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Intellectual capital accounting

in the UK
A field study perspective
Robin Roslender and Robin Fincham

Received August 2002

Revised July 2003
Accepted September
2003

University of Stirling, Stirling, Scotland, UK

Keywords Intellectual capital, Knowledge management, Accounting, Intangible assets, Reports
Abstract Accounting for intellectual capital is increasingly recognised to be one of the most
fascinating and potentially far-reaching challenges facing the accountancy profession. A growing
literature, encompassing theoretical, empirical and practical elements, is currently emerging as
researchers and practitioners endeavour to account for the hidden value that the intellectual capital
concept denotes, and its pivotal role in the value creation process. To date, many of the most
instructive advances have emanated from Scandinavia, reflecting these societies sustained interest
in necessity of accounting for the worth of employees, arguably the principal progenitor of
intellectual capital accounting. Reports from a number of Australian, Canadian and European
enquiries have added to the momentum of the intellectual capital accounting project, whilst
affirming its links with contemporary debates about the information society, intangibles,
knowledge management and business reporting. This paper reports and discusses some of the
findings of a recently completed field study of intellectual capital accounting developments in the
UK, funded by one of the professional accountancy bodies. Drawing on a series of semi-structured
interviews, it documents how senior managers in six knowledge-based organisations view
intellectual capital and related developments, their evolving attempts to respond to the challenges
these present, and their progress in measuring and reporting their performance in these areas.

1. Introduction
The primary purpose of this paper is to report some of the findings of the first
study of the development of intellectual capital accounting in the UK. It does so
against the background of a rapidly expanding literature on this and a number
of related topics, which illustrates how Scandinavian companies have, to date,
played a crucial pioneering role in progressing both intellectual capital theory
and practice. An exploratory field study was undertaken in six UK
knowledge-based organisations to gauge how UK practices compared with
those of Scandinavia, as well as with other countries including Australia,
Canada, the Republic of Ireland and Spain. The structure of this paper is as
follows. A brief overview of the topic of accounting for intellectual capital is

Accounting, Auditing &

Accountability Journal
Vol. 17 No. 2, 2004
pp. 178-209
q Emerald Group Publishing Limited
0951-3574
DOI 10.1108/09513570410532429

The research materials reported in this paper were collected in the course of a project generously
funded by the Research Committee of the Institute of Chartered Accountants of Scotland.
Previous drafts of the paper were presented at the 2002 European Accounting Association
Annual Conference, Copenhagen Business School and at The Transparent Enterprise: The Value
of Intangibles Conference in Madrid in November 2002. The authors acknowledge the many
helpful comments received from participants at these events and from the journals three
anonymous reviewers.

presented in the following section. Section 3 begins by outlining a number of

related lines of research enquiry on intellectual capital, before providing a
review of some of the main findings of empirical research on intellectual capital
accounting practices. The situation as it has evolved in the UK is discussed in
Section 4. Details of the present research project are outlined in Section 5, some
of the findings of which are described and interpreted in Section 6. The paper
ends by summarising the principal findings of the empirical enquiry,
comparing these with the findings of other studies, and finally seeking to
explain the UKs very modest progress when compared with the Scandinavian
experience.
2. Accounting for intellectual capital
Although writers including Reich (1991) and Stewart (1991) had previously
identified the growing importance of intellectual capital as a source of
long-term value creation for organisations, it was in the mid-1990s that interest
in it began to escalate. At that time a number of popular texts on the subject
were published, including Brooking (1996), Edvinsson and Malone (1997),
Roos et al. (1997), Stewart (1997) and Sveiby (1997a), together with Edvinssons
seminal 1997 paper on Skandia AFSs pioneering work in intellectual capital
management.
From a specifically accounting perspective, the emergence of intellectual
capital as a key organisational resource raised the question of how to report it
alongside other assets in financial statements. This was not a new problem,
however, as there have long been key organisational assets for which it has
not been possible to report values. The goodwill built up by a business could
only be included within the stock of intangible assets when it was acquired by
another business, subsequently to be amortised or more commonly written of
at the time of acquisition. Specific intangible assets such as brands,
themselves later to be included within the designation of intellectual capital,
were subject to the same provisions. Attempts to account for people, or
more specifically their experience, expertise, creativity, organisational
commitment, etc., currently designated as the human capital component of
intellectual capital, had all but been abandoned after first human asset, then
human resource accounting had slipped down the research agenda in the late
1970s.
The problem of accounting for intellectual capital was clearly one that could
not be ignored. Intellectual capitals growing importance was underlined by the
growing disparity between the book values of many businesses, determined in
accordance with prevailing financial accounting and reporting provisions, and
the market values of these same entities. The extent of what Edvinsson (1997)
termed the hidden value of organisations was frequently greatest in the
knowledge-based industries, precisely the places where intellectual capital is
most critical to long-term business performance. This situation quickly became

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more apparent with the rise of the dot.com companies in the late 1990s,
although post-Enron concerns about the veracity of financial statements and
the general downturn in the global economy following the events of September
2001 have seen a reversal in this upward trajectory. The worry was, and
remains, that disparities of this sort have the capacity to disrupt the workings
of the capital market (OECD, 1996, 1997a, b). In order to ensure that this did not
occur, some means had to be identified for reporting intellectual capital to the
market. Coupled with this, the growing tendency to link executive
remuneration to share price meant that the accountancy profession was
under great pressure to demonstrate the true value of the business in its
financial statements.
If it had been possible to identify some simple means of extending the
established accounting calculus to incorporate intellectual capital, the
(on-going) debate about accounting for intangible assets would have already
provided clear indications on how to proceed. It had not, which meant that the
accountancy profession was not well placed to deliver reliable information of
the sort many stakeholders might, not unreasonably, expect of it. In Edvinsson
(1997) the dilemma facing the accountancy profession is clearly visible.
Underpinning the Skandia value scheme is the desire to dissolve the intellectual
capital designation, thereby identifying a portfolio of elements that accountants
value incrementally, hopefully building up to the difference between the
organisations market and financial capital valuations. In the second part of the
paper, however, a more compelling vision of how to account for intellectual
capital, via the Skandia Navigator, is identified.
Edvinsson argues that a preferable approach is one that provides
information on the success with which an organisations management has
grown the stock of intellectual capital. Such information would, of necessity, be
of a more prospective nature, and thereby of greater relevance to stakeholders
interested in the sustained value creation capacity of the business. The
Navigator was designed to provide information on the human, customer,
process and renewal and development foci of the organisation, in addition to
financial information, and to do so using a set of indicators that would also
convey how the organisation viewed its own value creation strategy. Initially,
Skandia reported such information in the form of brief supplements to its
financial statements, quickly developing a more comprehensive approach in
the late 1990s (Mouritsen et al., 2001a). In retrospect, it is possible to view the
Balanced Scorecard as providing an alternative approach to the Navigator
(Kaplan and Norton, 1992, 1993, 1996), while Sveibys Intangible Assets
Monitor offers a third approach (Sveiby, 1997a, b). Lev (2001) has subsequently
developed a Value Chain Scoreboard that makes use of a possible nine different
information foci.
As if to emphasise the difference between reporting the success
(or otherwise) of intellectual capital management from traditional financial

reporting, the various scorecard approaches normally commended the

extensive use of non-financial indicators. These are selected for their
relevance to the task in hand, an idea more commonly associated with
managerial accounting than financial accounting. In the last analysis, however,
scorecards affirmed the value of employing a quantitative approach to
reporting, something that was soon to be challenged as researchers sought to
develop a second wave of intellectual capital reporting frameworks.
In the vanguard of this development were researchers associated with
the Danish Agency for Trade and Industry, which funded a programme
beginning in 1998 and continuing to date (DATI, 1999, 2000; MITR, 2002).
What these researchers commend is a narrative approach to intellectual
capital accounting and reporting, using what are termed as Intellectual
Capital Statements. The basis for such statements is the organisations
knowledge narrative (subsequently, termed the management narrative),
from which is adduced a number of key management challenges. These in
turn inform a set of management challenges for which relevant indicators
are identified. The whole information set (including financial statements) is
then reported to stakeholders on a regular basis, using a range of
representational forms inter alia extensive narratives. A similar approach
was also commended in the final report of the Meritum research group, the
Intellectual Capital Report combining three elements: the vision of the firm;
the summary of intangible resources and activities; and the system of
indicators (Meritum, 2002).
When discussing the indicators to be used in the Value Chain Scoreboard,
Lev (2001, p. 115) comments that they should satisfy three criteria to ensure
maximal usefulness.. The three criteria are: quantitative in nature;
standardized (or easily standardized) to permit inter-firm comparison; and
empirically linked to corporate value. This observation is at odds with the
trajectory implicit in the move to narratives. In the case of narratives, the
objective would seem to be that of developing an intellectual capital account
that adds value by virtue of the richness of its information content and
reflexive nature. A strong divergence of approach seems to be occurring.
Whilst the European model is moving in a strongly qualitative direction, the
North American model is seeking to retain as much of a hard number
emphasis as possible. This is evident in the case of the Value Creation Index
(Cap Gemini, 2000; Low, 2000) in which an organisations scores in respect of
nine intangible value drivers are weighted in an attempt to determine an index
that might be compared with like organisations. Lev himself has also been
active in developing a Knowledge Capital Earnings methodology (Gu and Lev,
2001; Stewart, 2001; Tayles et al., 2002). In common with the earlier Calculated
Intangibles Value metric (Dzinkowski, 1999), this approach is designed to
generate market-friendly intangibles valuations incorporating reliable and
robust financial information.

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3. Broadening the emphasis

Developing approaches to reporting intellectual capital is by no means the only
direction in which the intellectual capital accounting literature has evolved. A
key focus has been on the constitution of intellectual capital, and attempts to
identify its various components. Edvinsson (1997) initially distinguishes two
elements: human capital and structural capital, and proceeds to decompose the
latter into relational and organisational capital. The resultant tripartite
taxonomy has become widely evident in the literature: human capital;
relational or customer capital; and organisational or structural capital. There
have also been examples of four element taxonomies, e.g. Habersam and Piber
(2003) and Van der Meer-Kooistra and Zijlstra (2001) who prefer to identify a
separate connectivity variant. Adopting a more critical perspective on
intellectual capital accounting, Roslender and Fincham (2003) have argued the
merits of distinguishing between human or primary intellectual capital and
what this brings to the organisation in the form of secondary intellectual
capital.
A second line of enquiry focuses on the relationship that exists between
intellectual capital and intangible assets. In this context the term intangibles
is often evident, sometimes being used in a confusing way. For example,
Lev, himself who is a long time researcher in the intangible assets field,
appears to enrol the term intangibles to acknowledge that the growing variety
of intangible assets, and more particularly the fact that some new additions
to that designation are now highly significant sources of value creation
(Lev, 2001). At the same time, he makes relatively little use of the term
intellectual capital. By contrast, the Meritum (2002) report uses the terms
intellectual capital and intangibles interchangeably. The intellectual
capital/intangibles couple is argued to incorporate intangible assets. These
are to be identified by virtue of the comparative ease with which they can be
accommodated within the existing framework for financial accounting and
reporting. If it were possible to accomplish this in the case of all the elements of
intellectual capital/intangibles, there would be no need to develop such
approaches as the Intellectual Capital Report, itself an axiom of the broader
intellectual capital accounting literature.
The significance of intellectual capital/intangibles within knowledge-based
industries, those in which the role of human capital and its creativity, ingenuity
and capacity for innovation are so central, has resulted in some researchers
linking intellectual capital with knowledge management. A development
coincidental with intellectual capital, knowledge management is concerned
with how organisations might leverage their stocks of knowledge assets in the
pursuit of competitive advantage (Demarest, 1997; Nonaka and Takeuchi, 1995;
Prusak, 1997). There is a great affinity between knowledge management and
intellectual capital management, and as a consequence it is possible to
understand intellectual capital accounting as an attempt to account for

knowledge management. The DATI research programme of the late 1990s

acknowledged the link between knowledge management and intellectual
capital reporting, commenting that:

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The intellectual capital statement supports the companys knowledge management, i.e. the
part of management work that obtains, shares, develops and anchors knowledge resources.
The intellectual capital statement provides a status of the companys efforts to develop its
knowledge resources through knowledge management in text, figures and illustrations
(DATI, 2000, p. 14).

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Similarly, the work of its principal academic participants affirms this

relationship, e.g. Bukh et al. (2001), Mouritsen et al. (2001a, b, 2002), as does an
early critique of the intellectual capital topic by Yakhlef and Salzer-Morling
(2000).
The literature also contains a growing number of empirical studies of
intellectual capital accounting. Hitherto, many of the more insightful
contributions to this section of the literature are associated with the
conceptual and practical advances discussed to this point. They also evidence
the strong Nordic presence in the field. The work associated with the DATI
programme, from Mouritsens early paper on the comparison between EVA
and intellectual capital as competing technologies of management (Mouritsen,
1998) through the three Danish government publications (DATI, 1999, 2000;
MITR, 2002) to the complementary academic papers (Bukh et al., 2001;
Mouritsen et al., 2001b, c, 2002; Thorbjornsson and Mouritsen, 2002), is both
most comprehensive and advanced. Employing a field study research design,
Johanson et al. (2001a, b) detail the existence of a wide range of established and
well-embedded measurement routines for intangibles in a sample of 11 Swedish
companies. They document the ways in which a varied range of non-financial
indicators have become critical in understanding the dynamics of value
creation, and how in what they term the vanguards, these measurements are
intimately related to the task of management control.
Focusing on these studies creates a false impression of the general state of
development of intellectual capital accounting, however, even allowing for a
measure of (understandable) embellishment by their authors. Guthrie and Petty
(2000) conclude that in the case of Australian companies:
[T]here appears to be a lot of empty rhetoric surrounding the notion of measuring, valuing
and reporting intellectual capital (Guthrie and Petty, 2000, p. 244).

Using a content analysis approach, they reviewed the annual reports of the 20
largest Australian companies, organisations in which an interest in intellectual
capital and knowledge management might be expected to encounter (Guthrie
et al., 1999). For Guthrie and Petty, the main stumbling block to progress is the
absence of an established and mutually agreed framework for reporting
intellectual capital (p. 245). Although companies exhibited a general
awareness of the significance of intellectual capital for long-term

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organisational performance, and had begun to identify a number of specific

aspects that were of particular importance, few showed signs of attempting to
measure them or to report such information. In a subsequent field study with
Caddy, focusing on orphan knowledge, Guthrie and Petty found that there
was evidence of a medium to high propensity to create such knowledge (Caddy
et al., 2001). Consequently, there is cause for concern about the effectiveness of
present levels of intellectual capital management within even the best practice
organisations, a situation that necessitates the development of a structured
attempt to collect, codify and communicate such information throughout the
organisation.
A recent study of Canadian intellectual capital reporting practices (Bontis,
2003, p. 16) concludes that there is no evidence at all that intellectual capital
disclosure has garnered any traction for Canadian corporations. Out of 10,000
annual reports analysed, only 68 were found to use one of a range of intellectual
capital research terms, with just five actually employing the term intellectual
capital itself. The most popular term used was intellectual property, described
by Bontis as representing such intangibles as patents and the outcomes of
R&D expenditures. These findings should be seen in the context of the
Canadian accountancy professions relatively early interest in the field. This is
evidenced in the Society of Management Accountants of Canadas research
monograph on the management of intellectual capital (Lynn, 1998) and the
Canadian Institute of Chartered Acountings Canadian Performance Reporting
Initiative from 1997, and in particular McLeans exploration of the intellectual
capital/value creation interface (www.totalvaluecreation.com). Bontis
concluding observations about Canada being significantly behind its
Scandinavian counterparts, and the topic of intellectual capital disclosure
being very much an academic discussion appear to be fully justified.
April et al.s (2003) study of intellectual capital measurement and reporting
in South Africa is more encouraging. Using the research design developed in
Guthrie et al. (1999), they report a modest level of activity among the 20 largest
listed South African companies, with an emphasis in favour of external or
relational capital such as business collaborations, customers, brands and
distribution channels. In addition, the researchers carried out a series of
interviews with senior managers at seven mining companies. Despite reporting
fewer intellectual capital attributes than the larger sample, there was evidence
that they well understood the importance of intellectual capital. In common
with Guthrie and Petty (2000), the researchers conclude that the problem lies
with a lack of knowledge about how to measure and report it in any systematic
way.
Finally, returning to the European arena, Ordonez de Pablos (2003) reports
on the extent of intellectual capital reporting in Spain, a country that has
become increasingly prominent in the academic debates surrounding
intellectual capital/intangibles (Bueno, 2002; Canibano et al., 2000;

Garcia-Ayuso, 2003; Sanchez et al., 2000). Survey evidence indicates that in

2000 the intellectual capital and knowledge management field is in an
embryonic state in Spain. (p. 67). Out of 119 organisations that responded to
questions on knowledge management, only 11 had created a knowledge
management director position. Overall, the survey suggested that:

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. . .most firms have only stated the importance of knowledge-based resources but have done
little in terms of implementing knowledge management strategies and measuring and
reporting intellectual capital (Ordonez de Pablos, 2003, p. 67).

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Further analysis of the practices of a subset of five leading organisations found

that only a limited extent of intellectual capital reporting was evident.
Typically it was only three or four pages long and was included within the
annual report, rather than as a distinct entity. Few indicators were employed,
with a bias towards description, including outlining the main categories of
intellectual capital. As a first step, Ordonez de Pablos argues, organisations
must recognise the value of the intellectual capital reporting approaches
already in widespread use by their Danish and Swedish counterparts.
4. Meanwhile, back in UK
Absent from this catalogue of intellectual capital reporting studies, and with a
few exceptions from the broader literature review that preceded it, is any
reference to contributions from UK researchers. In addition to Roslender and
Fincham (2001), the 2001 special issue of the Accounting, Auditing and
Accountability Journal on measuring, managing and reporting intellectual
capital (Petty et al., 2001) included two papers from the UK. Collier (2001)
discusses the role that intellectual capital plays in the context of contemporary
policing in the UK. He distinguishes intellectual capital (as a stock) from
intellectual capacity, which he portrays as the flows or utilisation of that
capital, arguing for an equal focus on the valuation of intellectual capital and
valuing intellectual capital. The latter should not be conceptualised in the
numerical way that is normally associated with the former exercise. Holland
(2001) provides rich case evidence about the ways in which UK fund managers
gather information on organisations stocks of intellectual capital/intangibles.
Of particular importance are issues associated with the quality of management,
which is commonly assessed in the context of one-to-one private meetings
between senior managers and their fund manager counterparts. In general,
Hollands sample of fund managers is satisfied with the success of their
enquiries, despite the fact that they invariably depart significantly from their
normal practices.
Brennans paper in this collection does not rank as a UK contribution,
reporting findings from the Republic of Ireland (Brennan, 2001; Brennan and
Connell, 2000). Using the content analysis approach previously developed in
Guthrie et al. (1999), Brennan reports that despite evidence of significant

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extents of intellectual capital in the 11 companies sampled, the level of

intellectual capital disclosure in their annual reports was low. In her view:
Irish companies are currently making little progress in measuring these assets. Such assets
are rarely referred to in annual reports and, when referred to, it is in the most qualitative
terms. Judging by the disclosures in Irish annual reports studied in this paper, there seems to
be little interest in, and demand for, improvements in measuring and accounting for
intellectual capital assets (Brennan, 2001, p. 434).

Continuing work by ORegan et al., (2001, 2002) confirms that intellectual

capital and kindred intangible resources are perceived to be crucial to the
success of the Republic of Irelands economy. A recent study, again surveying
predominantly Republic of Ireland companies, concludes that intellectual
capital measurement initiatives are becoming increasingly evident (Wall, 2002;
Wall et al., 2002). The following reservation is expressed, however.
[Most Irish companies] are already measuring certain elements of human, customer and
organisational capital. But it appears that this may be occurring as part of their normal
working practices and not coordinated within a single IC programme. The main problem
seems to be that much of the work on IC is being done in isolation and is not part of an overall
strategy (Wall, 2002, p. 29).

Unfortunately, neither of these groups of researchers offers insights on

intellectual capital reporting practices.
Finally, a further indication of the state of development on UK thinking on
intellectual capital/intangibles can be gleaned from a number of reports
published in recent times. In Spring 2000 Leadbeaters study of New Measures
for the New Economy for the English Institute provided an overview of the
issues and some of the existing solutions associated with the growing role of
intangible assets. A second paper focussing on two key assets, human capital
and corporate reputation followed. Information on these assets must be
communicated to the market in an effective fashion if organisations are to
remain competitive (ICAEW, 2000). Vance (2001) reports the findings of a series
of interviews with analysts and fund managers in the City of London and
finance directors of a number of major corporations. Among the findings are
that corporate world is more interested in the management and valuation of
intangible assets than the City, that reporting value creation by intangibles
could create unhelpful expectations, and that little support existed for the
introduction of any statutory formal reporting system for intangibles. The
report contains no reference to extant intangibles reporting frameworks.
In parallel, the Innovation Policy and Standards Directorate of the
Department of Trade and Industry published a programme for research and
valuation of intangible assets (Butler et al., 2000). In the following year, Hoad
produced a report for the Future and Innovation Unit of the Department of
Trade and Industry entitled: Creating Value from Your Intangible Assets (DTI,
2001). Drawing on interview data, a range of crucial intangible assets are
identified: relationships; knowledge; leadership and communication; culture

and values; reputation and trust; skills and competencies; processes and
systems. The report concludes with the observation that organisations need to:
. . . look beyond their existing financial statements to consider how a wide spectrum of
excluded intangibles contribute to their current and future potential to create value
(DTI, 2001, p. 36).

Subsequently, the DTI has provided funding to research a limited number of

projects on the measurement and management of intangible assets as part of
the broader Evolution of Business Knowledge programme announced by the
Economic and Social Research Council in March 2002. These projects begin in
2003.
5. The research project
The empirical materials to be outlined and discussed in the remainder of the
paper were collected in the course of a research project funded by the Institute
of Chartered Accountants of Scotland (ICAS), through a series of interviews
with senior managers in six organisations conducted between May 2001 and
March 2002. The project itself began in November 2000, with a final draft
report being submitted in July 2002, and following revisions, resubmitted to
and accepted by ICAS in March 2003 (Fincham and Roslender, 2003).
The research proposal was developed during the mid-2000 and reflected the
expertise of the two researchers. One had a long-standing interest in the
development of accounting for the worth of employees and accounting for
strategic positioning, whilst the other was interested in researching
management philosophies from a fashion perspective, most recently
knowledge management. For its part, ICAS viewed a study of intellectual
capital accounting developments as a valuable contribution to its business
reporting research initiative. Following the publication in 1999 of Business
Reporting: the Inevitable Change?, ICAS has funded a number of studies in this
area. Business reporting is viewed as one direction in which financial reporting
might evolve in order that the accountancy profession continues to be able to
make a relevant contribution to senior managements needs, inter alia those
associated with the successful pursuit of value creation and a sustainable
competitive advantage.
The study was conceived of as being fundamentally exploratory in nature,
reflecting both the lack of any UK empirical research evidence on intellectual
capital accounting, and very largely informed by a conceptual framework of
ideas developed in other socio-cultural contexts. The expectation was that only
modest extents of intellectual capital accounting, broadly interpreted as
incorporating an emphasis on either measurement or reporting, would be
discovered. In the same way that some of the most progressive developments in
intellectual capital accounting were occurring in Sweden, a country in which
human resource accounting has continued to have an influence since the heady
days of the 1970s, the absence of a parallel interest in the UK was regarded as

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being highly symptomatic. Equally, however, it was acknowledged that

practice with regard to intellectual capital accounting might be running a
little ahead of theory, an observation that has motivated substantial research
in management accounting during the past decade and a half. So while the
reports identified at the end of the previous section referred to intangible assets
and their valuation, in the field itself the discourse might be that of intellectual
capital and intangibles. Similarly, organisations might be engaged in the
process of identifying the sort of non-financial metrics that would assist them
in measuring their performance, and at the limit be making some tentative
steps in the sphere of reporting, both internal and external.
The choice of the semi-structured interview as the principal method of data
collection was consistent with the defining exploratory nature of the field study
undertaken. It is also an approach with which both researchers were well
acquainted. This method has not been widely employed in earlier (and parallel)
studies where content analyses and surveys have prevailed. The original
research proposal identified the objective of gaining access to six organisations
that were likely to be increasingly reliant on stocks of intellectual capital.
In due course, interviews were secured in the following organisations: a
petrochemicals company; a computer hardware company; a computer software
company; an information provider; a financial products company; and a
professional services organisation. In each case the intention was to interview
four senior managers. The interdisciplinary nature of intellectual capital
suggested that a variety of different managers be interviewed across the
sample. The sample of interviewees included individuals engaged in financial
management; human resource management; knowledge management;
corporate services; information management; and supply chain management.
Interviews normally lasted for approximately 90 min and were recorded in
every case, for professional transcription. A parallel series of interviews was
conducted with a number of consultants, opinion formers and users in this and
related fields, further details of which are initially reported in Chapter 7 of
Fincham and Roslender (2003).
6. The findings
The interviews provided a rich mass of qualitative information, and in order to
make sense of the insights gained the following structure has been adopted.
Initially, we outline how widely ideas about intellectual capital and related
developments were disseminated among the sample of interviewees. This is
followed by an account of the various reasons and motives underlying
respondents (and their organisations) interest in intellectual capital. The
specific dimensions of intellectual capital that were currently attracting
attention are then outlined. The analysis continues by considering the level of
implementation of intellectual capital encountered in the field study as a
prelude to reporting on attempts to measure intellectual capital. The section

concludes with a number of insights on the progress evident with regard to

reporting on intellectual capital, both internally and externally.
6.1 The dissemination of intellectual capital and related ideas
Amongst those interviewed, only a minority was familiar with the term
intellectual capital, and amongst them not all were clear about its meaning. In
the petrochemicals company, three respondents were familiar with the term, a
Senior Performance Analyst commenting that he was hearing more and more
about intellectual capital. The fourth person from this company was less
comfortable with the term but indicated that while it might not be talked about
every day its in the organisation, corroborating his colleagues suggestions
that it might have been a little slow to catch on. The Director of Human
Resources in the information provider said he had been aware of the intellectual
capital theme for a number of years, because of its connections with his own
specialism. He also acknowledged its Scandinavian origins as did a Director of
Knowledge Management in the professional services organisation.
Whilst the respondents from the petrochemicals company were generally
enthusiastic about what they knew about intellectual capital, their two
counterparts in the information provider and professional services
organisations offered less favourable comments. The Director of Human
Resources observed that intellectual capital might be an unfortunate term, one
that left people behind, a little like the term human resources itself. This had
the consequence of currently making it difficult to talk about. The Director of
Knowledge Manager claimed to have witnessed peoples eyes glazing over
when intellectual capital was mentioned, something he personally believed
could be problematic.
Several respondents exhibited less informed understandings of intellectual
capital. Two equated it with intellectual property, one of its constituent
elements. The Director of Legal Services in the information provider reasoned
that intellectual property including the know-how and expertise of the
workforce provided the core intellectual capital of the business, conceding that
neither term was presently widely used. A Business Unit Manager in the
computer hardware company identified intellectual capital as the propriety
stuff within the business, as opposed to knowledge and the communication of
information. By contrast, his Finance Director, with global accounting and
finance responsibilities for this division of the company, distinguished
intellectual capital from intangibles (as opposed to intangible assets),
identifying intangibles with the valuation of IP, goodwill and that sort of
thing. In his view, while intellectual capital had a strong human resources
association, and had been high on the corporate agenda in the USA for some
time, the term did not feature in the UK organisations vocabulary, something
that was evident in the interview with his colleague, the Human Resources
Director.

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There were many indications of a greater familiarity with the term

knowledge management among respondents. This was understandable given
that two organisations, the petrochemicals company and the professional
services provider, had extensive knowledge management initiatives in place,
while a second pair was in the process of embedding a range of recognised
knowledge management practices. A fifth company had, albeit belatedly,
begun to explore what such an approach might offer them. In the sixth
company, the term did not appear to be current, perhaps as a consequence of
the presence of a business process model approach to organisational change.
It was in those organisations where knowledge management was best
established that respondents understandings of intellectual capital were most
evident. In the case of the petrochemicals company, knowledge management
had been pursued since the mid-1990s, the company claiming that it was in the
forefront of such initiatives, both in the UK and globally. Here knowledge
management had given rise to recent initiatives including an Operations
Excellence programme that aimed to cascade the knowledge sharing culture
down from the managerial and engineering levels to the operational and
technician levels.
The Director of Knowledge Management in the professional services
organisation indicated that he had been engaged in knowledge management
before it was called that, describing it as good business. He continued:
Its just that businesses have got so complex in recent years, they need to be a bit more
scientific about the way they exploit their peoples skills and experience. . . [The] brand
strategy is people, knowledge, world, which kind of acknowledges the centre of everything
we do. I suppose the only assets we really have is the knowledge and skills and experience of
our people.

The initiative was now well embedded in the organisation by means of a

three-dimensional matrix of lines of service, industry groups and territories,
and enhanced by a powerful intranet facility.
In the information provider, the Director of Human Resources had
encountered knowledge management several years previously, and had quietly
introduced it into his own departments activities as an aid to resolving the
traditional challenges of personnel management: recruitment; learning; staff
development; etc. It was now being recognised to be more widely applicable,
particularly with regard to retaining staff, and more particularly their personal
knowledge. This was also acknowledged as being the motivation for the
introduction of knowledge management initiatives in the computer hardware
company. The Human Resources Director talked of the people in the
organisation being the really valuable assets that the business needed to
capture, admitting that a lot of people who come into our organisation expect
it to be a lot better than it actually is in this regard.
Knowledge management had only recently come on to the agenda in the
software company. This was the result of a merger creating what was

described as a global company with a global expertise that was not all in the
right place, so we have a huge knowledge management issue. An early
initiative had attempted to create a technical community enthusiastic about
sharing knowledge within the company based on special interest groups and
knowledge champions. Although the initiative had proved moderately
successful, recent commercial difficulties had resulted in web sites being
used to debate broader issues. There was now a growing suspicion that some
key groups had not embraced the technical community ethos as
wholeheartedly as they might. A second initiative had involved profiling the
(technical) attributes of the workforce as a precursor to a skill development
programme. Once again, commercial difficulties combined with a buoyant
labour market for key employees conspired to hamper the company in its
efforts to pursue this initiative.
6.2 Motives for interest in intellectual capital
Although relatively few respondents were familiar with the term intellectual
capital, rather more of them associated various intellectual capital related
themes with knowledge management. It therefore seems reasonable to conclude
that the two terms are being used interchangeably. For convenience, however,
the term intellectual capital is used in the following pages. Further questioning
revealed a number of reasons underlying an interest in intellectual capital.
While these reasons were offered by different individuals in the course of their
own discussions with us, it was also possible to discern organisational motives
to some degree.
In two of the case companies there was a strong sense in which an interest in
intellectual capital and related ideas was associated with a desire to avoid
re-inventing the wheel. In the petrochemicals company the knowledge-sharing
culture was linked with the idea that, somewhere out there in the broader
operations of the organisation, the solutions to most problems were probably
already known by somebody. Consequently, it was in everyones interests to
make solutions to problems known to colleagues as a matter of course through
an on-going process of knowledge-sharing. In the computer hardware company
there was evidence of a widespread view that the organisation had become a
victim of its own success in creating an open culture. Communication flowed
readily and staff were motivated to get on with projects once the green light
was shown to them. Yet, the prevailing mind-set was also one in which
problems tended to be tackled afresh each time. A knowledge-capture system
held out great appeal, both as a counter to this, and to prevent knowledge from
slipping away from the organisation.
Another common motive reflected the belief that intellectual capital ideas
were associated with a more effective style of operating. A balanced scorecard
was in the early stages of implementation in one of the divisions of the
information provider. In some part this was seen as a response to the

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perception that the division was currently more bureaucratic and slower to
market than its main competitor. The scorecard initiative, and the systems
needed to sustain it, were seen as a way of making the company able to react
more quickly, while engaging people more in the business. This perception
was conditioned by the nature of the work of this division a
solutions-generating part of the business with the scorecard intended to
encourage the (rapid) generation of new ideas from the bottom up. In the
software company, the embryonic interest in ideas about intellectual assets and
knowledge sharing mirrored a general perception that the organisation needed
to create a culture more attuned to innovation and learning amongst large
sections of the workforce. Whilst a culture of this sort had existed when the
business was smaller, its loss was regarded as contributing to companys
presently perilous commercial situation.
The professional services organisation discussed the link between
knowledge management and the stock of intellectual assets in the context
of a major merger that the firm had undergone a couple of years back. The
result was a much larger organisation in which knowledge could no longer
be managed informally. In order to extract the greatest benefit from the
key asset their people better knowledge management systems were
required. This was seen in terms of leveraging intellectual assets so that
fee income could be maximised. The financial products company had also
experienced significant change in recent years as a result of a major
merger. Although a business process model of organisational change
prevailed, respondents also acknowledged that this embraced to the pursuit
of greater levels of knowledge sharing across formerly quite distinct
entities.
Finally, returning to the petrochemicals company, we encountered a quite
distinctive reason for an interest in intellectual capital. The function
responsible for codifying accident and incident data and disseminating it to
the health, safety and environment community within the organisation, had
given much thought to how these data could be utilised. The problem
emphasised was a lack of learning, with a perception that same mistakes
were being repeated. This was recognised to be a critical issue, in an
industry where huge resources are committed to improving performance in
this area. Powerful systems for gathering and analysing incident data were
in place in the organisation. In addition, strictly observed procedures existed
for holding moratoria and drawing lessons from incidents, particularly those
of a serious nature. Nevertheless, one respondent took the view that the
company still needed to make the final step: to introduce an effective learning
model for incident management. Such a model needed to provide an
appropriate methodology together with rules for the dissemination of
information.

6.3 The dimensions of intellectual capital

The findings reported in the preceding paragraphs indicate that despite a
general lack of familiarity with the term intellectual capital, a number of
respondents and their companies were interested in intellectual capital related
issues and ideas. To gauge how extensive this interest actually was, it proved
useful to analyse the interview materials using the tripartite model or
taxonomy of the components of intellectual capital that has emerged in the
literature: human capital; relational capital and structural capital.
Given the perceived association between intellectual capital and human
resources noted earlier, it was not surprising to learn that human capital
constituted a key focus of attention among respondents. This was equally
apparent in those companies that did not claim to be very far advanced in the
introduction of knowledge management practices. Major initiatives were
underway to determine the current stocks of human capital, information that
was used to inform employee development programmes and employee
retention decisions. The Human Resources Director in the computer hardware
company described a talent appraisal process in the following terms.
We look at our people and ask: who are the top talent that are demonstrating ability right
now, who are what we would call the key standard talent that you want to retain, that are the
backbone of your business, and who are the people that you would probably look at
developing or investing in? And when we have isolated the top talent, we move on to what we
call talent appraisal which is about looking at the potential. Because its all very well having
somebody performing well in the role they are currently doing now, but do you really want to
invest in them, have they really got the potential to grow in the future and to take on more and
more responsibility, take on leadership roles?.

As a consequence, less attention was being paid to those inhabiting the lower
end of the talent scale. Competitive pressures dictated that it was important to
identify who of the middle 70 per cent of the workforce could move to the top 20
per cent whose skills were in great demand in both local and national labour
markets. The business did not need to move everyone through the
organisational levels and into the upper end of the scale. Achieving the right
balance of talent was the key challenge, not least because in this industry the
use of temporary and contract labour, some of it of the highest quality, was
commonplace. From the employers point of view it was desirable to meet
specific targets for permanent to temporary staff. The traditional 70/30 split
had, until recently, been difficult to achieve, but with the downturn in the
industrys fortunes in 2001, a policy of layoffs had resulted in 90 per cent of
staff being of permanent status. When the market recovered, as the Finance
Director indicated, the new target would be more in line with the 80/20
understood by the all-important industry analysts.
The appraisal and development system in place in the information provider
was currently being developed in a new initiative. This was described as a
more sophisticated and complex performance measurement system based on
new software that allowed performance reviews and personal development

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plans to be fed into a database. It effectively ranked skills sets, measured

competence and identified development needs. Once again, the initiative
incorporated aspects of intellectual capital and knowledge management, and
was increasingly strategic in nature, intended to promote effective (human)
resourcing, identified as ensuring that you have got the right people at the
right time.
In the computer software company extensive work had been completed in
identifying the technical resources required for the performance of specific jobs.
The project had now evolved into a second phase, similar to the latter two
initiatives and designed to provide some measure of the skill levels presently
available within the existing workforce together with an indication of key
development needs. A Senior Development Manager explained:
As part of the TDP (technical development programme) process, we initiated another project
which was to look at technical attributes. We identified and defined a group of about twelve
technical attributes. Other attributes could then be added and role specific attributes which
were being developed by others in the company. We also developed a managers toolkit which
allowed managers to take a technical person and map that person against the technical
attributes, identify gaps in their skills levels and map these gaps against the [British
Computer Society] ISM3 model . . .Our objective is to be able to say I have a coder here, his
level of software construction is 3 and it needs to be 6, measuring it against the attributes.

The ultimate intention of this exercise was to use the staff skills database to
inform manpower planning for projects. Unfortunately, it had served to
confirm fears that in some areas, many senior employees were seriously
deficient in core skills, something that had resulted a good deal of damaging
resentment.
The second dimension of intellectual capital encompasses various aspects of
the relationship between an organisation and its customer base. Among the
factors that have the consequence of keeping customers coming back are a
companys stock of products or brands, and the level of service that it delivers
to customers, together with the information systems and databases that
increasingly underpin such relationships. These and similar marketing assets
constitute relational or customer capital. This might be compared with the
following observations of the Finance Director in the computer hardware
company.
So always start with the customer. How does operations, the production facility, how does
that fit into the customer experience? The customer is concerned with price and we are
concerned with margin. And so when we look internally we look at everything that generates
your margin. The overall goal of operations is CQLT. So its looking at the Cost. We are trying
to drive cost down. Customers want Quality. We are always trying to drive quality up. We
also work to reduce Lead time to our customers. Then there is time to market. In our industry
Time to bring a particular computer to market is very, very important because the
competition is always out there, all the time.

In this company, building up a stock of customer-based relational capital was a

complex process. It was not simply a case of providing value for money, rather

what the customer was prepared to pay for a solution, together with
additional services such as installation, training, maintenance and upgrading,
or what was termed the total cost of ownership for the customer. Quality, in
turn, was not limited to the hardware itself, but to the support structure
expected by the customer, and that needed to be delivered consistently in a
market place where expectations are rising relentlessly. Against this
background both lead time and time to market assume a heightened
significance. Customers expect that they can access their chosen solution
within the relative short timeframes. Equally, enhancements to technology,
perhaps more than support facilities, are also expected to be available as
quickly as possible. The suggestion that once the initial investment in a
particular supplier has been made, the customer is in thrall to that supplier, has
long since been dismissed.
In the information provider efforts to integrate the companys many
customer information databases were just about to begin. This had been
recognised as a much needed exercise, one that a Financial Planning Manager
hoped would result in improved customer relations.
We are actually investing at the moment in a relationship marketing system, which is quite a
significant investment for us. What it will do, which we dont currently have at the press of a
button, is provide one view of a customers relationship with [the company]. There will be one
key contact for a customer, and although there will be different levels of contact, there will be
just one view. People will be able to see at a glance when someone last had contact with a
customer, what the sales are across all divisions, any particular issues, together with some
cash flows and debtors information as well. We are looking at managing our customers to
maximise our relationships with them.

A colleague spoke of the companys customers expecting it to have a

more joined-up approach. To date information had been managed effectively
within divisions but not across divisions. For the company, a joined-up
approach would enable the development of a sales-led emphasis and a greater
capacity to cross sell, thereby making the most of existing customer relations.
The computer hardware company also provided insights on a different sort
of relational capital, one that depended on the organisations relationships with
its own suppliers rather than its customers. The company had developed a
scorecard that it used to assess the performance of suppliers. In this industry it
was crucial that a company could rely on its various suppliers, some of who
were resident within the companys own facilities. Problematic supply chains
were known to jeopardise a businesss capacity to service its own customers,
and therefore require continuous monitoring. Supplier performance assessment
was carried out on a quarterly basis and made use of a simple colour coding
mechanism. For suppliers classed in the red category, corrective action would
be put in place, with no new business being awarded to them. Those in the
amber category might also find themselves denied of further work until they
had got themselves into a fit state. According to a Business Unit Manager, a
similar practice had recently been introduced in the case of the agencies

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supplying temporary workers. Those not deemed to be supplying a

satisfactory stream of labour were quickly replaced by more reliable
competitors.
As we reported earlier, a few respondents identified intellectual capital with
intellectual property, suggesting that in their organisations this particular
intangible asset was a key element of structural capital. In the information
provider the nature of the business meant that key elements of protecting
intellectual property rights ensuring that third parties seek consent and pay
for intellectual property and that certain know-how or trade secrets remain
confidential assumed great importance. In a rather different sense, in the
petrochemicals company both an Operations Manager and a Senior Business
Analyst identified a critical stock of less formalised knowledge that performed
the same function. In this science-based industry, there was recognition of the
informal knowledge that technical and engineering staff accumulated in their
black books. This was normally lost to organisation when individuals left,
the debriefing of retirees or exit interviews as a means to promote knowledge
management being actively under consideration.
Structural capital also embraces key organisational attributes such as
organisational culture, management structures and processes, knowledge
networks and organisational philosophies. Unlike intellectual property, these
are of a fundamentally intangible nature, difficult to count and to place any sort
of financial value on. Yet, they can be vitally important assets or enabling
mechanisms. The existence of a progressive corporate outlook or culture
provides the context for business practice, and can be a significant determinant
of business success. Indeed, in an age when a growing proportion of the
workforce have enjoyed a prolonged educational experience, and are regarded
by companies as central to the successful pursuit of competitive advantage, it
would be self-defeating to impose dis(en)abling organisational cultures.
Several respondents discussed at length about the centrality of their
organisational cultures. In the professional services provider there were
references to the long journey entailed in building an effective knowledge
management environment. This journey was regarded as being continuous as
its end point kept receding as operations became increasingly globalised and
the task of managing human and structural assets expanded beyond the local
environment. The core characteristic of any knowledge management
environment, its cultural dimension, was identified as trust and evidenced by
the existence of a network of trust relationships. The Director of Knowledge
Management described this in the following terms:
If you look at the basis of knowledge management, it is the establishment of trust
relationships that is extremely key for the re-use of content [ knowledge]. I think a lot of
people focus on the development of content and getting it out there. Once it is out there, it is
only worth investing in if people actually leverage it . . .. And if you are going to do that you
have got to be able to look at knowledge and say: is this good, is this rubbish, is this

something we can actually re-use?. You would only really re-use it to its fullest extent if you
had a relationship of trust with the person that wrote it.

In the petrochemicals company, health, safety and environmental issues were

regarded as being at the core of the organisational culture. Successfully
managing such things was central to staying in business, and consequently
perceived as very important for individuals seeking promotion. It was
suggested that the population from which senior management traditionally
came were those middle managers who had a very heavy HSE agenda. In this
context, a health, safety and environment manager referred to recent
discussions about safety performance learning, which effectively meant
taking the learning culture into a new phase. The aim was to ensure that the
maximum learning possible was gained from the incidence of accidents. This
meant moving beyond recording and reporting safety incidents to identify the
learning to be gained from them, and to embed this learning within the
organisation. Or expressed more simply, moving from measuring safety
incidents to successfully managing safety.
In both information provider and computer software company, there were
concerns about cultures of innovation being stifled by the bureaucratic
attitudes that had accompanied the recent growth. In the information provider
this amounted to a feeling of having lost the formerly spontaneous culture of
product innovation and as a result, falling behind the competition. It was at
present necessary to empower people, to engage them in the business so that
the ideas flowed again. The loss of a strong innovation culture appeared more
serious in the computer software company. In the absence of a learning culture,
many staff were unwilling to commit themselves to upgrade their skills
continuously. The cause was attributed to the companys increasingly
bureaucratic quality, something that had been attendant of recent rapid
growth. It had picked up a lot of bad things about big companies and forgotten
a lot of good things it had being the company it was. The escalating
commercial difficulties this company was facing meant that its ability to invest
in much-needed culture rebuilding initiatives was severely constrained, in the
short-term at least.
6.4 The implementation of intellectual capital
The preceding paragraphs provide evidence that irrespective of the limited
familiarity with the term intellectual capital amongst the individuals
interviewed in the course of the study, many of the substantive dimensions
of intellectual capital appeared to be attracting their interest. This said,
however, it is important not to convey the impression that the debate about
intellectual capital, inter alia its management and reporting aspects, is
currently flourishing in the UK. While some individuals spoke sincerely and
positively about intellectual capital, at most they were usually referring to quite
specific intellectual capital related insights and initiatives being pursued in

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those parts of the organisation with which they were acquainted. There was
little evidence to suggest that in any of the six companies in the sample, the
implementation of intellectual capital and related ideas and practices assumed
a systematic form. Consequently, those instances of good practice
encountered during interviews must be treated with caution.
In the petrochemicals company, the well-established and widely
acknowledged commitment to knowledge management identified it as the
most advanced of the six organisations in the sample, something also evident
in earlier paragraphs. While such practices continue, possibly to be enhanced
by the integration of intellectual capital thinking, there were indications that
senior management support for knowledge management might already have
peaked. The team that had been in the vanguard of developments in the middle
and late 1990s, had recently been disbanded, with some members leaving the
organisation to set-up a knowledge management consultancy. Those who
remained had assumed new responsibilities, and while they were encouraged to
pursue their former interests, they did so largely in their own time. Funding
had also been reduced or diverted to current initiatives such as e-business. As a
consequence, the prospects for further development would appear to be
intimately associated with the future activities of a relatively small group of
individuals who may elect to move in other directions.
In common with similar businesses, in its consultancy operations the
professional services organisation operated a powerful Lotus Notes-based
database that facilitated the development of an impressive form of knowledge
management. Databases allow the codification of experience gained from
projects alongside the career histories of individual consultants, which in turn
provide a means of assembling project teams for future engagements.
Impressive though such systems are, however, there are limits on the extent to
which they can be regarded as constituting a broadly-based intellectual capital
or knowledge management culture. Although well apprised of various
knowledge management practices, including networking and communities of
practices, together with a range of coaching activities, their efforts at the
broader management of human and intellectual capital seemed to relatively
rudimentary. An interview with a manager from the audit side of the business
indicated that, to date, only initial efforts had been made to promote
information sharing in her area. The philosophy of forming special
relationships with audit clients persisted.
In the course of an interview with the Financial Controller of one of the
divisions of the information provider we learned of the very recent decision to
introduce a balanced scorecard approach to performance measurement. This
initiative was associated with a broader cultural change programme underway
within the division, something evident in a number of the headline goals that
were incorporated within the prototype scorecard: delivering customer
satisfaction; improving productivity; promoting innovation; and increasing

knowledge sharing. All of these also have strong intellectual capital

associations. Less encouraging were the observations that this project was
being driven or championed by the divisions Chief Operating Officer, to all
intents and purposes as a personal initiative and consequently within the
existing budgetary constraints. The Financial Controller herself was not aware
of the existence of any similar initiative elsewhere in the companys UK
operations or indeed whether the other divisional heads even knew of this
particular development.
Finally, as we have already noted, in the computer software company interest
in intellectual capital was at best embryonic, and to a significant extent reflected
the position in which the company found itself at the time of the interviews.
Although the efforts to identify the skills set available to the organisation, and
its immediate development needs, were both well-intentioned and
well-conceived, they were largely reactive in origin. Likewise the decision to
catalyse greater levels of communication via the companys intranet. There were
also indications that we were provided access to the organisation in the hope
that our enquiries might stimulate further beneficial activity. What was absent,
perhaps understandably given the companys financial position, was the
existence of a coherent intellectual capital or knowledge management strategy.
6.5 The challenge of measurement: intellectual capital metrics
The modest degree of embeddedness of intellectual capital thinking among our
sample of respondents was complemented by a similar extent of metric
development being reported. In common with other findings, progress in
developing measurement metrics in the software company was rather limited.
As a result of the skills audit aspect of the Technical Development Programme,
senior management were better apprised of the portfolio of expertise on offer,
although more significantly they had a clearer understanding of a pressing
skills gap. The management consultancy division of the professional services
organisations commitment to the implementation of an extensive array of
knowledge management practices did not appear to extend to the development
of measurement systems. In common with similar businesses, they had
developed a sophisticated operation based on their various corporate
databases. Such systems are probably well in advance of those operated by
most other sectors of industry, including other divisions within the
organisation. As long as these systems remain effective, there is likely to be
little urgency to invest resources in the development of metrics.
In both computer hardware company and information provider there was
evidence of attempts to develop a range of metrics to complement the
developments outlined above. Again, however, there was no indication that
these initiatives were planned or part of a broader programme. In some cases,
the metrics were novel and insightful, reflecting the enthusiasm of those
individuals who had been responsible for their introduction. The recently

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launched balanced scorecard initiative in the information provider held out the
prospect of more orderly progress in the future, but only if that initiative
continued. Bottom-up developments seemed to be relatively a commonplace in
the computer hardware company, and once taken up by corporate
management, they were cascaded down through the various divisions across
the globe. As yet, however, there were no indications that intellectual capital
metrics were any more advanced elsewhere in the organisation.
Some metric development was also evident in the financial products
company. This organisation had installed a business process model as part of
its organisational change programme, and as a consequence appeared to have
comparatively little interest in the intellectual capital field. An interviewee in
the Information Technology division indicated that a balanced scorecard had
been in use here for some time, and that currently there was interest in
collecting new information on performance. How the company was perceived
by its various customer groups had resulted in the introduction of some new
metrics, alongside those for financial performance and risk management.
Progress to date remained modest, reflecting both the size of the change
management task the organisation continued to face and the general downturn
in the fortunes of companies in the industry. Also, the prevailing culture of the
organisation, and its traditional reliance on hard information meant that
many people had reservations about the extent to which it was possible to trust
these new data.
As the most advanced company in the sample, it was not surprising to learn
that the development of intellectual capital metrics was actively under review
in the petrochemicals company. The Senior Performance Analyst responsible
for producing and disseminating his divisions balanced scorecard was
considering the introduction of additional metrics in the people focus of the
scorecard. These would complement such key performance indicators as the
morale index and measures of absenteeism. No firm decisions had been made
as yet, however. Managers were still being asked for their thoughts on what
intellectual capital signified to them, and how best to provide information
about it. At other times in the same interview, the idea of developing measures
that related to the companys brands and to its stocks of intellectual capital was
also discussed. These were viewed as being a valuable addition to existing
indicators relating to utilisation levels, emissions, safety performance, etc. The
move away from such operational measures was regarded as an indication of
the evolving organisational culture, although it was clear from other interviews
within the company that this idea might not be shared across the group as a
whole.
6.6 Reporting intellectual capital performance
Employing the balanced scorecard to report intellectual capital performance in
the petrochemicals company was based on the use of this approach for internal

reporting since the early 1990s. This scorecard had been conceived of
independently of Kaplan and Nortons own model, and departed from it using
six as opposed to four performance foci: financial; customer; process; people;
technology; and health, safety and environment. Other scorecards had also
developed within the different divisions of the group, although there had been
no attempt to create a group scorecard. The Senior Performance Analyst
responsible for the petrochemicals scorecard was not an accountant, having
moved into this field after a successful career in the scientific grades. He was
conscious that his scorecard was known to senior accounting and finance staff
who were too preoccupied with their financial accounting and reporting tasks
to undertake such work. This also meant that its role was limited to that of
internal reporting, at least in the foreseeable future. He was comfortable with
this division of labour, and was largely unconcerned about extending his own
activities in the direction of external financial reporting.
The performance measurement and internal reporting opportunities
afforded by a scorecard were acknowledged by the Financial Controller in
one of the divisions of the information provider. The decision to embrace the
balanced scorecard had been made as an aspect of the ambitious culture change
programme recently introduced in this division. To date, only this division was
contemplating developing a balanced scorecard, and there was presently no
intention of making the practice universal. In her view, most people across the
company as a whole seem to be quite happy with the information that they are
getting. She was enthusiastic about the balanced scorecard model, however,
and took the view that as the information needs of management changed in the
future, signs of which were already beginning to emerge, then new reporting
formats, including the balanced scorecard, would need to be considered.
The Finance Director in the computer hardware company was also
reasonably familiar with the balanced scorecard, having used them elsewhere
in the organisation at different times in his career.
[This] is a fairly large organisation. In different parts of [the company] Ive used very
sophisticated scorecards, in others I havent. For example, I was in a shared services
organisation in Australia and also in California. And basically we got: This is shared
services, this is your finance and IT, and so on.. So we got benchmarked for all these
different activities, how much it cost, cycle times, etc. We got benchmarked, we measured
these things on a regular basis and set goals for them. So that was fairly sophisticated in
terms of a balanced scorecard. [Here] its a new organisation, new vision, new reporting, so we
are getting there, but we are not there yet.

In time, he envisaged the development of scorecards at the business unit level.

These could be used to report such things as the performance of the companys
suppliers, together with measures associated with customer and cost of
ownership perspectives.
In the remaining three companies there were no indication that the balanced
scorecard and intellectual capital issues might be beneficially linked. None of
interviewees in the computer software company seemed aware of the balanced

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scorecard, a finding that mirrors the very limited extent of metric development
evident there. In the case of the financial products company, the general
absence of any discussion of intellectual capital resulted in the lack of a
perceived link between them. The recent initiatives in relation to metric
development noted earlier may have the consequence of increasing interest in
intellectual capital in the near future. Finally, in the same way that the diffusion
of knowledge management within the professional services organisation had
not, as yet at least, been accompanied by much metric development, there was
no evidence that the balanced scorecard was viewed as a valuable complement
to it. Respondents indicated that the balanced scorecard was used for some
internal reporting tasks, but was not linked with the knowledge management
programme.
Knowledge of alternative intellectual capital reporting approaches was very
limited. The Senior Performance Analyst in the petrochemicals company
identified the Skandia Navigator as a variant on his own companys and
Kaplan and Nortons balanced scorecard approaches. The Director of Human
Resources in the information provider had attended a presentation by Leif
Edvinsson some years back, and had learned of the Navigator at that time. The
Director of Knowledge Management in the professional services organisation
indicated some familiarity with the work of Sveiby, although mainly because of
the latters association with his firm in Australia rather than as the advocate of
the intangible assets monitor.
These findings accord with the generally limited level of understanding of
intellectual capital evident within the sample. To date, a lack of knowledge
about the various first wave of intellectual capital reporting approaches has
probably not held back the progress that has been made in these companies. As
some of them move forward, however, and begin to consider how it might be
possible to report on intellectual capital effectively, it will become necessary for
companies to have a much greater awareness of the options that are available
to them. This is particularly the case in respect of the external reporting of
intellectual capital. At present, this is not on the agenda of any of the
companies in the sample, including the petrochemicals company. Unless steps
are taken to address this situation, by indicating what options are available for
reporting or providing some form of account of intellectual capital, there is the
very real danger that companies will not be in a position to capitalise on
whatever progress they have made to date.
7. Discussion
Summarising the findings, there is only limited evidence to suggest that
intellectual capital, including knowledge management, is presently a major
focus of interest within this sample of companies. What interest intellectual
capital is attracting is largely a consequence of the recognition that what it
relates to is of growing importance to the long-term value creation aspirations

of organisations. It therefore needs to be identified and, as far as possible,

managed in an effective way. Despite the lack of use of the term intellectual
capital by the majority of interviewees, coupled with some confusion about
what it might refer to, a range of its constituent elements were singled out for
discussion. What was clear in these discussions is that most individuals had
found their way to intellectual capital as a result of their involvement in
existing initiatives or programmes rather than one that had focussed
specifically on intellectual capital. Equally, there was evidence in some
companies that much of the progress that had been made was the result of the
efforts of individuals. In this light, it must be concluded that intellectual capital
is neither systematically nor strongly embedded within any of this sample of
companies. The same situation was evident in the case of metric development.
A range of interesting metrics was currently being developed to meet the
emerging information needs of managers. These metrics were rarely informed
by intellectual capital insights. Although these metrics were beginning to be
incorporated into scorecard reporting frameworks, these were designed for
internal communication purposes. Reporting on intellectual capital externally
was not an issue, irrespective of any recognition of its contribution to sustained
value creation.
These findings are similar to those reported by Wall (2002) and Wall et al.
(2002), which are based on a parallel study of a sample of predominantly
Republic of Ireland companies. While we might not be quite so convinced that
UK companies are highly aware of intellectual capital, we are certainly in
agreement that in practice only a tiny proportion of them had people dedicated
to working with it (Wall, 2002, p. 29). As a consequence, it must be concluded
that at this point of time, intellectual capital is not firmly rooted within UK
companies and among their managements. Wall continues:
Ireland is therefore typical of most developed nations when it comes to IC. Apart from
Scandinavia and North America, little pioneering work is being done in this area and a wait
and see strategy seems to be in place (Wall, 2002, p. 29).

While evidence from Scandinavia, e.g. Bukh et al. (2001), Johanson et al. (2001a,
b) and Mouritsen et al. (2001a, b, 2002), continues to confirm the growing
presence of intellectual capital thinking there, Bontis (2003) does not suggest
that Canada at least can be considered a pioneer in the intellectual capital field.
The recent paper by Ordonez de Pablos (2003) on the Spanish experience cited
earlier would seem to indicate that the situation is similar to that reported here
and by Wall and his colleagues, despite evidence of some pioneering
contributions to the academic and policy literatures by Spanish researchers. In
line with the earlier findings of Petty and Guthrie (2000), April et al.s (2003)
South African observations about the lack of any systematic foundation to
either the measurement or reporting practices of their respective samples of
companies support the conclusion that some Scandinavian organisations lead
the field by a considerable distance.

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Returning to the findings of the present study, the question of why UK

companies appear to be so far behind needs to be considered. Earlier in the
paper, when outlining the nature of our research project, Swedens progress in
the field of intellectual capital accounting was linked with its continued interest
in human resource accounting, long after that particular research focus lost its
popular appeal in the late 1970s. Human resource accounting had evolved into
human resource costing and accounting by the early 1990s, a concept that
informed the work of a group of researchers in the School of Business at
Stockholm University. They later established the Journal of Human Resource
Costing and Accounting, which initially provided an outlet for their own work
and that of the small invisible college of researchers who continued to be
interested in accounting for the human factor. The term intellectual capital
soon began to appear in the pages of this journal as contributors reported and
discussed current developments in the field. More significantly, however, in
1998 two of the leading exponents of human resource costing and accounting
published a think-piece on its relationship with both human resource
accounting and intellectual capital in the Accounting, Auditing and
Accountability Journal (Grojer and Johanson, 1998). The paper quickly
proved to be a major catalyst for research on intellectual capital.
This act of faith with human resource accounting occurred in the same
country that is credited with introducing some of the most progressive work
re-design programmes as part of the quality of working life movement that
emerged in the 1970s (Fincham and Rhodes, 1999; Thompson and McHugh,
2002; Watson, 1987). The movement emphasised the value of human creativity
and implored employers to pursue work practices that allowed employees the
greatest opportunities to exercise their creativity and commitment to the
organisation for mutual benefit. In this sense, human resource accounting and
the quality of working life movement are consistent with each other. More
significantly, both can be seen as manifestations of the social welfare culture
(and the underlying social democratic tradition) that has characterised Sweden
since the 1960s, a culture that has given rise to a comprehensive, if expensive,
social settlement that is much admired across most of the developed world.
Much of this has also become part of the way of life of many of Swedens
close neighbours during the last 30 years, the same countries much in evidence
in the vanguard of the development of intellectual capital. As well as sharing a
culture, the Scandinavian block of countries has also become identified with
technological advance, highly educated workforces, extensive value-added
activity and, as a result, significant levels of economic prosperity. These
countries are in the vanguard of the knowledge economy, which itself is
intimately associated with contemporary themes including intellectual capital,
knowledge management, the learning organisation and innovation. Taking all
of these observations in combination, it is little wonder that intellectual capital
practice is so developed here (Kreiner and Mouritsen, 2003).

By contrast, the UK can be considered to lag far behind. Whatever progress

may have been made in the 1960s and 1970s in respect of the creation of a
parallel social settlement to that of Sweden, given a seeming preference for a
more corporatist agenda, the return of a Conservative government in 1979
heralded a commitment to espousing market principles wherever possible,
coupled with the promise of greater freedom of choice for the individual. Any
improvements in the efficiency with which health, welfare and educational
institutions are currently run must be balanced with serious questions about
the quality that they deliver, a dilemma which may yet be the undoing of the
New Labour project that successfully challenged the Conservative partys
electoral stranglehold after the mid-1990s. As a result, the prevailing social
settlement in the UK is much less attractive than that of the Scandinavian
countries.
The prevalence of the market is felt everywhere, not least in the case of
employment. Senior executives are regularly rewarded with massive salaries
and bonuses (that sometimes bear little relationship to their performance) in
order to secure their services in the highly competitive market for executive
compensation. Those in the lower reaches of the employment hierarchy find
themselves rather less well served by the markets for their labour. The belief
that its workforce is the key asset for any organisation would appear to be a
largely rhetorical statement in many instances. Within the employment
relationship, improvements in value-added are commonly pursued by driving
down the level of remuneration rather than as result of effective knowledge
sharing. In this environment it is of little surprise that companies will evidence
little interest in intellectual capital, and that its presence is largely
unsystematic in nature and closely linked with the interests of individuals.
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Further reading
ICAS (1999), Business Reporting: the Inevitable Change?, in Beattie, V. (Ed.), Insitiute of Chartered
Accountants of Scotland, Edinburgh.
Leadbeter, C. (2000), New Measures for the New Economy, Centre for Business Performance,
London.