What Is Intellectual Capital?

What Is Intellectual Capital?

Let me explain intellectual capital directly: it's the value derived from your company's employee knowledge, skills, business training, or any proprietary information that gives you a competitive advantage.

You should see intellectual capital as an asset, broadly defined as all the informational resources at your disposal that can drive profits, attract new customers, create new products, or improve your business overall. It's essentially the total of employee expertise, organizational processes, and other intangibles that boost your bottom line.

Some subsets include human capital, information capital, brand awareness, and instructional capital.

Understanding Intellectual Capital

Intellectual capital is a business asset, but measuring it is highly subjective. As an asset, it doesn't appear on the balance sheet as 'intellectual capital'; instead, where possible, it's folded into intellectual property as part of intangibles and goodwill, which itself is hard to quantify.

Companies invest significant time and resources in developing management expertise and training employees in specific business areas to build this 'mental capacity' in their enterprise. This investment in enhancing intellectual capital delivers returns to the company, even if they're tough to measure, and it can create business value over many years.

Measuring Intellectual Capital

Various methods exist to measure intellectual capital, but there's no consistency or uniform standard in the industry. For instance, the balanced scorecard, an industry performance metric, evaluates four employee perspectives as part of quantifying intellectual capital: financial, customer, internal processes, and organizational capacity.

Alternatively, the Danish company Skandia views the transformation of human capital into structural capital as the core of intellectual capital. They've created a house-like structure for measurement, with financial focus as the roof, customer focus and process as the walls, human focus as the soul, and renewable and development focus as the platform.

Due to its vague nature and characteristics, intellectual capital is also known as intangible assets and environment.

Types of Intellectual Capital

Intellectual capital is typically divided into three categories: human capital, relationship capital, and structural capital.

Human capital covers all the knowledge and experience of employees in an organization, including their education, life experiences, and work experience. You can increase it through training.

Relationship capital includes all the relationships an organization maintains, such as with employees, suppliers, customers, shareholders, and others.

Structural capital refers to the organization's core belief system, like its mission statement, company policies, work culture, and organizational structure.

Examples of Intellectual Capital

Examples include the knowledge a factory line worker has built over years, a unique product marketing method, a way to reduce downtime on key research projects, or a secret formula like Coca-Cola's. A company can strengthen its intellectual capital by hiring qualified people and process experts who add to the bottom line.

Consider a mechanic who graduates from technical school and joins an automobile manufacturer. Their initial intellectual capital is the school knowledge. After a year on the job, it grows with gained experience and specific applications. After two years, a training program on new technology and efficiency further increases the mechanic's—and thus the company's—intellectual capital.

As technology and process improvements become key differentiators in modern companies, intellectual capital plays a larger role in succeeding in competitive markets.