Karl Erik Sveiby

Professor in Knowledge Management at Hanken Business School, Helsinki

«Measure for Learning – not for Control»

What are the main intangible assets of a company? Would you make a difference for multinational companies and middle market companies?
I’m following the general view, even though I’m still thinking of it. The distinction of three main intangible assets that we made in 1987 (in the book The Invisible Balance sheet) has become a de facto standard. Initially I called the three components individual capital, customer capital and structural capital. But I soon abandoned the “capital” word, it makes people believe that intangible assets behave similarly to money, which they don’t.

Another difference is the distinction in the classification. Most IC-frameworks put all people in the human capital area. I prefer “Competence” to the term Human Capital. As “Competence” I classify the people, whose work directly influences the customers´ opinion about the organisation; they are as consultants, and people in marketing, sales and R&D.

In my distinction, “Internal Structure” contains both the support processes and the competence of the staff maintaining internal processes, such as people in HR, accounting, IT, etc. The reason is that all processes in a firm require support of people to function. Their competencies are intimately linked to those processes and they are primarily for internal customers. This distinction is important because there are crucial differences between the two groups, particularly in knowledge-intensive organisations.

According to you, what are the key characteristics of an effective knowledge organisation?
An effective knowledge organization is one which is able to create value from all its intangibles. Intangibles do not stand alone; they are interrelated and classifications and distinctions hide this. The interrelations are important, because this is where most of the value is created. An isolated intangible asset doesn’t generate value. “Flows” between them generate value and the identification of those forms the foundation of my approach to measurement.

Most important are interrelations between intangible assets rather than intangible assets themselves?
Yes, but it is the actions of people that create value from those interrelations. A person is neither an IA of the firm nor a human “resource”, but a free individual, who can come and go as he/she likes. What an individual may do is to make his/her competencies available to a firm. The best thing the firm can do is to ensure that the environment is conducive for people to use their competencies to create value. This is done in interaction with the structure, with other people and with customers.

According to you, is there no difference between multinational companies and middle market?
No. There are differences in scale and then main difference is that public service organisations generally have difficulties in determining who their customers are. Some, like public departments and ministries, don’t have customers but they serve citizens of the society.

What is your methodology for IA rating, what criteria do you take?
Clarify the word rating, please.

Quality based evaluation, more than financial.
There are companies in the market place, who offer IC rating. What they tend to do is calculate a range of fairly general indicators and then rate the firm higher or lower according to a scale. I don’t believe that kind of rating creates much value. I wouldn’t call my approach “rating”, just “measuring”.

You have a mapping on your website of different methodologies. Could you make a comment on this methodology and where is yours?
My model is the IA/Monitor and it’s one of the scorecards methodologies in the lower left corner on the map. It measures individual components of Intangibles.

Why and how have you arrived to this methodology / model?
Through the IA Monitor (IAM) a firm aims to get a better picture of how value is created from intangibles. The IAM is the only methodology, which distinguishes four modes of value creation: to grow and Intangible Asset, to renew it, to utilize it or to reduce the risk in owning/using it. Those 4 modes of value creation are applied on each one of the three intangibles and the process is to design indicators, which capture this.

Roughly, how many indicators are there in your model?
The value creation modes form four rows and the Intangible Assets form three columns; it becomes a simple table with 12 cells, 12 indicators. Then add the four value creation modes of tangibles, making a total of 16 indicators in a table.

With the total outcome, do you get a financial value?
No. The IAM is a range of approx. 16 indicators, each one of them measuring a creation of value, usually as a ratio. A judgement then has to be made to what degree a certain level of the ratio as aligned with the business strategy or not. Those indicators are then given extra focus. The generation of indicators in the IA-Monitor process is bottom-up, because the much of the value creation in firms is intangible and invisible. During the process of designing ad working with the IAM such hidden value in uncovered ; the firm learns about itself. This is in contrast to top-down approaches, which tend to be for control purposes, as for instance, the Balance Scorecard.

Your job is to make trainings about how to make a company grow. After those trainings, people go back to their firm and do they make things happen, or not?
It depends a lot on the type involvement I have with the client. Some clients are quite happy to do everything themselves and just refer to me for advice. Other clients ask for more help.

What is the purpose of those measurements?
It varies a lot. Quite a few of the implementations of IC scorecards tend to be for PR purposes or “justification of your own existence”; to show shareholders that the company is producing something valuable. I have noticed that public organizations, in particular, have become quite active in using IC-scorecards for PR purposes. This probably has to do with the fact that is hard for a public organization to show that it creates value, so their managers are looking for new approaches.

Private corporations tend to be interested primarily in increasing efficiency and they implement scorecards to increase their control over their asset base. However, it is dangerous to try to measure intangibles with a control purpose, because the indicators are quite easy to manipulate and we human beings are great manipulators as soon as we believe that we are monitored for control or award purposes. Lots of the implementations have failed, precisely because people are sub-optimising only to look good in the measurements.

As you can hear, I am not impressed by justification purposes or controlling. I believe we should measure for learning. Statistics and mathematics are languages, which help us see things that we don’t see when using only verbal communication. When learning is the purpose, we help people grow and we help them to get better control of their work environment. It is sad that I am among the few, who advocate a learning view of measuring (See my article Measure for Learning).

Do your clients communicate about the results of your measurements?
Since I discourage my clients to use the results for PR and control purposes, the clients I am involved with are generally communicating them internally.

Are the companies, which implement the methodology, overperforming their sector competitors, as far as the financial indicators are concerned?
Some studies have been published in IC journals comparing the relationship between IC reporting and stock market performance. They generally find a positive correlation, however, there is little or no evidence that stock market analysts are using published IC-reports in their analyses.

Is there a better resistance to crises for companies which use this intangible assets approach?
I do not know; I have seen no empirical studies on that issue. Companies, which use IAM internally in order to learn, probably have a more human-centred orientation and this allows them to be more resilient. But this is only a hypothesis.

Thank you very much for this interview.
Thank you.

Propos recueillis par les étudiants du projet collectif «Tribune Sciences-Po de l’économie de l’immatériel».