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Intellectual Capital at SkandiaMaylun Bucklew
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The "dawning of new insight" has struck executives after they have spent a decade running companies based on bottomline. Executives are rethinking quality management, core competencies, and the value of employees, their knowledge, and experience on the job. This profile looks at what Skandia, an international, knowledge intensive company, has done since 1991 to highlight the hidden value of a company. Skandia uses, in addition to the standard book value of the official balance sheet, a new systematised approach to make tangible these hidden values. Factors such as competence base and well managed performance procedures contribute to the total value of a company. Competence base is defined as employees' professional insights, applied experience, and organisational learning. Performance procedures are defined as how customers are handled, and how the operations, processes, business development and logistics are conducted. The more knowledge intensive a company is, the more important are these soft dimensions.
Skandia and its Growth
Skandia, a multinational insurance and financial services company, is based in Stockholm, Sweden. In 1855, Skandia was founded as an international insurance company. In 1900, Skandia was the first non-British reinsurer to have a New York office. Today, five divisions comprise Skandia: Skandia Norden, Direct Insurance Nonlife, Assurance and Financial Services, Skandia Investment Management, and Reinsurance. Employing approximately 11,000 people worldwide, Skandia has total assets of $35 billion.
Assurance and Financial Services, AFS is the division with which this profile is concerned. AFS addresses individual clients' financial well being through programs of longterm savings solutions. The most rapidly growing division within Skandia, AFS has grown swiftly more than 30% annually during the last six years. Spanning 10 countries with 1200 employees and actively engaging more than 12.000 brokers, AFS takes care of almost 500.000 customers. True of most growth companies, Skandia is interested in attracting investors, and in having current as well as prospective investors understand and recognize the full value of the company.
While most companies appoint directors of finance and operations and focus company valuation on finance and operations, they lack a function to deal with hidden values. To address this, AFS created a position that focuses on developing and applying a systematic approach to hidden values. It has a director of intellectual capital. The mission of this function is to identify and improve the visibility of intangible and non material items, to capture and package these items for transfer to users, to cultivate and develop these items through training and knowledge networking, and to capitalize and economize on these items through rapid recycling of knowledge and increased commercialization.
The Director of Intellectual Capital at Skandia AFS, Leif Edvinsson, reports to the Chief Operating Officer of the AFS division and is a member of the COO team. Charged with enhancing and systematically developing the intellectual capital of the division, Leif Edvinsson works through project teams. He faces the challenge of leveraging work related to intellectual capital through other functions such as human resources, information technology, and business development (Figure 1).
With this approach, AFS is trying to build more than a "learning organization." AFS strives for an "intelligent organization." This is a dynamic learning and teaching organization that continuously renews its performance. Critical for this development is a federated global organization with competencies and alliances built on intellectual capital, information technology, and leadership around core cultural values.
Defining Intellectual Capital
Traditionally, companies have been assigned book values which appear in Dun and Bradstreet and Moody's. These values are assumed to reflect the worth of the respective company, based on the financial value and the confidence in the company. Such book values are frequently referenced in traditional reporting. However, some companies can be undervalued, because they possess considerable hidden values that are not accounted for in the book value. According to Leif Edvinsson, these hidden values differentiate companies and give them a competitive edge. Therefore, grasping and systematically managing the resources that contribute to intellectual capital is essential. For companies in the knowledge area, development of new measurement approaches and indicators, in addition to traditional financial indicators, has become critical.
The AFS definition of intellectual capital is the knowledge, skill, and technologies used to create a competitive edge for Skandia. Intellectual capital encompasses the access to and use of all employees' knowledge and applied experience, and the organizational structure, technology, and professional systems within a firm. These elements trarlslate into competitive advantage and monetary gains.
Intellectual capital is the soft and intangible part of the value of the company in addition to the financial balance sheet (Figure 2). It is sometimes referred to as goodwill, technologies, competence, etc. A more managerial definition of Intellectual capital is the sum of structural capital and human capital. Human capital refers to the knowledge, skill, and experience of the employees. Structural capital refers to the extension and manifestation of human capital. It includes tangibles such as the information technology systems, brand and company images, customer databases, organizational concepts and manuals.
Describing Intellectual Capital
Leif Edvinsson uses the metaphor of a tree to describe hidden value. "Hidden value," he says, "is the root system for the tree." In order for it to flourish and bear fruit, the tree must have healthy, strong roots to provide the nutrients and nourishment necessary for its growth and production of fruit The quality of the fruit, which you can see, is dependent on the roots, which you cannot see. The same goes for financial capital. To get it to flourish, you must cultivate the roots. In effect, this search for new indicators in the knowledge area turns traditional bottom line accounting upside down. Since Leif has been director, recognition of the importance of hidden values and their systematic management has increased within Skandia and AFS.
To demonstrate what intellectual capital is, take the following example. A software company has a value 15 times greater than the published book value. This greater value goes beyond the finite software products delivered. The accounting gap is due to unaccounted factors such as the millions of customers, intensive research and development, a strong market position, company brand name, etc. Very detailed financial accounting exists for the sales of software products. Rare, however, is any systematic accounting for the hidden value of customer bases, knowledge levels of people, replacement costs of information technology systems, and the return on investment for training and development. Each employee comes equipped with his/her unique set of experiences, education, background, skills, and outside interests that amplify intelligence and combine knowledge. This set is called a competence base. What does not appear in the book value is the inherent value of the existing people, their bright ideas and competence bases, the systems, the organizational infrastructure, R & D portfolios, and customer base.
As another example, consider a film processing company. Once a chemically based operation, the company has had to transform its operations to use computer technology and electronic processing to stay competitive. This has caused the company to shift its competence base from chemistry to electronics. Such a shift is costly and not positively reflected in traditional accounting procedures. In fact, the valuation of the company may even decrease with current accounting practices. The costs of replacing staff, developing or acquiring new talent to accommodate and support the shift, maintaining that talent, and transferring the knowledge are significant. However, in terms of the company's future in image and film processing industry, such costs are necessary and positive to the well being of the company.
What led AFS to the concept of intellectual capital is the concern with speed of learning, recycling of applied experience, and international transfer of skill. Ironically, intellectual capital is invaluable to a company, and yet is assigned no value. Intellectual capital is the essential root system of companies but is often invisible in the accounting systems. Such systems show historical statistics. Intellectual capital indicates the future. Traditional systems seldom account for and measure the worth of concepts, competence, and innovation. AFS, therefore, is consciously making sure that the transfer of skills, learning, and experience takes place through the procedures it puts in place. However, managing intellectual capital is cross-functional. It is a combination of human resources development, business development and strategy, and information technology development. So, to reveal hidden value, AFS defines what performance items must be measured and how those items can be made tangible. Through this process, intellectual capital is transformed into added value.
Promoting Intellectual Capital
How does Mr. Edvinsson spend time as the Director of Intellectual Capital? Initially, much time was spent developing a language, or taxonomy, to increase awareness and share insights on the four functions of intellectual capital development. These functions are: to identify, capture, cultivate, and capitalize on intellectual capital. As part of his responsibility, Mr. Edvinsson meets with colleagues to do "missioning". A portion of his time is spent implementing information technology with the systems group for knowledge networking. This means communication technology is used to knit together employees and give them access to knowledge inside and outside the company. To refine company culture, cultivate core values, and channel leadership, he cooperates with human resources. With people in accountin& he works to develop ways to measure hidden value and create intellectual capital ratios. And to initiate and implement projects, programs, and joint activities that will add to the business of AFS, he works with operating units. Another important role for the Director is to make people within and outside of Skandia aware of the hidden value of AFS, and engender cooperation for joint business growth beyond the published book value. A prirnary focus is to identify and measure, or "map," critical intellectual capital items within each operating unit of AFS. Through this, the importance of information technology (IT) in developing intellectual capital has become evident
Using IT to Fertilize Intellectual Capital
A critical part to growing intellectual capital is the technological and organizational structure of the company. Hierarchically structured organizations tend to kill intellectual capital growth unless they are changed to more interactive structures which are process oriented and knowledge transfer oriented. Information technology fosters such knowledge sharing among employees and promotes efficient processes, in the case of AFS. Information technology is augmenting both the AFS operations and business.
Because IT is strategically important for the growth of AFS, it is essential to note how ITintensive AFS is. Today AFS spends twice as much, and some AFS units four times as much, as the industry average. This has led to higher administrative processing efficiency, which is measured and reported. Productivity gains there have grown about 54% over the last two years, combined with a gross income growth of over 200%.
In its growth, AFS does not acquire companies but starts them up from scrakh. To minimize the startup costs of new operations and promote productivity throughout the company, AFS has developed a special prototyping system to set up AFS companies. This IT based process supports employees in opening and operating an office. Prototyping involves installing a composite of standard modules into an office. Used for a new office, these modules contain procedures and routines needed in the business. Among other things, the modules will cover how to design contracts, how to set up accounting procedures, and how to administer the product. These modules shorten time for local product customizing. Prototyping has reduced startup time by as much as 50% for some operations.
Accounting, invoicing, and financial reporting are standardized through the same body of software that supports all operations. Existing companies as well as startups use the software. Some adaptation is necessary for each location, because the computer technology used varies greatly in the already established companies. As a practical matter, Skandia has chosen to retain the existing hardware (mainframes, AS400's, IBM PC's and compatibles, and Macintoshes) and make the software work on a variety of platforms. New companies install IBM PC's and compatibles. Because the software forces standardization, employees can transfer their skills in using the software from one location to another. The AFS information technology system will integrate business units to increase the range of financial services for the client and produce a package of financial services at a lower cost than competitors.
Another way that AFS uses technology to support intellectual capital is found in the computer based training for employees. Skandia Life, an AFS daughter company, maintains one training center in England, which has specialized in self instruction training systems. Employees can choose among some 30 different computer based packages from the center and learn about product information, sales techruques, customer development, and other topics.
To facilitate knowledge sharing and transnational communication among employees, AFS is building an electronic knowledge networking and transfer system for the competence base. Plans are to make available customer and sales information and to have applications which do the processing for services that AFS provides. Employees will be able to access databases intemal and extemal to AFS. Some of the intemal databases contain overheads and other audiovisual materials, which are used in presentations. These are examples of knowledge tools. Others contain fund performance information. An IT based competence network will connect AFS worldwide and provide access to the knowledge tools and systems to transnational competencies.
Measuring Intellectual Capital
Skandia has started to describe intellectual capital through measurement of new indicators. Periodically, a balance scorecard for measuring performance on financial capital and various intellectual capital dimensions is presented to Skandia management. To define what to measure, each of the operating units of Skandia (located in the U.S., England, Columbia, Spain, Germany, and Switzerland) identified the five most relevant and critical intellectual capital items for itself, using a proprietary list of over 30 intellectual capital items. Identification was done through dialogue with local management. From these sets of the five most relevant and critical items, a set of three major intellectual capital dimensions (or categories) was derived. These are customer capital ratios, human capital ratios, and structural capital ratios. Within each of these dirnensions, a number of intellectual capital ratios can be defined. Each intellectual capital item was discussed with management and accounting to establish a baseline ratio.
As an example, suppose the number of existing customer accounts is one ratio for which a baseline is established. That ratio can be used to measure how well the business is doing in terms of that intellectual capital item. We would score the number of new customer accounts or the growth per account. This number would be compared with the strategic goal, and then, we would look at the effect on the business by examining the profit per customer. By computing the ratio periodically, a performance controller or manager can plot the trend of the ratio and determine what intellectual capital factors should be focused on and changed in the business to improve the performance of the company.
In the interest of intellectual capital AFS invests in training and development of its employees, places value on their applied experience and competence, and seeks crossfertilization within the organization. Such crossfertilization adds to another critical ratio, innovation and development. This is one of the most important ratios to follow for the future value of a company.
This procedure produces more balanced reporting through the addition of intellectual capital items to traditional financial ones. Such reporting leads to more systematic management of hidden values. To sum up, this whole intellectual capital and hidden value pursuit is very much a pedagogical one. The hidden value of the company, which is not shown in traditional accounting is articulated and made tangible to provide deeper insight into future growth. The mission is to reveal hidden values which are strategic to the company's future, in order to fertilize continued growth of AFS. Transnational and global development of AFS as an entity is heavily based on further development of concepts, systems, competencies, alliances, customer bases, and organizational issues, and on packaging and dissemination of nonmaterial values throughout AFS. The speed of development relies on linking human capital to structural capital. This calls for systematic management of human and structural capital.
Intellectual capital managed this way also cultivates investors' relationships. The first time information about intellectual capital values was presented, verbally, was in the 1992 Skandia annual report. Now, such information supplements are provided quarterly as a number of balanced performance indicators for AFS. These supplements also serves to deepen the perspectives of analysts and investors.
Costs and Gains from Intellectual Capital
The intellectual capital effort is expected to save a significant amount of money over time. By using the prototyping process, AFS has reduced startup time for a new office by onethird or more. For a 30% growth rate in new businesses, this amounts to sizable savings. In the area of competence development, the computerbased training and network are expected to reduce traveling and expenditures for training. The savings each year are proiected to be several times the cost of developing the systems. Other major gains are increased speed of strategic learning, systematic focusing of leadership, and increases in valuation of the company over the book value.
The Reach on to Intellectual Capital
Externally and internally, reactions to intellectual capital have been very good. Senior managers have been very supportive. They agree with the concept, appreciate the new insights, and promote key activities related to intellectual capital. Middle managers have also been supportive. They have experienced a growing need for a formal approach to intellectual capital issues in recent years. Frontline staff and the union agree with the concept and actively participate.
Many people still mistakenly view intellectual capital as a resurrection of human resource accounting of companies. Twenty years ago, European companies tried to establish connected audit systems to monitor training and people's attitudes, behavior, and performance. EventualIy, the effort was abandoned. In contrast, the intellectual capital approach covers both human and structural capital, joining them together for more rapid growth.
The Importance of Intellectual Capital
Systematic treatment of intellectual capital at AFS highlights how important intellectual capital is. Company value depends on and includes the total worth of individuals plus company structure. That worth encompasses the knowledge, skills, and inhouse experience of each person, as well as the shared knowledge, skills and experience of all employees combined, and the organizational procedures followed in the business. That worth is dynamic and difficult to measure. AFS, however, has started to articulate and make tangible, ratios for systematic management of these factors. For AFS, intellectual capital increases company value and makes business operations more efficient. AFS is showing investors that the value of a company is dynamic and is more than just hard financial ratios.
In addition, the sharing of competencies requires management of information. Information management and intellectual capital are, therefore, related. Intellectual capital at AFS involves human resources, information technology, business strategy, and the participation of employees, in order to rapidly transfer experience in the company. It is energizing and charging both the national and transnational operations at AFS.
To get people to share competencies, a company must facilitate exchange of knowledge among employees. The company must inform people of intelligence that is available, make people and intelligence accessibie, and train everyone to use the information and any supporting technology.
AFS has developed vehicles to do this, using technology when appropriate. The technology and its degree of sophistication are less important than the organizational intelligence and competence of the employees. Leadership and organizational design are crucial to this process.
Measuring and valuing intellectual capital, as AFS does, promotes strategic organizational learning and teaching, and a balanced management focus on hidden values which encourages organizational survival. Intellectual capital gives sharing of knowledge legitimacy, establishes the worth of competence in a company, and places value on combined and individual slci~ls and experience of coworkers. Intellectual capital is invaluable and intangible. However, it manifests itself in business through productive, consistent, and efficient operations, and management that adds value. Leadership must focus on linking human capital to structural capital and producing sustained value (Figure 3). The ultimate target is to transform IQ into ECU (European Currency Units). In other words, the gray cells and intelligence are translated into hard currency.
ABOUT THE AUTHORS
Maylun BuckLew works at the Ernst Young Center for Information Technology and Strategy in Boston, Massachusetts. Leif Edvinsson is the Director of Intellectual Capital at Skandia AFS in Stockholm, Sweden.
They can be contacted on the following addresses:
Leif Edvinsson
Skandia AFS
S103 50 Stockholm, Sweden
Tel +468 788 49 93
Fax +468 24 90 68
Maylun BuckLew
Ernst & Young
One Walnut Street
Boston, MA 02108, USA
Tel +617 742 2500
Fax +617 725 1522