Interview with Leif Edvinsson: “Intellectual Capital: the new wealth of corporations”

The new New Economy Analyst Report – November 13, 2001

Juergen Daum’s new New Economy Best Practice service

à Deutsche Version

How the Balanced Scorecard can help to master the challenges of the more intangibles intangible-based new economy – an interview with David P. Norton, co-creator of the Balanced Scorecard concept Interview with Leif Edvinsson: Intellectual Capital: the new wealth of corporations

News categories: the New Economy Economics, management of Intellectual Capital, human capital management, enterprise and business strategy,

Leif Edvinsson, as the world’s first corporate director of Intellectual Capital at Skandia of Stockholm, Sweden, has pioneered a new system for visualizing and developing intellectual, intangible and organizational business assets¹. Mr. Edvinsson is today the inspirator CEO of Universal Networking Intellectual Capital, UNIC (a conceptual company for Intellectual Properties management based on the theories of Intellectual Capital, and Professor for Intellectual Capital at the University of Lund in Schweden.

This is a shortened version of an interview with Leif Edvinsson from the book “"Intangible Assets and Value Creation"”² by Juergen Daum. This shortened version has been published in the German Newsletter “Controlling & Finance”, issue 10/2001.

Juergen Daum: Why are companies and shareholders investing more into intangibles today than in the past?

Leif Edvinsson: The reason is, that industrial value chain processes no longer dominate value creation. Today it is innovation, it is seeking new ways of meeting market demands, that is yielding the highest return on investment - much more than improving incrementally a company’s existing production line. And that means that you have to invest into systematic innovation. You have to invest into your Intellectual Capital. You have to invest into knowledge upgrading. You have to invest into new structures that help you to innovate and to make a difference.

Juergen Daum: What are the components of Intellectual Capital ?

Leif Edvinsson: One is people. The other is what is surrounding people in an organization, that is what I call structural capital – all those intangibles left behind, when people go home, and in that I include internal processes and structures, databases, customer relationships and things like that. With structural capital you enable organizations to make their human capital more productive. It’s not that people work harder. It’s that people work smarter with structural capital. This is what represents really the value of on organization. Not financial capital, not human capital, but structural capital.

Juergen Daum: You applied these principles at Skandia as the world’s first corporate director of Intellectual Capital during a major strategic transformation of the company, which was very successful. During this process, the IC value of Skandia has grown from a very minimal value in the early 1990s into some $15 billion at the beginning of the year 2000. What has changed within the company?

Leif Edvinsson: First of all the thinking. Secondly the reporting system, and third, how we were managing or better cultivating innovation. If you want to change something, you first have to change the thinking of people – the mind set. And if you want to change the thinking, you need to develop another taxonomy, another language. And this language has to be understood by your counterparts. You can use a lot of words to try to convince your CFO. But his mental model is not focused on words, it is focused on numbers. So if you want to communicate with people who are number trained, you have to develop numbers. So that is why we developed a number language for Intellectual Capital - the “Navigator”. It is a kind of Balanced Scorecard which we used to report on customer relations, internal processes, human capital and financial results. This numbers represented also the basis for our annual report supplement, to let our investors and stakeholders understand the true value of the company. Then we moved on to introduce knowledge navigation.

Juergen Daum: How does it work, knowledge navigation ?

Leif Edvinsson: The overall objective is to cultivate innovation. And determined innovation normally starts with an analysis of available options. You go for best option before best practice. This presumes that you take nothing for granted. Openness is crucial. You must ask and listen to what you do not know that you do not know. This is knowledge navigation. You don’t have to be an expert to do this. On the contrary – expert knowledge can be a blinding frame of reference. The important thing is to cultivate a sensibility for events around you and what can be renewed. Innovative business concepts are generally based on a small shift that makes a big difference. Therefore the next step in this mental transformation at Skandia was, to nourish the potential, which already existed, further. This is why we created the future center, a laboratory for organizational development. It is serving as an arena for knowledge safaris, strategic knowledge meetings and simulations concerts. During the first two years, when I managed it, the center had almost 12000 visitors who have come to, for example, test models of innovative knowledge enterprising in an environment that encourages new ideas and creative processes. The future center is a place, where people from Skandia meet with people they usually do not meet. And it s a place which is much different from the place at which they usually work. It is a prototyping space.

Juergen Daum: What do you think is the role of the organization at all?

Leif Edvinsson: The role of the organization is to leverage the business opportunities. In our modern networked world, where nobody can achieve alone economic success, the role of the organization is to provide the necessary structure for individuals to collaborate in a way, that leverages their talent and existing market opportunities in order to create economic value. And if a company does not take advantage of and realize its opportunities, it is not due to anything else than its missing or weak organizational capabilities. You can use a very simple proxy for it. And the proxy is what I call the IC multiplier. It is structural capital divided by human capital. This ratio shows that structural capital has to be larger than human capital. Otherwise you have not a multiplier but the opposite of multiplier, which in turn will lead to an erosion of human capital. If your structural capital is too weak, it will not turn human capital into value and the value of your under-exploited human capital will decrease as well. Which means that the largest component of IC has to be structural capital or organizational capabilities. The focus is on getting a higher leverage of the human capital through structural capital. The financial number to score this is value added per employee, which opens the eyes for the main value driver today: to turn human capital into structural capital which can be used to leverage market opportunities.

Juergen Daum: What do you see as the major management challenge in “intellectual capitalism” compared to industrial capitalism ?

Leif Edvinsson: I think one of the big frontlines and spaces for the future is knowledge care. And knowledge care is how you focus as a leader on the tacit dimensions of your workforce. Burn-out is the most rapidly growing disease among knowledge workers around the world. And it is counterproductive for the organization as well, not just only for the individual. Burned-out talents are no talents any more and will not be able to contribute in value creating innovations. It is a waste and destruction of capital, of human capital.

Juergen Daum: And what do you recommend instead ?

Leif Edvinsson: Focus on structural capital ! So actually that means, that you have to find new work regulations, work environments, and work set-ups where you have knowledge nomads coming into your enterprise for two to four hours a day working with your structural capital and then leaving. It is the quality of its structural capital that determines, what a company is able to create from its human capital, with its talented people, what a company is able to make out of individual knowledge. So part time is the work style of the future. This trend will change the way value-creating interactions are done. New organizational rules will emerge, such as much looser organizational structures. So it is a tremendous power shift that will take place, challenging traditional management of both corporations and societies to a transformation policy – to see the options to reshape the existing to something new and better.

Juergen Daum: Mr. Edvinsson, thank you very much for this very interesting interview.

¹ see: Leif Edvinsson, Michael S. Malone, Intellectual Capital, HarperCollins Publishers, 1997, ISBN 0887308414

²English Edition: Juergen H. Daum, "Intangible Assets and Value Creation", John Wiley & Sons Ltd., ISBN 0470845120 (Mai 2002).
German Edition: Juergen H. Daum, „Intangible Assets oder die Kunst, Mehrwert zu schaffen“, Galileo-Press, ISBN 3-89842-112-0 (April 2002).

Additional Resources:

Business Management in the new, New Economy - How to exploit Intangible Assets to Create Value - Presentation held by Juergen Daum at SAP's European mySAP Financials Conference, June 2001, Basel / Switzerland

Human Capital in Transformation: Intellectual Capital Prototype Report, Skandia 1998 Skandia’s Intellectual Capital supplement report to its annual report 1998

The “Guideline For Intellectual Capital Statements” from the Danish Ministry of Trade and Industry

The new FASB rules for reporting on Intangible Asset - The European versus the U.S. way - Report about the new US-GAAP rules for Goodwill and Intangible Assets as the American way to deal with Intangibles. In addition the new Danish rules are presented, which oblige companies with significant Intellectual Capital to report about them through a Intellectual Capital Supplement in addition to its financial reports

More about New Economy Economics and Management Best Practice in general, and about other related topics will be continued here in this new New Economy Analyst reports (see for example this report). To subscribe for Juergen Daum’s free-of-charge e-mail push newsletter click here.

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