N. 15, June - July 2004 
IP & RTD: Articles 

Intellectual capital: do you want to improve the real value of your business?
Stefano Merico
 IPR-Helpdesk Team
University of Alicante
 
Today's changing business environment brings new management systems which firms must comply with if they want to survive1 in the global market. The increasing importance of the so-called knowledge economy had modified enterprise value creation which is now based on intangible assets rather than tangible resources.

In this respect, the conclusions of the 2003 OECD European Intangibles Summit highlighted a number of "new" key economic factors that should be taken into account, for example: ICT2, software, R&D, innovation, human capital, organisational factors, entrepreneurship and firm dynamics3.

At the end of the last Century, empirical and practical research was carried out in order to identify, measure and manage these new elements, analyzing the role they play in a modern and dynamic economy.

Pioneering work on this issue was conducted by Karl Erik Sveiby who, in 1986, developed the first "knowledge enterprise" and theorized the "Intangible Assets Monitor", a managerial tool intended to identify and manage intangible corporate assets.

Further research activities were carried out by Robert Kaplan and David Norton in 1992, with the so-called "Balanced Scorecard"4 management system, a new system created to manage intangible assets strategically, thus providing a continuous corporate learning cycle intended to improve business value.

Another important player on this subject was Leif Edvisson, who developed the "Skandia Navigator", a tool intended to make intangible assets dependant on financial accounting data.

Finally, Daniel Andersen focused his efforts on the development of the above-mentioned "systems" through his so-called "value explorer"5.

The increasing relevance of intangible assets management is thus analyzed from two different perspectives: on one hand, with the purpose of disclosing enterprise data for clients, shareholders and stakeholders and, on the other hand, with the aim of fully exploiting corporate resources.

While the first objective should be reached at international level in 2005, thanks to the adoption of the US accounting rules (i.e. the Statement of Financial Accounting Standard (SFAS) no. 141 on Business Combinations and Statement no. 142 on Goodwill and Other Intangible Assets 6) by the International Accounting Standards Board (IASB), the second is left to companies' own criteria.

Identifying, valuating and managing intellectual capital is a prioritiy for every European firm, not only the biggest but also for SMEs7. However, today there are still very few enterprises introducing and developing such a system of management.

The market value of engineering and manufacturing companies is between 2-5 times higher than the net book value. This difference is due to the intangible assets, which are not reflected in any traditional financial report8.

In recent surveys, 81% of the companies screened had not assigned any value in their annual report to intangible assets, however 49% of the companies surveyed did plan to invest in applications supporting the management of intellectual capital9.

Understanding the way said management systems work is vital in order to comprehend the revolution to take place. We can exemplify these systems by imagining that they are structured in three main steps: identification of corporate intangibles (generally divided into Human capital, Structural capital and Relational capital), measurement of the specific asset real value (converging economic and legal factors) and management of those assets with the necessary knowledge to fully exploit them.

By intangible assets, we mean trademarks, patents, utility models, know-how, designs, firm's information and relations, which the enterprise usually ignores or does not exploit in the most profitable way. The study provides a radiography of the firm's intangible resources thus identifying the specific strategy (on legal issues and in the marketplace) that the firm should comply with. In that sense, the study reveals a typical strategy based on licensing, mergers and acquisitions, cost saving, the sale or purchase of IP assets, Join Ventures or strategic alliances, Collateralization and Securitization10, which enterprises should follow to optimize their value.

The result of the study is a draft ICR (Intellectual Capital Report), that some pioneering firms11 have started publishing. The report shows all the information needed to carry out an efficient strategy based on intangible assets.

One of the first European firms that applied for such a management system was the Danish firm Skandia. Skandia's activities in Intellectual Capital Management helped the enterprise to expand its number of points of sale from 5,000 to 50,000 in 5 years12.

A number of public organisations are also involved in institutional consultation and projects concerning intangible assets. The key public actors are the Swedish Ministry of Industry, Employment and Communications, The Swedish National Board for Industrial and Technical Development (NUTEK), the Swedish Council for Work Life Research (RALF), Invest in Sweden Agency and Statistics Sweden.

At EU Institutional level we can underline the research activity developed through different projects like Magic 13, NewKind 14 and the European Observatory on Intangibles 15 that help improve the understanding of intangibles and their practical application.

Further steps will be implantation and corporate reorganization based on these systems, reorganization that will start thinking about the role and value of intangibles. This kind of study and analysis will be the future challenge not only for economists but also for intellectual property advisors who at present only focusing their activity on intellectual property-related juridical issues.

Such management systems are the beginning of a new professional activity, embody interdisciplinary skills and enable us to fully understand the link between the legal and economic dimensions of Intellectual Property.





1. To analyze competitiveness in today's European economy, please see, European Commission, European Competitiveness Report 2003, in: Benchmarking enterprise policy 2003 - Results from the 2003 scoreboard, europa.eu.int («)


2. Information and Communication Technology.(«)


3. OECD, Presentation to 2003 European Intangibles Summit, London, 4 July, www.euintangibles.net («)


4. For up to date information on these rules by the European Enterprises, please see: Robert S. Kaplan & Robert P. Norton, Focusing your organization on strategy - with the balanced scorecard, 2nd edition, Harvard Business Review, February 2004.(«)


5. A more comprehensive and exhaustive view of intellectual capital management systems can be found in: Ordoñez de Pablo, Patricia, Capital Intelectual y aprendizaje organizativo: nuevos desafíos para la empresa, Pag. 91-98, Spain, AENOR, 2003(«)


6. For a case study on the adoption of these rules by European enterprises, please see: Vania Crosara and Stefano Zambon, The new U.S. Standards on Accounting for Goodwill: an exploratory study with reference to European Companies, in PRISM project Webpage at www.euintangibles.net («)


7. To analyze the essential role conferred on the SME by the EU Institutions, please see europa.eu.int («)


8. Sveiby, K.-E.: The New Organizational Wealth. Managing & Measuring Knowledge Based Assets.San Francisco: Berret-Koehler, 1997.(«)


9. APQC: Benchmarking Consortium Study, Houston, Texas, 1996. («)


10. For more on this issue see Sep/Oct 2003 WIPO Magazine at www.wipo.int («)


11. For an example of a recently published Intellectual Capital Report, please see Systematic webpage at www.systematic.dk («)


12. Edvinsson, L. & Malone, M, "Intellectual Capital. Realizing Your Companies True Values By Finding Its Hidden Brainpower". New York: Harper Business, 1997(«)


13. www.profactor.at («)


14. www.researchineurope.org («)


15. www.ll-a.fr («)