our companies and effectively managing this asset is the key to any company’s success.
There are three strategies that you can use to manage human knowledge capital in your organization. These are:
1.Hiring the right people
To be able to manage human knowledge capital effectively, you must hire the right people. This will result in a higher retention rate which means retaining more intellectual capital for your company. There are four considerations in hiring effectively;
Recruitment plans: Recruit by using a strategy that complements your business plan
Corporate Image: Leverage your company's positive corporate image while recruiting and create a reputation as a good place to work
Skills Assessments: Measuring skills can ensure that you get well-qualified employees
Selection Process: Include peers in the selection process as appropriate, especially if the position requires specialized or proprietary knowledge.
2.Forming a bond with your employees
Creating a bond with employees is crucial in motivating them to use their intellectual capital to benefit the company. Such a bond helps employees see that their contributions also benefit them.
There are different ways to achieve this by rewarding performance excellence and holding non-performers accountable. This could be done by creating a culture of trust, cooperation and compensation.
We need to remember that employees want to share in the organisation’s financial success and they ultimately have control over their intellectual capital.
3.Creating a Knowledge-rich Environment
We need to create a knowledge-rich environment that encourages learning, provides learning & improvement opportunities and reinforces the sharing of knowledge and expertise is important to the success of the company and retain this success while keeping our best assets with us in long-term. To be able to do this, we need to implement mentoring progress to share expert knowledge, reward and acknowledge creativity and innovation for new ideas and products, provide opportunities for skills development to encourage cross-training and support, and lastly, creating a culture to share the knowledge and work together.
Tobin’s Q - Measuring Structural Knowledge Capital
Companies can set the price of their products and services, but the power to drive market value still rests with the consumer. Market value allows you to place a measurable value on products and services, however, it is difficult to value of Knowledge capital as it is not something you can trade in the open market or define a price.
You need to take stock of your structural knowledge capital and determine its value to your organization.
Tobin’s q ratio: Devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets.
When using Tobin's formula to measure the value of a structural knowledge asset, if q is less than 1, it would be unwise and unlikely for a company to continue to invest in that asset or that type of asset. Why? Because it means using a greater amount of resources for an asset that's worth less than its inputs.
If q calculates to be more than 1, a company should look into continuing, duplicating, or expanding that type of structural asset. When calculating total replacement cost use both the cost of labour and cost of material and remember that marginal, or negligible, costs don't need to be considered.
How to Manage Structural Knowledge Capital
To be able to effectively manage knowledge capital, we need to create a corporate culture where information flows freely and is supported. There are three components to manage knowledge capital:
1.Information: It is important to share information in person and using the technology. Then the key is providing easy access to information so an employee can pull it if they need it. However, many companies still push too much information to employees, even when it's not necessary. Therefore, there should be a clear distinction between “just in time” versus “just in case”. This will create an environment where sharing is accepted and encouraged. This requires a good and open communication plan.
2.Knowledge: Similar to information, a company should support and encourage the free flow of knowledge. The structural network's value comes as a result of shared knowledge. You could create a strong structural network that will support the transfer of knowledge throughout the organization.
3.Movement of People throughout the organization: Supporting and encouraging your people throughout the organisation as important as the previously mentioned free flow of information and knowledge. This can be done by providing inter-departmental cross-training and supporting people to move between the departments. The ultimate goal of structural capital is to create an unobtrusive bridge that links people to the information, experts, or expertise they need. Once the bridge exists, the exchange of information needs to be supported, not stifled.
Managing and Measuring the Value of Business Relationships as Knowledge Capital
Your business relationships affect the intellectual capital of your organization. Relationship knowledge capital applies to three kinds of relationships: those with clients, suppliers, and partners.
Clients or customers are pretty easy to identify. They're individuals or companies that buy your products or services.
Partners are two or more companies strategically aligned for mutual benefits. Hardware and software companies are often partners.
Suppliers are people or companies providing products or services to your company—from office supplies to outsourced customer service.
Relationships build human knowledge capital when partners support joint communities of practice. And when customers assign new and challenging projects, the project can result in the creation of new human knowledge capital.
Structural capital grows when you leverage your partner or supplier relationships. You can conduct joint research or share R&D information. Creating collaborative processes for data or product exchange can also create structural capital.
The relationships you build with your customers, suppliers, vendors, or strategic business partners are your business.
Relationship knowledge capital is created by relationships that are profitable, contribute to human knowledge capital, and build structural knowledge capital. There are a number of methods of measuring the value of relationship knowledge capital with your relationships with customers, suppliers and partners. These are;
1.Satisfaction: The goal of measuring satisfaction is to correlate high satisfaction with increased relationship knowledge capital. If you only measure a single aspect of satisfaction, such as customer satisfaction, you risk missing other important information about your relationship capital. Therefore, instead of using basic “How are we doing?” questions, you need to include questions that measure loyalty and the likelihood of continuing or increasing business interactions with your company.
2.Customer value: A company's greatest assets are its customers. It's important for a company to determine the value of its customers and how much it would cost to replace them. Although the intangible value of your customer relationships is vital to your business, the income from your customers is simpler to quantify.
The following is a calculation to determine the value of a customer in terms of the actual cost of replacing them:
base sales + sales growth + referrals - costs = value
A base sale is the average annual sales from a customer over her lifetime. Sales growth is how much more a customer spends from year to year. Referrals are any business that can be tracked to an existing customer's suggestion. Customer acquisition cost is only a cost in the year the customer first buys from you. Include in this cost advertising expenditures, commissions, the portion of sales overhead devoted to serving new customers, and the back-office costs of setting up a new account. The cost of retention involves costs associated with maintaining ongoing customer service. The result is the total amount it would cost your company to replace a customer—their value. Your current customer is more valuable than one you don't have yet as you've already incurred the cost of acquiring her business, so the longer she remains a customer, the more income you'll get from her.
3.Cost savings: This does not mean the classical approach of reducing staff levels and/or quality of products. You can share cost savings in any of your business relationships—clients, suppliers, or partners. This may come as a result of sharing business practices, information or data. To measure this, determine the cost of an event or process and compare it with a new process shared with your business partner or supplier. The greater the savings, the greater the value that new process brings.
KISS Model
Leveraging your business relationships can mean great results as well as expanded relationship knowledge capital. When you're investing in relationship capital, you should expect a return on your investment, just as you'd expect one on any other capital investment. You should be able to select appropriate strategies for managing relationship knowledge capital so that you can build intangible assets. These strategies are called as KISS:
K - Knowing each other's business: You need to learn how your partner companies make money, what are the needs and how you can help meet their needs.
I - Innovating together: By forming joint task forces, cross-training, sharing best practices and exchange ideas.
S - Supporting each other: If you've invested the time and energy to get to know each other and are committed to innovating together, then it makes sense to support the relationship you've built. Therefore, the third strategy for managing your relationship knowledge capital is to support each other in your business relationships.
S - Sharing your winnings: By sharing the reduced cost of production, marketing, increased revenue from new markets, customers and even cross-selling to existing customers.
Relationship knowledge capital is simply recognizing and leveraging the intangible value of your business relationships. The strategies of KISS help you maximize your returns while building solid business relationships. The more people you engage in the relationship, the more intellectual capital you can draw from for new ideas. Remember that your corporate culture needs to encourage the exchange of ideas, skills, and knowledge for your company to see real gains from what can be a very elusive, intangible asset.
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