Intellectual Capital: The currency of the future

1
KM 101 Dr. Nick
Bontis Associate Professor of Strategic
Management, McMaster U. Director, Institute for
Intellectual Capital ResearchAssociate Editor,
Journal of Intellectual Capital Chief Knowledge
Officer, Knexa Solutions
www.NickBontis.com
nick_at_bontis.com
2
Seminar Agenda

• Phase 1 Knowledge Era
• understanding the context of the information age
• Phase 2 IC Multi Perspectives
• What is IC? Depends on who you ask.
• Phase 3 IC Models
• levels of analysis, types of knowledge, stocks
  flows
• Phase 4 SLAM Measures
• alignment of stocks and flows with performance
• Phase 5 Causal Mapping
• Structural equation methodology and measures
• Phase 6 National IC Index
• Country level measurement and modeling
• Phase 7 Software Demonstration
• TangoNet and Tribute

3
Entering A New Era ?
GroupWare
Tech
Machine
Industrial Era
Agriculture Era
Land
Mind
Knowledge Era
Tobins q
Accounting Metrics
Internet
4
In 1997 home PCs passed TVs in units soldRetail
Week
Canadian Internet Usage 1995 4, 1998 25, 2005
75 Nielsen
Internet users 30 million - 1999 817 million -
2005 WTO
Internet traffic doubling every 70 daysDept. of
Commerce
5
KM Research Highlights

• IDC reports FORTUNE 500 wasted 12 billion
  duplicating work
• Ford reports 914 million cost savings due to KM
  from 1997 - 2000
• Chevron saves 650 million since 1991 due to KM
• Texas Instruments saves 1 billion cumulatively
  sinceKM program launched in mid 1990s
• Gartner Group reports
• 90 of FORTUNE 500 working on KM
• 33 of FORTUNE 1000 had begun KM programs by 1999
• will rise to over 50 by 2003
• World Economic Forum
• 95 of CEOs feel that KM is critical to success

6
Myths of Measuring KM

1. The reality is that when you finally do it, you
   are never satisfied
2. The few who are doing it are probably not doing
   it well
3. Those who say they are doing it are probably
   lying
4. No one is sure what it is, but they hear that it
   is great
5. Everyone thinks everyone else is doing it

7
KM Research Highlights

• Stats Canada (348 organizations surveyed)
• 93 have KM initiatives, 25 dedicated budget
• Why have KM?
• Competitive advantage, human capital,
  intellectual capital retention
• Fortune 500
• 80 have KM initiative(s) in place, 25 have
  CKOs53 have KM staff, all s expected to grow
• 6 have KM initiatives company-wide, 60 lt 5
  yearsKM is owned 32 Sr.Mgt., 25 HR, 16 IT
• Government - all levels
• Institute for Intellectual Capital Research
• CKOs from 40 HR, 40 IT, plus other (hired
  within)

8
Multi - Perspectives
Marketing
Human Resources
Technological Systems
Economics
Finance
Organizational Behaviour
Accounting
Sales
Training Development
Strategy
9
Volunteer for a Reading test
Aoccdrnig to rscheearch at Cmabrigde Uinervtisy,
it deosn't mttaer in waht oredr the ltteers in a
wrod are, the olny iprmoetnt tihng is taht the
frist and lsat ltteer be at the rghit pclae. The
rset can be a total mses and you can sitll raed
it wouthit a porbelm. Tihs is bcuseae the huamn
mnid deos not raed ervey lteter by istlef, but
the wrod as a wlohe.
10
Volunteer for a Reading test
11
Where are we going?

• Lester Thurow - MIT
• The dominant competitive weapon of the 21st
  century will be theeducation and skills of the
  workforce.
• Jac Fitz-enz - Saratoga Institute
• The contingent workforce will become the
  dominant model.
• President Clinton - U.S. White House
• By having the chance to work while you learn ...
  You embody the growing unity between experience
  and education.
• Steve Maharey - NZ Labour Spokesperson on
  Education
• Maori and Pacific Island peoples in particular
  remain under represented in tertiary education.

12
Importance of phenomenon

• Choo and Bontis (2002), Bontis (2002)
• Fitz-enz (2000)
• Max Boisot (1998) Choo (1998)
• Knowledge Assets, Knowing in Organizations
• Sveiby (1997) Stewart (1997) Roos (1997)
• Organizational Wealth
• Nonaka and Takeuchi (1995)
• The Knowledge Creating Company
• Drucker (1993)
• arrival of the knowledge society
• Toffler (1990), Handy (1989)
• ultimate resource, intellectual assets 3 or 4
  times BV

13
Tracing KMs History

• Egyptians, Greeks, Monks, Knights
• Taylor (1911)
• Evidence of codification of knowledge
• Simon (1945)
• Cognitive capacity bounded rationality
• Schumpeter (1952)
• Innovation from new combinations of knowledge
• Penrose (1959)
• Organization is a knowledge repository

14
IASC, CICA, FASB SEC Help!
15
Distinguishing the Terms
16
Devils Advocate
17
The Danger of KM
KnowledgeManagement
OrganizationalPerformance

• Achievement Driven
• Paternalistic
• Balance

• Organizational Slack

18
Level of Analysis Individual

• recruitment
• building competencies
• assessing weaknesses
• retention
• compensation
• satisfaction

19
Level of Analysis Group

• concerted team action
• collectively aligned mind sets
• synergy
• cohesion
• shared perception of thebusiness environment

20
Level of Analysis Organization
Continuous Improvement
Strategy
Systems
Culture
Trust
Technology
Structure
Leadership
21
IC Conceptualization

• 2nd order
• multi-dimensional
• 3 sub-domains
• drivers
• trust, culture
• leadership

22
Conceptual Model - Firm
23
House Metaphor
24
IC Perceptual Model
25
Nonaka (SECI Model)
26
Metaphors and Analogies

• stocks and flows
• production system
• capacity utilization, bottlenecks, throughput
• ties-in stocks of knowledge and flow of learning
• bathtub analogy
• tap in and leak (knowledge flow)
• water level (intellectual capital)
• the whole water system (organizational learning)

We need an integrative framework!
27
Strategic Learning Assessment Map
Individual
Group
Organization
Cross-organization
Individual
H R S
Feed-forward
Group
H R S
Flow Input
Legend H (human), R (relational), S (structural)
IC)
Organization
Feed-back
H R S
Cross-organization
H R S
28
Measure, Test and Evaluate

• multi-method approach (quantitative and
  qualitative)
• IICR Knowledge Audit survey design (Likert-type)
• objective proxies (www.Saratoga-Institute.com)
• benchmarking of HR metrics (turnover and training
  dev.)
• e-mail direction (IICR e-Flow Audit)
• knowledge sweeping (dynamic corporate yellow
  pages)
• Some tools to check out ...
• Knexa.com, BrassRing.com, OpenText.com
• Monster.com, eLance.com, Talent websites
• Tango Simulation
• www.TangoNow.net
• IC Disclosure
• www.Celemi.se
• www.Skandia.se
• www.Carlbro.dk

29
KM Continuum
Tribute Technology
IICR KM Diagnostic
KM Seminars
30
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32
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33
KM Diagnostic Audit
34
Correlation vs Path Analysis
Correlation between Age and Risk of Heart
Attack 0.36 (p lt 0.01)
Correlation between Obesity and Risk of Heart
Attack 0.32 (p lt 0.01)
Age
Heart Attack
Obesity
35
Correlation vs Path Analysis
Path between Age and Obesity 0.26 (p lt 0.01)
Path between Obesity and Risk of Heart Attack
0.43 (p lt 0.01)
Age
0.26
Heart Attack
Obesity
0.43
36
Outcome Constructs
0.506
ManagerialLeadership
0.442
R2 68.2
0.530
0.326
0.360
Training
Human Capital
Relational Capital
0.307
R2 28.5
0.358
- 0.337
Structural Capital
0.475
0.751
Knowledge Generation
0.491
0.734
Employee Satisfaction
Employee Commitment
0.327
0.543
R2 44.1
0.439
0.456
0.429
Knowledge Integration
Process Execution
- 0.372
Employee Motivation
0.394
0.262
0.430
ValueAlignment
Knowledge Sharing
0.285
- 0.233
R2 28.5
37
Participating Organizations
ABN AMRO North America Inc. Allstate
Insurance Company AMP Australia
AMP UK Andersen
Consulting Aon
AXA Client Solutions Blue
Cross Blue Shield of Florida Blue Cross Blue
Shield of Illinois / Texas Blue Cross Blue
Shield of North Carolina CNA Commercial
Insurance Equitax Farmers Insurance Group
Hartford Financial Services Hewitt Associates,
LLC Intermountain Health Care
International Monetary Fund Merrill
Lynch National City Corp. Northwestern Mutual
Life Penn National Insurance PNC Bank Savings
Bank of Utica United Health Group Zurich
U.S.
38
Quantitative Metric Model
_
Human Capital Depletion

Human Capital Effectiveness
Human Capital Valuation
Human Capital Investment

39
Quantitative Metric Model
_
Human Capital Depletion

Human Capital Effectiveness
Human Capital Valuation
Human Capital Investment

• Revenue Factor
• Income Factor

40
HC Effectiveness - Income Factor
41
Quantitative Metric Model
_
Human Capital Depletion

Human Capital Effectiveness
Human Capital Valuation

• Compensation Expense Factor
• Compensation Factor

Human Capital Investment

• Revenue Factor
• Income Factor

42
HC Valuation - Compensation Factor
43
Quantitative Metric Model
_
Human Capital Depletion

Human Capital Effectiveness
Human Capital Valuation

• Compensation Expense Factor
• Compensation Factor

Human Capital Investment

• Revenue Factor
• Income Factor

• Development Rate
• Training Investment

44
HC Investment - Development Rate
45
Quantitative Metric Model
_

• Voluntary Turnover
• Involuntary Turnover

Human Capital Depletion

Human Capital Effectiveness
Human Capital Valuation

• Compensation Expense Factor
• Compensation Factor

Human Capital Investment

• Revenue Factor
• Income Factor

• Development Rate
• Training Investment

46
HC Depletion - Voluntary Turnover
47
Areas of Concern
48
Research Implication I
0.442
R2 68.2
0.530
0.326
0.360
Training
Human Capital
Relational Capital
Human Capital Effectiveness
0.307
R2 28.5
0.358
- 0.337
Structural Capital
0.475
BusinessPerformance
Knowledge Generation
0.491
0.734
Employee Satisfaction
Employee Commitment
0.327
0.543
R2 44.1
0.439
0.456
0.429
Knowledge Integration
Process Execution
- 0.372
Employee Motivation
0.394
0.262
0.430
Human CapitalDepletion
- 0.233
R2 28.5
49
Research Implication II
0.506
ManagerialLeadership
Retention of Key People
0.442
R2 68.2
0.530
Training
0.358
- 0.337
0.475
BusinessPerformance
0.751
Knowledge Generation
0.491
R2 44.1
0.734
Employee Satisfaction
Employee Commitment
0.327
0.543
0.439
0.456
0.429
Knowledge Integration
Process Execution
- 0.372
Employee Motivation
0.394
0.262
0.430
ValueAlignment
Human CapitalDepletion
Knowledge Sharing
0.285
- 0.233
R2 28.5
50
Research Implication III
0.506
ManagerialLeadership
Retention of Key People
0.442
R2 68.2
0.530
0.326
0.360
Training
Human Capital
Relational Capital
Human Capital Effectiveness
0.307
R2 28.5
- 0.337
Structural Capital
0.475
0.751
Knowledge Generation
0.327
0.543
Knowledge Integration
Process Execution
- 0.372
0.394
0.262
ValueAlignment
Human CapitalDepletion
0.285
- 0.233
R2 28.5
51
Research Implication IV
0.506
ManagerialLeadership
Retention of Key People
0.442
R2 68.2
0.530
0.326
0.360
Training
Human Capital
Relational Capital
Human Capital Effectiveness
0.307
R2 28.5
0.358
- 0.337
Structural Capital
0.475
0.751
0.491
0.734
Employee Satisfaction
Employee Commitment
0.543
0.439
0.456
0.429
- 0.372
Employee Motivation
0.430
ValueAlignment
0.285
52
Research Implication V
0.506
ManagerialLeadership
Retention of Key People
0.442
R2 68.2
0.530
0.326
0.360
Training
Human Capital
Relational Capital
0.307
0.358
Structural Capital
0.475
0.751
Knowledge Generation
0.491
0.734
Employee Satisfaction
Employee Commitment
0.327
0.543
0.439
0.456
0.429
Knowledge Integration
Process Execution
Employee Motivation
0.394
0.262
0.430
ValueAlignment
Knowledge Sharing
0.285
- 0.233
53
KRA Health Canada
54
Elements of KM Programs
55
KM Applications Matrix
Individual
Group
Organization
Extended
56
Arsenal of KM Tools
TACIT
EXPLICIT
EMBEDDED
57
Background Information

• United Nations
• Nationalize IC concept
• Leverage for public policy
• Isolate a target area for study
• McMaster University
• World Congress on IC
• 1st MBA with KM minor
• Develop methodology
• Research and collect metrics
• Design a structural model

58
Arab Region
Somalia Sudan Syria Tunisia UAE Yemen
MoroccoOman
PalestineQatarSaudi Arabia
Algeria Bahrain Comoros Djibouti Egypt Iraq
JordanKuwaitLebanon
LibyaMauritania
59
Conceptual Model - Firm
60
Conceptual Model - Nation
61
House Metaphor
62
Descriptive Statistics
63
Financial Capital
64
Human Capital (1 of 4)
65
Human Capital (2 of 4)
66
Human Capital (3 of 4)
67
Human Capital (4 of 4)
68
Process Capital (1 of 2)
69
Process Capital (2 of 2)
70
Market Capital (1 of 2)
71
Market Capital (2 of 2)
72
Renewal Capital (1 of 3)
73
Renewal Capital (2 of 3)
74
Renewal Capital (3 of 3)
75
Sampling for the NICI
10 of 22 countries representing 77 of the
population
76
Development of the NHCI
77
Development of the NPCI
78
Development of the NMCI
79
Development of the NRCI
80
Countries Ranked by NICI
Is the NICI a good predictor of a nations wealth?
81
Structural Model of NICI
H4
H6
H1
H2
H5
R2 20.9
H3
82
Clustering by NICI and GDP
Relative FC GDP / capita
1.0 0.5 0.0
0.0 0.5
1.0
NICITM
83
Conclusions
National intellectual capital accounts for nearly
one-fifth of the explanatory power of the
financial wealth of an Arab country.
Human capital is the pre-eminent antecedent for
the intellectual wealth of a nation. As a
nations citizens codify their knowledge into the
systems and processes of a country (H1), those
structural capital assets can then be renewed for
the future (H2) by investing in research and
development. A feedback loop further develops a
nations human capital (H3). Eventually, the
codified knowledge base of a nation can be
marketed (H4) within the global and domestic
economies. As the human capital continually
develops (H5), a nations ability to market its
intellectual wealth will result in a higher
financial well-being (H6).
84
Future Research

• Larger sample across many more nations (allows
  for bench-marking).
• Longitudinal nature of impacts (i.e., time lag
  effects of constructs and measures).
• Alternative financial capital measures
• In-depth intra-national analysis (i.e., within
  industrial sectors or sub-geographies)
• Intermediating effects (i.e., poverty, gender
  empowerment, health)

85
Background Information
86
Conceptual Model - Firm
87
Conceptual Model - Nation
88
Developed Nations
AustraliaCanadaChina
FinlandFranceGermany
ItalyJapanNew Zealand
Norway Russia Singapore
SwedenUKUSA
89
Descriptive Statistics (1 of 2)
90
Descriptive Statistics (2 of 2)
91
Prime Ministers Report
Category Canada's Performance Top Performer
Economy Average U.S.
Labour markets Top U.S.
Innovation Poor Sweden
Environment Poor Sweden
Education Average U.S.
Health Average Japan
92
Financial Capital
93
Human Capital (1 of 2)
94
Human Capital (2 of 2)
95
Process Capital (1 of 2)
96
Process Capital (2 of 2)
97
Market Capital (1 of 1)
98
Renewal Capital (1 of 2)
99
Renewal Capital (2 of 2)
100
Development of the NFCI
101
Development of the NHCI
102
Development of the NPCI
103
Development of the NRCI
104
Development of the NMCI
105
Countries Ranked by NICI
Is the NICI a good predictor of a nations wealth?
106
Structural Model of NICI
H4
H6
H1
H2
H5
R2 20.9
H3
107
Modified NICI ?
R2 83.3
0.913
-0.670
0.578
108
Poverty
109
Health
110
Gender Empowerment
111
Clustering by NICI and GDP
1.0 0.5 0.0
?
Relative GDP / capita
0.0 0.5
1.0
NICI
112
G8 by NICI and NCFI
4.0 0.0 -4.0
RelativeNFCI
-2.0 -1.0 0.0 1.0
2.0
Relative NICI
113
Further Developments ...

• IICR KM Diagnostic Tool (business and government)
• Health, financial services, software, chemical,
  hospital
• IICR KM Seminars (business and government) -
  certification
• Education (McMaster University, Tangonow.net)
• eFlow Audit (codified proxy of e-mail flow)
• World Congress (http//worldcongress.mcmaster.ca)
  Jan 19-21, 2005
• Journal of Intellectual Capital
  (http//www.emeraldinsight.com/jic.htm)
• 1 text Oxford U. Press with Choo, 1 books with BH
  KMCI Press
• Knexa.com (Tribute incentive methodology, ICUs,
  rewards)
• NICI (National Intellectual Capital Index) for
  United Nations
• Longitudinal causal mapping with integration (RBC
  project)
• Citation impact (literature and cases)
• Knowledge auction experiments

114
Knexa Solutions

• New knowledge assets with old value measures
• Market mechanism the invisible hand of the
  market
• Exchanges
• whats next? talent markets total markets
• Internet Auction Model
• E-bay, Yahoo, Bid.com, etc. stickiness, bid-ask
• Cost / benefit micro calculation
• ICUs electronic tokens and the reward of
  redemption

115
5 To Dos Immediately

1. Raise awareness about knowledge era
   challengesAction Fully engage employees about
   KM
2. Dont throw training dollars down the
   toiletAction Benchmark your TD / FTE
   investment
3. Attempt to recoup talent that leaves the
   firmAction Implement universal exit (entry)
   interviews
4. Accelerate your knowledge absorption rateAction
   speed reading test (www.bontis.com/speedread)
5. Be mindful of technology investmentsAction Test
   that search costs are reduced

116
Thank you!

• Speaking, training
• Keynotes, seminars
• Consulting, surveys
• www.NickBontis.com

Dr. Nick Bontis Ph.D.DeGroote Business
School McMaster University Tel [phone]
x23918 Fax [phone] Director, Institute
for Intellectual Capital Research Chief Knowledge
Officer (CKO), Knexa SolutionsAssociate Editor,
Journal of Intellectual Capital nick_at_bontis.com
www.NickBontis.com