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Measuring Intellectual Capital. Explanation of IC Rating of Intellectual Capital Sweden AB.

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Intellectual Capital

Intellectual capital can be said to constitute value creating factors not shown in traditional balance sheets, but which are of critical importance to a company's long-term profitability.

 

What is IC Rating? Definition

IC Rating is a way of measuring intellectual capital from a new perspective and with a new approach focus on the assets that in fact decide the ability of knowledge based companies to create value for its interest groups.

IC Rating ICSAn IC Rating provides management with a foundation for optimizing the competitiveness of the organization by functioning as:

  • A foundation of a modern business control system with clear and measurable goals for maximizing future profitability. This analysis can be repeated for measuring the goal achievement;

  • A basis for improvement and change activities which can be used on both management- and operational levels. The areas of improvement can be identified after which decisions about changes can be made;

  • A structured image of value creating assets that can be used in market communication (investor relations, annual reports) as well as within the organization, where the tool creates a new basis and a new language for internal aspects important to the business activity.

Situations that require measuring Intellectual Capital

  • Valuation. When either selling or buying a company, IC Rating will give you invaluable information on its future potential.
  • Benchmarking. When you have several units which you want to compare, either within companies or between companies, IC Rating provides a standardized tool and terminology.
  • Organizational Development. The result of an IC Rating will pinpoint areas to develop and improve, and also allows you to measure improvements consistently over time.
  • External Reporting. There is an increasing demand for transparency in company reporting. IC Rating complements traditional financial reporting, and provides a comprehensive and future-oriented view of your company.

benefits of measuring Intellectual Capital

  • A better understanding of non-financial assets and their importance in the company's value creation.
  • A shared language and terminology as well as a system for managing intangibles.
  • Better management of intellectual capital.
  • Increased transparency and possibilities for both internal and external reporting.
  • A business recipe consists of the company's business idea and strategy in combination with the market conditions in the chosen business environment. One of the evaluations for strength of business recipe is for instance how well a company differentiates itself in its chosen business environment.
  • Organizational structural capital is a result of the employees' efforts to transfer their knowledge to the company. It is employee independent of individuals and is effective 24 hours a day.
  • Intellectual properties can be defined as packaged and protected knowledge. Examples of intellectual properties are patents, licence agreements and in-house developed software that create competitive advantages and temporary monopolies.
  • Processes. The process capital aims to make it possible for the employees to increase the financial return on their knowledge and competence. This goal is met by increasing the conditions of the human capital to focus on its core-competence. Examples of process capital are well-developed work-processes and methods, IT support, reusable competence and organizational effectiveness etc.
  • Human capital consists of the people working for the company. The company only has limited control over this resource for instance through employment contracts.
  • Management is responsible for the overall development of the intellectual capital through optimizing its usage to create value for the company's shareholders and other stakeholders.
  • Employees. The employees use their knowledge and experience to satisfy the demands of the customers and to transfer their knowledge into reusable structures and processes, which can be used by others in the company. Factors that can increase control are e.g. competitive wages and a satisfactory working environment.
  • Relational structural capital. Interested parties in the business environment of a company are the main contributors to the value of this part of the structural capital. It consists of relationships with business partners and other external connections that contribute to fulfill the company's needs, and also includes elements like reputation and customer potential.
  • Network. The network of a company is constituted by all networks that are of significant importance for the future profitability of a company. Current customers excluded. Examples of networks are recruitment-, sales-, competence- and R&D-networks. The strength of these relationships decides the efficiency of the networks.
  • Brand is defined by the recognition and reputation in the target group, and by how well the company has managed to differentiate itself from the competition. This is made possible by strengthening and associating the brand with values that in a positive way distinguishes the company.
  • Customers. Except from generating revenues, the customer-base also serves other positive functions. It can facilitate other business aspects since customers also serve as a reference for the company's abilities e.g. increased attraction regarding new clients and co-workers. The most important aspect is the ability to attract and maintain customers.
  • Intellectual capital. The business recipe forms the working conditions for the other elements of intellectual capital. The business concept and strategy are assessed separate from the different types of capital, but the assessment nevertheless evaluates the conditions of the human- and the structural capital in the context that the business recipe provides. The value of a company's intellectual capital is a combination of the strength of the business recipe and the efficiency of the human- and structural capital.

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