Karl Erik Sveiby is well known as a pioneer in the field of managing knowledge-based organisations. In this exclusive interview, uk.internet.com, a sister website to vnunet.com, spoke to him about the crucial importance of harnessing this knowledge - the things you can't touch and seldom see.
To gear up for the New Economy, businesses need to get a grip on their intangibles. This is the key lesson that Sveiby, a Swedish business theorist, has been trying to hammer home to them for the past 15 years.
He says that he first discovered the importance of intangible assets when he was executive chairman and co-owner of Ekonomi+Teknik Frlag, a Swedish publisher, in the early 1980s.
There he found that he "couldn't see such assets as the talent of our journalists in the balance sheet. I also struggled with the fact that our customers were adding so much value to the business that it was hard to see why we weren't paying them!"
Inspired by Marshall McLuhan's idea that everything we do, however prosaic, is an expression of ourselves, Sveiby identified three structures that manifest themselves as an organisation's business value (as against the value seen in an orthodox balance sheet).
These are: customer relationships, internal structure and employee competence. These three elements make up what Sveiby calls "knowledge capital", but he stresses that the label itself is less important than what it signifies (intangible assets) and what it positions you to do (improve your business strategy).
Sveiby's colleagues at Celemi, a Swedish business improvement consultancy, use an Intangible Assets Monitor (IAM) to try to measure this knowledge capital. The IAM divides intangible assets into three components: customers (the company's external structure); organisation (its internal structure); and the competence of its staff.
The customers column includes elements such as 'image-enhancing customers' and the stability of the organisation's customer base. The organisation column looks at, among other things, its 'rookie ratio' - the ratio of employees with less than two years' seniority to experts - and the third column lists issues such as competence-enhancing projects and the turnover of expert staff.
Celemi uses the IAM when presenting its own annual accounts, and the approach behind it has also been adopted in its homeland by the FreningsSparbanken when assessing companies that are seeking loans.
Ian Windle, Celemi UK's managing director, claimed that the IAM is about being fair to employees, because it recognises their intellectual capital value, but adds that the knowledge it provides is also useful to company bosses.
"A lot of traditional ways of measuring a business are very historic - all they do is tell you what happened," he says. "When you look at intangible assets, it gives you more clues about the future of your business."
"So you might see that your profit was smaller last year, but also be able to see that this was because you'd hired a lot of new people the year before and they'd spent their first year in the company developing competencies on challenging projects - and so your intangible assets shot up," he explains.
Forces of conservatism
Sveiby also revealed that PricewaterhouseCoopers uses the IAM internally, although not as an auditing tool for its customers as yet. This, he claims, is despite the fact that the accountancy profession has traditionally been hostile to offerings that profess to measure intangible assets.
He believes that resistance is now waning, however, because of developments like the 'balanced score-card' devised by Robert Kaplan and David Norton, and the theoretical work on intangible investments undertaken by Baruch Lev at New York University (see http://www.stern.nyu.edu/~blev/).
The investment analyst community has also proven itself equally resistant to the formal measurement and reporting of intangible assets, however.
"In many ways, analysts are using tools like the IAM intuitively," says Sveiby. "The numbers in analyst reports relate to tangibles, but if you read the text closely, the analysis usually has little to do with the numbers: instead it is precisely about intangibles - market trends, management skills, risks about staff leaving and so on. They do think in these terms, it's just that it's not systematic. Now that might be fine for experienced analysts, but not for the general public."
The third source of resistance, he believes, comes "from top brass in companies, who are happy with the present state of affairs. Such people would rather not present too much in reports. After all, if you want to hide your company from scrutiny, then the old ways are the best ways."
Sveiby's motto, 'to make organisations better places for people', is in keeping with this anti-conservative sentiment. "Take away the people from an organisation and it no longer exists", he says. "A lot of the stress, sacrifice, and general negativeness we experience in our lives comes from the workplace. Why do we persist with environments that are detrimental to our health?"
But away from work, this advocate of knowledge-sharing prefers a solitary path. "I like to walk on the rocks in Sweden or on the Australian coast - very natural environments both - by myself or with my family. I meet too many people in my working life," he says.
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