The knowledge toolbox:: A review of the tools available to measure and manage intangible resources

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Abstract

Given the increased discussion on the development of metrics to manage intangible resources, there is a need for a review of the most important tools available to managers for this purpose. This article reviews four measurement systems currently popular among practitioners: (i) human resource accounting; (ii) economic value added; (iii) the balanced scorecard; and (iv) intellectual capital. The assumptions and details of each tool are discussed, as well as the operationalisation procedures to apply them correctly. Strengths and shortcomings of each system are also analysed in order to supply `knowledge managers' with the instruction sheet to the knowledge toolbox.

Section snippets

A new set of rules

Welcome to the information age, where products and companies live and die on information and the most successful companies are the ones who use their intangible assets better and faster. Knowledge and information are nowadays the drivers of company life, much more so than land, capital or labour. What does this mean for managers? The increased importance of knowledge does not simply add an additional variable to the production process of goods: it changes substantially the rules of the game.

Human resource accounting (HRA)

Human capital represents the human factor in the organisation; the combined intelligence, skills and expertise that gives the organisation its distinctive character. The human elements of the organisation are those that are capable of learning, changing, innovating and providing the creative thrust which if properly motivated can ensure the long-run survival of the organisation. Since Hermanson's classic study several decades ago, the topic of how to and whether to value human assets has been

Economic value added (EVA™)

Traditional financial measures of performance, like Return on Assets (ROA) and Return on Equity (ROE) have long been criticised for their inadequacy in guiding strategic decisions. In particular, they do not consider the cost of capital incurred to fund the projects that generate these returns, and thus are severely lacking as instruments to guide managers in their quest for value-creating venues. They are also highly aggregated which means that they often confound the impact of different

Balanced scorecard (BSC)

After a multi-year, multi-company study sponsored by Harvard Business School, Kaplan and Norton (1996)suggested that managers need a multi-dimensional measurement system to guide their decisions: a Balanced Scorecard (BSC) including leading and lagging indicators and measurements focusing on the outside and the inside of the company. It was not the first time that companies were encouraged to monitor non-financial measures (Eccles, 1991). By the early 1990s, many organisations were already

Intellectual capital (IC)

Intellectual Capital (IC) has enjoyed a very rapid diffusion in the last five years. Even though the term has been widely used in the literature before, the current wave of interest has been sparked by a few companies (mainly Skandia, Dow Chemicals and the Canadian Imperial Bank of Commerce) who started using it as a blanket denomination of all intangible resources. These companies realised that the existing frameworks (including some of the ones we reviewed above) could not address the issues

Conclusion

So, which is the best tool? Sadly, we cannot answer that question: in truth, we believe that any answer would be pretentious and harmful. There is no universally best tool: there are only tools that are more or less appropriate to specific situations and companies. All of the tools we examined above have success stories they can rightfully take credit for. We should never forget however that those same tools applied to the wrong situation would damage companies, or at the very least generate

NICK BONTIS, McMaster University – DeGroote Business School, MGD#207-1280 Main Street West, Hamilton, Ontario, Canada, L8S 4M4. E-mail: [email protected]

Nick Bontis is Professor of Strategic Management at McMaster University. He is also Director of the Institute for Intellectual Capital Research. His current research and consulting activities focus on explaining performance heterogeneity through knowledge management, intellectual capital and organisational learning behaviours.

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    NICK BONTIS, McMaster University – DeGroote Business School, MGD#207-1280 Main Street West, Hamilton, Ontario, Canada, L8S 4M4. E-mail: [email protected]

    Nick Bontis is Professor of Strategic Management at McMaster University. He is also Director of the Institute for Intellectual Capital Research. His current research and consulting activities focus on explaining performance heterogeneity through knowledge management, intellectual capital and organisational learning behaviours.

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    NICOLA C. DRAGONETTI, INSEAD, Boulevard de Constance, 77305 Fontainebleau, Cedex, France. E-mail: [email protected]

    Nicola Dragonetti is currently a Doctoral Student in Strategy at INSEAD. His research interests concern the social factors influencing the creation of knowledge inside an organisation, and the role of knowledge and organisational learning in the determination of organisational and competitive advantages.

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    KRISTINE JACOBSEN, Intellectual Capital Services, 46 Gray's Inn Road, London WC1X 8LR, UK.

    Kristine Jacobsen is working as a Business Consultant with Intellectual Capital Services in London, UK. She holds a MSc in International Strategy and Marketing from the Norwegian School of Management, Oslo, Norway. She is also co-author of several book chapters on Strategy and articles and case studies on Intellectual Capital.

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    GÖRAN ROOS, Intellectual Capital Services, 46 Gray's Inn Road, London WC1X 8LR, UK.

    Göran Roos is Chairman of Intellectual Capital Services, London, UK, and a part time Intellectual Capital Associate at Monash/Mt. Eliza Business School in Melbourne. He also has a research position at Henley Management College in the UK. Mr Roos is author and co-author of several books and articles on Intellectual Capital and Strategy.

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