Performance Management

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Tomasz Ćwik

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Tomasz Ćwik

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What are intangibles? - Intellectual capital model by Scandia

One of the first significant attempts of classifying and reporting the value of intellectual capital

took place in 1994 by the group of specialists of Swedish financial service firm Scandia. At that time Professor Leif Edvinson was appointed as a world first Intellectual Capital Director at Skandia AFS. In 1994, Skandia began to publish a series of intellectual capital supplements to its financial accounting statement.

According to Skandia’s model market value of the company maybe divided into financial capital and intellectual capital. Financial capital is simply the company book value and contains all assets presented in traditional balance sheet. The rest of company value consists of intellectual capital that is subdivided into human capital and Structure Capital. What is important - human capital is not owned but rented and left company after 5 pm. On the contrary structure capital is the part that is still in the firm after 5 o’clock. This comprises corporate culture, management processes, IT systems, databases, reputation, brands and intellectual property. Naturally, that part of IC is controllable by the management and it is obvious that one of the main objectives of IC management is to move the value form human part to the structure. Skandia divided Intellectual capital more deeply into next layers. Entire intellectual capital classification according to Skandia is presented on the graph.

It is necessary to say that Skandia definition is not only one approach to the intangible assets described in literature. Many of them like MERITUM project have different approaches to that problem but have common elements. They tend to classify intangible as knowledge assets (such as those resulting from investments in R&D and often codified in patents), human capital, and organisational capital.
The European Union project on Measuring Intangibles to Understand and Improve Innovation Management (MERITUM) was funded within the framework of the Targeted Socio-Economic Research (TSER) programme between 1998 and 2001.

What is new in economy?

It is now commonly accepted that we are in the midst of a new phase of evolution in the major global economies, which is characterized by new performance and value drivers that are mainly intangible. So-called intangible or knowledge economy is the new environment that companies have to learn to cope with. During the last two decades most industrialised economies have progressively moved towards a knowledge-based rapidly changing economy where investments in human resources, information technology, R&D and advertising have become essential in order to strengthen a firm’s competitive position and ensure its future viability.

With the transition to a knowledge-based economy, the principal source of economic value and wealth is no longer the production of material (tangible) goods but the creation and management of intangible assets. In other words, economic growth is not as much influenced by investments in physical capital (i.e. land, machinery etc.), as by intangible assets which is a critical determinant for the productive and exploitation of physical capital. Consequently, some companies depend on being able to measure, manage and develop their intangibles.

This new phase is having profound implications also for corporate accounting and reporting. It is well known that there is a gap between the accounting book value and the market value of many internationally-listed companies as well as polish. There is also widespread concern about the difficulty of valuing and assessing the performance of 'new economy' companies. Some companies have recognized this new phase and started to produce reports which are largely different from the traditional, financially-oriented ones. (Some examples will be presented in next chapter 3). These reports may take different names (intellectual capital report, auxiliary balance sheet, report on intangibles etc), but they have a common goal of penetrating beyond the financial dimension in order to identify and track the new value drivers - mainly of an intangible nature - which permit long-term, sustainable growth of the company.

What you measure is what you manage

“What you measure is what you manage” says one of the most famous performance truisms. Taking it into consideration organizations implement more and more sophisticated methods of measuring and managing of their performance. Among years that systems has evaluated becoming much more detailed providing standardised set of information to their recipients

Nowadays we live in “new economy”, economy that basis its value on knowledge, information, brands, know-how, licence and other intangible assets that despite that do not have its physical form sometimes presents a significant or even fundamental part of company value. Some companies also polish one, build its value mostly on intangibles rather than on typical physical resources.

This new economic order challenges and offers innovative opportunities to the audit professionals and financial analysts and to the top managers. It became obvious that traditional methodology that was created to measure tangible assets may not be such efficient or even may appear irrelevant to measure intangible. In particular, the so-called intellectual capital supplements starts to be more popular part of annual reports of companies those assets are mostly intangible. This data pose a real problem of verification and scope of information which are disclosed to institutional investors and the general public. The procedures for verification and assessment of this new information are immature and need to be standardized and agreed at an international level.