measuring and managing intangibles - oecd.org · assets monitor and other models have ......

The present project has been accomplished thanks to financial support from the European Commission, OECD, the Swedish Council for Work LifeResearch, Nutek, the Swedish Ministry of Trade and Industry and the Swedish Public Relations Association.

International Symposium

Measuring and Reporting Intellectual Capital:Experience, Issues, and Prospects

Amsterdam

Technical Meeting9-10 June 1999

MEASURING AND MANAGING INTANGIBLESELEVEN SWEDISH QUALITATIVE EXPLORATORY CASE

STUDIES

COUNTRY COVERED: SWEDEN

RESEARCH TEAM:

Ulf Johanson, Stockholm UniversityMaria Mårtensson, Stockholm University

Matti Skoog, Stockholm University

The opinions expressed in this paper are the sole responsibility of the author(s) and do not necessarily reflect those of the OECD,the governments of its Member countries, the co-organisers, or the supporting organisations.

This document cannot be quoted or cited without the express permission of the author(s).

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TABLE OF CONTENTS

OPENING NOTE ........................................................................................................................................... 3

THE RESEARCH PROBLEM....................................................................................................................... 4

OBJECTIVE................................................................................................................................................... 5

METHODOLOGY ......................................................................................................................................... 6

DEFINITIONS, CLASSIFICATIONS, AND MEASUREMENTS OF INTANGIBLES ............................. 8

What is meant by intangibles? .................................................................................................................... 8Measurement models proposed in the literature ....................................................................................... 10

EMPIRICAL FINDINGS ............................................................................................................................. 12

The development of the measurement system .......................................................................................... 13The purpose of the measurement system..................................................................................................... 15The measurement system. Part 1 – the content ............................................................................................ 15The measurement system. Part 2 – the management control process ....................................................... 20The outcome of the measurement system.................................................................................................... 24

LIST OF REFERENCES.............................................................................................................................. 26

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OPENING NOTE

1. The present project is one of several subprojects in the MERITUM (Measuring Intangibles toUnderstand and Improve Innovation Management) project. The aim of the MERITUM project is toinvestigate possibilities to measure and report intangibles. At the present time, nine universities andresearch institutes in six European countries are participating in the project. The following five subprojectsare in progress as this paper is being completed (note that all five projects are not undertaken in everycountry): (1) How could intangibles be meaningfully classified? (2) Which are the measurement systems in‘good’ practise enterprises? (3) What effects do incorrect measurements of intangibles have on capitalmarkets? (4) What is the importance of intangibles with respect to growth and employment? (5) What is theaudit-ability of intangibles? Apart from a number of reports, a further objective is to produce policyimplications concerning measuring and reporting intangibles.

2. The present project has been in progress since about a year and should be completed during 1999,which is in accordance with the planned time schedule. The expected outcomes of the project are (a) adescriptive report of Swedish ‘best practise’ cases and (b) three more analytical-oriented papers thatconsider several theoretical approaches (e.g., theories of the firm). Additionally, based on comparisonsbetween cases provided by the six participating countries, the intention is to develop a questionnaire foreventual use in an extensive survey involving the measuring and reporting of intangibles in firms from thesix nations.

3. The intention of the present paper is to give an outline of the project through designating thefollowing topics:

1. Research problem

2. Presenting the principal aim of the project

3. Describing the numerous definitions and measurements of intangibles that have beenproposed

4. Methodology

5. Empirical findings

6. Future steps that need to be taken

4. It is too early to draw any conclusive inferences. Given the way the project has been started it isour hope to obtain feedback beneficial for our further research process in the understanding of what occursin a number of selected cases.

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THE RESEARCH PROBLEM

5. Powerful forces are reshaping the economic and business world and many of these forces haveled to a fundamental shift in organisational processes (McKern, 1996). The prime forces of change includeglobalisation, higher degrees of complexity, new technology, increased competition, changing-clientdemands, and changing economic and political structures (Goodman & Chinowsky, 1997; Allee, 1996;Baldwin et al., 1997; McKern, 1996). Such a development has resulted in steep learning curves, ascompanies struggle to adapt quickly, respond faster, and proactively shape their industries (Allee, 1996).Organisations are beginning to recognise that technology-based competitive advantages are transient andthat the only truly sustainable competitive advantages they have are their intangible assets. This hasresulted in a need to visualise different intangible assets more efficiently. To maintain competitive strengthand to survive over time in a competitive market organisations need to measure, evaluate, and manage theirintangibles with greater efficacy.

6. Is this search for the visibility of intangibles a new phenomenon? With respect to humanresources, the answer is strictly no. During the past 30 years, numerous measuring proposals relative tohuman resources have been suggested. These suggestions are concerned not only with costs but also withincomes (utility analysis, e.g., Cascio, 1991) and values (human resource accounting, e.g., Flamholtz,1985; Gröjer & Johanson, 1998), primarily for internal decision-making determination. About 30 studieson the effects of human resource accounting information on decision-making and learning have beenperformed during the past 20 years (Johanson, 1999a). The studies reveal that measurements make asignificant difference on decision-making and individual managerial learning.

7. Numerous studies (Johanson et al., 1999) have documented the need for improved reporting ofintangibles from actors outside as well as inside the organisation. In reaction to this need, Kaplan & Norton(1992) introduced the balanced scorecard. Rigorous scientific investigations on the consequences of theimplementation of this measurement system have not been performed to date, however (Johanson et al.,1999). Nevertheless, anecdotal information suggests that there is no lack of enthusiasm to employ thescorecard for managerial control (Olve et al., 1997). Many other concepts, such as the intellectual capitalstatement (Edvinsson & Malone, 1997) and the intangible assets monitor (Sveiby, 1997), have also beenlaunched with the same target in mind, namely to measure and report intangibles; tangibles and financialdata are also considered but play a secondary role to intangibles.

8. Human resource accounting, the balanced scorecard, intellectual capital statements, the intangibleassets monitor and other models have frequently been utilised in annual reports (Ehrvervsudviklingsrådet,1997; Johanson et al, 1999) and, even if investors and analysts clearly state their interest in takinginformation on intangibles into account (Epstein & Freedman, 1994; Mavrinac & Boyle, 1996), it appearsthat what ultimately counts is conventional financial information (Eccles & Mavrinac, 1995; Carlsson &Eliasson, 1998). Why is it that investors and analysts decline to rely on intangible information? Is itbecause of a fear that the external reporting is not based on internal measurement routines utilised formanaging the firm? Boudreau (1999) proposes that human resource metrics are not linked to organisationaloutcomes. Despite the general positive view towards these models, it is questionable whethermeasurements of intangibles are actually used within firms. To what extent are intangibles measured?What are the measurements being practised and how are these measurements practised in the managementcontrol process? Have there been any internal changes in firms to indicate that a measurement system ofintangibles has been applied?

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OBJECTIVE

9. The main objective of the present study is to analyse management control systems in order tounderstand the “best practises” employed within Swedish companies. This is done in relation to measuringintangible investments, measuring the outcome from those investments, using the measurements formanagement decision making, and disclosing that information for the benefit of stakeholders.

10. The outcome of such an analysis would be twofold: (a) a suitable description of the most fruitfulpractise and (b) beneficial to theory building. This twofold objective can be formulated within thefollowing overall research question: How and why have “best practise” organisations adapted theirmanagement control system when taking intangibles in addition to tangibles into account? The questioncan be further divided into four sub-questions. The first two questions concern the content of themeasurement system while the remaining two are more dynamically oriented.

1. How are the measurements and management control systems in relation to intangiblesperformed in “best practise” cases? What is measured? How is it measured? What do themeasurements capture and what do they miss? How is management control obtained?

2. Which intangibles do organisations consider as important? How are these intangibles definedand classified?

3. What have been the dynamics underlying the development of the management controlsystem?

4. What are the consequences of the measurements and measurement systems in regards tomanagement and outcomes of the organisations?

11. Because management control is a key word in the project, it is necessary that the concept will bebriefly defined here. Numerous propositions have been composed with respect to the concept, and in ouropinion the content and the definition of the concept is affected by the theoretical view. However, at thepresent stage definitions provided by Flamholtz (1996) and Emannuel et al. (1990) will serve as a point ofdeparture.

12. Flamholtz (1996) defines management control as measures to (1) motivate people to actconsistent with organisational objectives; (2) co-ordinate efforts of different parts of an organisation; and(3) provide information about the results of performance and operations. Accounting control systems aredefined by Flamholtz as ”a set of accounting mechanisms (both techniques and processes) designed toincrease the probability that people will behave in ways that lead to attainment of organisationalobjectives” (Ibid., p. 127).

13. According to Emmanuel et al. (1990), management control is the mediating activity betweenstrategic planning and task control. It concerns the effective management of the interrelationships in theorganisation and is essentially a routine affair. ”Reporting on the performance of all aspects of anorganisation’s activity on a regular basis, so that all areas are systematically reviewed” (Ibid., p. 97). Themain tool, though not the only one, is management accounting information which ”… is collected in astandard manner from all parts of an organisation; because it is in quantitative (monetary) form, it caneasily be aggregated into summaries for higher levels of management…” (Ibid., p. 97). Control isconcerned with directing future activities and thus it ”…consists, in part, of inducing people to do certainthings and to refrain from doing others” (Ibid., p. 97). ”The person in control is the one who has the powerto enforce his will on others” (Ibid., p.7).

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METHODOLOGY

14. The present research questions are investigated using qualitative exploratory case studies (Yin,1994). A number of (eleven) Swedish companies known for being “advanced” and “experienced” withrespect to measuring intangibles and utilising these measurements in their management control processhave been selected. The selection has largely been based on three sources of information: own experience,literature studies (Ehrvervsudviklingsrådet, 1997; Olve et al., 1997), and asking a panel of eight persons torank organisations intent on being recognised as “best practise firms” with respect to measuring andcontrolling intangibles.

15. Data have been collected using semi-structured interviews in addition to studying documentsdescribing the measurement and control process. The specific question areas used include the following:

1. About mobilising the change and the goal of measuring and reporting.

• What caused the development of the present measurement routine?

• Which strategies are required to reach the company’s goals?

• Which intangibles are strategically important?

2. About the content.

• What is measured?

• How is it measured?

• What variables are neither measured nor reported but ought to be?

3. About the work.

• Who is doing what and when in regards to the work of measuring and reporting? Areexternal people involved in the work?

• What are the borders and links to financial and management accounting?

• What is reported internally and externally? When and how? To whom? Why?

4. About outcomes

• What is the outcome of measuring and reporting? (Is decision-making, action, andlearning significantly influenced? Has company performance been improved?) If so, inwhich ways has it been improved?

16. To date, three researchers have taken part in the interviews and in the assessment of thedocuments. Each researcher has written a note with respect to each source. In these notes, data have beencategorised in a way that appears to be fruitful with respect to actually understanding what is going on inthe different organisations. The researchers have subsequently discussed and compared their respectivenotes. From these discussions, several new categorisations have emerged.

17. The selection of respondents has been proposed by the organisation. Because the present interestis to find “best practise” cases, the bias in selecting respondents in favour of the measurement system andthe measurements actually used does not cause any problems.

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18. The methodology has many similarities with grounded theory (Glaser & Strauss, 1967; Strauss &Corbin, 1990; Parker & Roffey, 1997; Slagmulder, 1997). For instance, previously acquired data have beencoded, classified, and reclassified simultaneously with the collection of newly acquired data. Documentsand respondents have been selected taking “saturation” into account, and there has been no specific set oftheories guiding the data collection process. This is not to say that there is no pre-understanding of thesubject under investigation. Of course, personal experience as well as different theoretical positions havebeen accessible to function as a sort of filter.

19. Data collection from the Swedish cases is expected to be terminated after the summer of 1999. Inthe autumn of 1999, comparisons will be made with case studies performed in other participating countries.The descriptive report will be finalised before the year 2000 and the analytical papers in the spring of 2000.

20. When gathering data there has been an effort to obtain triangulation (Yin, 1994) in two ways.First, data triangulation, where documents, interviews, and literature have been triangulated and, secondly,investigator triangulation, where the notes from the interviews have been compared between the threeparticipating researchers (Patton, 1987; Yin, 1994).

21. So far, eleven (of an expected 12) organisations have been approached. The sample comprise twobanks, two software, one construction, one telecommunication, one office equipment, one educationconsultant, one public relations consultant, one transportation and one engineering company. In some ofthe firms e.g., the transportation company only one of the divisions has been subject to investigation. Themajority are large or medium-sized (more than 500 employees) companies except for the two consultingfirms that have a maximum of 100 employees. One of the software and the Office Equipment companyhave their headquarters in the US, whereas the remaining firms are Swedish-based.

22. Within each organisation, from one to six persons have been interviewed and various documentshave been studied. Up to date, in total more than 30 interviews have been performed and about 50 internaldocuments have been read. Proposals in the present paper are based on eight of the firms. Note that generalconclusions with respect to all employees and all parts of the organisation can, of course, not be made. Thisnot the point. Rather the interest is presently to understand what is really going on when measuring andcontrolling intangibles inside the case firms.

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DEFINITIONS, CLASSIFICATIONS, AND MEASUREMENTS OF INTANGIBLES

What is meant by intangibles?

23. There is no generally accepted definition of “intangibles.” Canibano & Sanchez (1998) state thatthe adjective “intangible” normally accompanies different concepts such as assets, investments, resources,or other phenomena. The transformation of the adjective into a noun is ample proof of the existing lack ofa broadly accepted definition. Numerous definitions and classifications of intangibles have been suggested,particularly during the last decade (Johanson et al., 1999). Naturally, there is no consensus becauseconstituents of what could be regarded as intangibles are dependent on the purpose of dealing with theconcept, e.g., accounting, statistics related to national accounts, and management control. Further, differenttheories of a firm also affect the way in which characteristics and hence definitions of intangibles areformulated. The various definitions that have been suggested will not be discussed in the present paper; amore extensive report is provided in Johanson et al. (1999) and Johanson (1999b). Some of the proposalsmade for management control reasons will be provided in order to make eminent the wide variety ofproposals.

24. Apart from focusing on intangible assets or investments, from a managerial point of view it mightbe valuable (or perhaps even more valuable) to focus on intangible processes, activities, or phenomena.

25. Intangible assets, or, as Petrash (1998) identifies it, intellectual property, can be said to bedefined as ”knowledge articulated with legal ownership,” which consists of such elements as patents,trademarks, copyrights, and trade secrets. The broader concept intangible resources consists of, in additionto intangible assets, other properties, such as intellectual capital, whereas the broadest concept--intangiblephenomena--recognises cognitive processes within the firm, additional to the intangible resources.

26. The definitions of intangibles are largely divided into two categories in order to capture both the“asset/property” aspect of intangibles as well as the “resource” aspect (Stojilkovic, 1998). A commondivision (Myers, 1996; Hall, 1992; Brooking & Motta, 1996) is to promote the idea that intangibles areeither intangible property or intangible resources. The intangible property consists of assets that areprotected by law, such as patents, trademarks, trade secrets, and computer software; intangible resourcesare inclined to be made up of work processes, employee knowledge, and R&D activities.

27. However, intangible resources are quite often looked upon as consisting of know-how orcompetence. Stewart (1991) conceives of intangibles as consisting of competence and intellectualresources, together forming what is known as intellectual capital. This broader definition is also supportedby, for example, Brooking & Motta (1996).

28. Hall (1992) asserts that intangible resources can be defined as either “assets” or “skills.” Assetsinclude the intellectual property rights of patents, trademarks, copyright, and registered designs, as well ascontracts, trade secrets, and databases. Intangible resources, which are skills or competencies, include theexpertise of employees, suppliers, distributors, and the culture of the organisation, which enables it to copewith change put the customer first etc. In addition to being categorised as assets or skills, intangibleresources may be categorised as being either people dependent or people independent.

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29. Lowendahl (1997) and Haanes & Lowendahl (1997) provide definitions on a number ofintangibles for the purpose of strategic management of professional service firms. Because there is noconsensus on the definition of “resources,” Haanes & Lowendahl refer to Itami (1987), who suggests thatresources consist of (a) physical, human, and monetary resources that are needed for business operations totake place and (b) information based resources such as management skills, technology, consumerinformation, brand name, reputation, and corporate culture. After further elaboration on the concepts ofintangible resources, intangible assets, capabilities, and competencies, Haanes & Lowendahl andLowendahl categorise intangible resources into competence and relational resources. The latter term--relational resources--refers to reputation, client loyalty, etc., which are conceived of as being fundamentalto the performance of the firm. Competence is defined as the ability to perform a given task and exists atboth the individual and organisational level. On the individual level, it includes knowledge, skills, andaptitudes; on the organisational level, competence includes client specific databases, technology, routines,methods, procedures, and organisational culture.

Figure 1: Intangible resources

RESOURCES

TANGIBLE INTANGIBLE

COMPETENCE

•Information based

•Skills

Capabilities

•Aptitudes

RELATIONAL

•Reputation

•Loyalty

•Relations

Source: Haanes & Lowendahl (1997:208)

30. Lowendahl (1997) takes the division one step further, since he divides competence and relationalcategories into the subgroups individual and collective, depending on whether the employee or theorganisation is stressed.

31. To give an example from the level of the firm, Skandia, a major Swedish insurance company,prefers to use the concept “intellectual capital” (IC), which they define as ”the possession of knowledge,applied experience, organisational technology, customer relationships, and professional skills that provideSkandia with a competitive edge in the market” (Edvinsson, 1997:368). Skandia, Dow Chemical (Petrash,1996), and many other companies (e.g., Stewart, 1997) obviously prefer to distinguish between human,organisational, and customer capital.

32. To summarise, whereas a classification of intangibles in terms of R&D, software, marketing, andtraining appears to have been the dominant mode 10 years ago. Today’s classification schemes are orientedmore towards distinguishing between external (customer-related) and internal structures, on one hand, andhuman capital, on the other (e.g., Sveiby, 1997; Roos & Roos, 1997; Petrash, 1996; Skandia, 1995).

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Measurement models proposed in the literature

33. Proposals on measuring intangibles have been suggested by individual organisations(Ehrvervudviklingsrådet, 1997) and numerous authors. (A more extensive overview comprising evenhuman resource accounting is found in Johanson et al., 1999.) Only a few of these proposals will bereferred to in the present paper.

34. Roos & Roos (1997) interviewed executives in five small Northern-European countries in orderto develop an intellectual capital (IC) process model inductively. The authors reported extremely positivereactions towards IC and strategically important process factors could be identified. They conclude that todevelop an IC system (1) the company must be mature enough to go beyond solely financial indicators,have a clearly defined business orientation, and a clear operational commitment to moving ahead; (2) theIC system should measure only the IC change affecting the long-term earning capability; (3) the IC systemmust be rooted in the language of the company; (4) IC, to be measured, has to be categorised and indicatorson each category have to be developed; and (5) if a balance sheet approach to IC is used, it is likelynecessary to introduce a form of IC profit & loss account that shows the flows between different ICcategories.

35. From the interview data, a classification scheme of intellectual capital and measurements ofdifferent intangibles were also developed. A set of indicators for the measurement of different categorieswas also developed.

Table 1. Classification Scheme

Human capital Organisational capital Customer andrelationship capital

Business processcapital

Business renewal anddevelopment capital

Customer relationship

Knowledge Flow of information Specialisation Supplier relationship

Skill Flow of products andservices

Production processes Network partnerrelationship

Motivation Cash flow New concepts Investor relationship

Task Co-operation forms Sales and marketing

Strategic processes New co-operationforms

36. Sveiby (1997) proposes an intangible asset monitor where the financial capital, the customercapital, the organisation, and the people are measured by means of growth/renewal, efficiency, andstability.

Table 2. The Intangible Assets Monitor

Tangible Assets Intangible Assets

Our Financial Capital Our Customers Our Organization Our People

Growth/RenewalEfficiencyStability




(Sveiby, 1997)

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37. Together with eleven major Swedish companies the Swedish Public Relations Association (1996)proposes measurements of intangibles in five different segments separating individually owned fromcompany owned.

Table 3. Return on communications. A measurement model proposed by The SwedishPublic Relations Association (1996:16)

Leadership

(L)

Market

(M)

Finance

(F)

Employees

(E)

Community

(C)

Performance Measurementsshowing Awareness of thecompany (and its manage-ment)

In defined audiences Among customersand potentialcustomers

Among owners,potential investorslenders, analysts,and financialmedia

Among employeesand potentialemployees

Amongpoliticians,opinion buildersand the generalmedia

Support for visions,goals and strategies

The corporatebrand position

Investorsatisfaction (ISI)

Traininginvestment peremployee

Support for corp.visions, strategies

Support for basicvalues

CustomerSatisfaction (CSI)

Rankings Competence level Handling ofcritical issues

Confidence inmanagement

Inquiry Share Ratings Support forvisions etc.

Confidence in theorganization

Motivation (ESIor ECI)

Performance Measurementsshowing support and in-volvement

Empowerment

Peformance Measurementlinked to profits/results

Supportive Behavior Market Share Relative Cost ofCapital

Value Added perEmployee

Freedom to Act

Relative PriceLevel

Share Price/ BookValue

38. Kleinwort Benson used 20 measures grouped into four major categories (The Conference Board,1997):

1. growth measures (operating profitability, business volumes, and value of client assets);

2. client satisfaction measures (client retention, client satisfaction survey ratings, clientsatisfaction index, client service standards, and investment performance);

3. marketing and sales measures (audience perception, recognition of client needs/opportunities,innovation index, sales pipeline, and product movements); and

4. business management (staff retention, staff satisfaction, training progress, project progress,internal customer relations, credit quality, and balance sheet.)

To conclude, although there is no shortage of proposals dealing with measurements of intangibles, theextent with which these models are actually practised remains obscure.

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EMPIRICAL FINDINGS

39. Empirical findings obtained from documents and interviews have been categorised in thefollowing manner.

1. The development of the measurement system.

• The time perspective

• A typical story of the development of the measurement system

• Market considerations – the most significant force

• Individual actors – the second most significant force

• Involvement of external consultants

2. The purpose of the measurement system.

3. The measurement system. Part 1 - the content

• Labels and pictures that are practised

• Intangibles open to measurement

• The accomplishment of the measurement system

4. The measurement system. Part 2 – encouraging change

• Ownership of indicators

• Communication of visions and figures

• Benchmarking

• Salary bonus

• Increased knowledge by statistical analysis

5. The outcome of the measurement system

• Establishment of extensive data banks

• Learning and change are central

• Influence on argumentation

• Integration of the measurement system

• Measuring without acting is less satisfactory than not measuring at all

• The measurement system – a product for sale

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40. Each of these categories is discussed in the next sections. Occasionally, examples from one ortwo of the firms are provided. All references, even to documents, have been omitted in this paper becauseof confidentiality. There is not yet any agreement of revealing the company behind the case.

The development of the measurement system

41. There are only a few reinforcing factors that have been mentioned by respondents or that haveappeared in the documents. In all of the cases, a story is told describing how the measurement systememerged. These stories normally contain only two or three driving forces. These forces consist of; (1)changes in the market place, (2) individual actors, (3) organisational changes, and (4) an encouragingexperience with quality assurance work. The first two of these forces will be discussed in more detail in alater section. However, before turning to these driving forces, a brief description of the time perspectiveand a typical description of an emerging measurement model will be specified.

The time perspective

42. Common to most of the organisations is a process that dates back some years. Becausemeasurement systems are subject to an evolutionary process, it is impossible to determine when theprocess actually began. However, when listening to the stories told by the respondents or by studyingdocuments, we noted that certain years were frequently stressed as important for the present measurementsystem.

Table 4.

Officeequipment

PRconsultants

Tele-communication

Bank (A) Bank (B) Transportationcompany

Constructioncompany

Educationconsultants

1970s End 1980s Early 1990s 1992 1992 1994 1994 mid 1990s

A (typical) story of the development of the measurement system

43. Bank A was formerly a federation of 11 regional and one central bank with substantial autonomy.In the beginning of the 1990s, this federation was transformed into a company. At the same time, all banksin Sweden, including the bank under discussion, suffered a severe crisis. The board stated that it wasessential to establish strong central frames and to initiate a process of decentralisation. Additionally, theboard made it known that it was important to increase knowledge about the prevailing climate among thecustomers and employees. It was not sufficient to look at the bottom line, other indicators were alsoimportant. The idea of systematically measuring intangibles was born.

Market considerations – the most significant driving force

44. The predominant mobilisation force originates from market considerations. Except for the twoconsultant companies, a severe economic crisis or increased competition is alluded to as the main sourcefor mobilising change. The development of the measurement system in the consultant firms is alsodetermined by market reasons, i.e., the prospect of selling.

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Table 5.

Type oforganisation

Officeequipment

PRconsultants

Tele-communication Bank (A) Bank (B)

Transportationcompany

Constructioncompany


Type of factor:

Severeeconomiccrises

X X X

Increasedcompetition

X X X X

The possibilityof selling themodel

X X

Individual actors – the second most important force

45. The second most important category of driving forces is individual actors who have entered thescene at the right moment and who have proposed ideas for change. This has been mentioned in almost allof the cases. By actors, we refer to either internal individual ‘heroes’ or external consultants.

Table 6.

Type oforganisation

Officeequipment

PR

consultants

Tele-communication

Bank (A) Bank (B)

Transportationcompany

Constructioncompany


InternalFactor

A singlehero

A single hero A singlehero

A singlehero

A single hero A singlehero

Singleheroes

ExternalFactor

Externalconsultant

Externalconsultant

Externalconsultant

Externalconsultant

Externalconsultant

46. The background of the single internal actor differs. Human resource departments, controllers andline management are represented. These internal actors played a significant role as driving forces at anearly stage of the development of the measurement system.

47. Remarkably, in some of the firms the people connected with financial matters seem to be left farbehind in the developmental process. According to some of the persons interviewed, one of the reasons toaccount for their lack of interest is related to their feeling of being threatened by the “new” control system.

48. In at least the three of the cases, the same consulting firm has played (and still plays) a significantrole in the development of the measurement system. Since 1987, the business idea of this firm has been toserve as market leader of management control methods with respect to intangibles. They identify theirmodel in terms of Management of Intangible Assets (MIA), suggesting that the model is a third generationmethod, where the first generation comprised organisational surveys concerning ‘the invisible contract’between employers and employees. The MIA has been described using the following table.

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Table 7.

Generation Type Frequency Function Owner Output Basis

1st Investigation Ad hoc Take thetemperature ofthe org.

HR and/orMarketingDepartment

Data Separatequestions

2nd Investigation Ad hoc Improverelationships,leadership,motivation

Board ofdirectors

Information/Knowledge

Theory/Hypothesis

3rd Investigation Regularly Strategy- andaction-orientedlearning

“Everybody” Understanding Theory andvision/strategy

The purpose of the measurement system

49. The general purpose of the measurement system is to improve upon critical success factors forthe long-term competitiveness of the firm. This might be thought of as the universe of discourse of theclassification systems implicitly utilised by the firms. Most of the firms in the present sample accomplishcontinuous measurements of these critical success factors. Data are subject to statistical analysis andevaluation by management at different levels. This means that determination of the critical success factorsis enhanced, and the measurement routine, and hence the classification, is subject to continuous change.Managers are normally committed to act in accordance with the measurement results. This further supportsthe learning and those alterations occurring in the classification systems.

50. Many of the firms have explicitly stated that parts of the measurement system is under thebusiness protection policy but, despite the management control focus, the eight firms specify parts of thesystem in different external reports. With respect to the Office Equipment Company and the two consultingfirms, the external publication is understandable because these companies market their measurementsystem.

Table 8.

Officeequipment

PRconsultants

Tele-communication


Constructioncompany


Report topotentialcustomers(?)

Brochure No externalreport (?)

Booklet.Nothing inthe annualreport

No externalreport

Presentationin the annualreport



The measurement system. Part 1 – the content

51. In all cases, the measurement system is now performed on a more or less regular basis. Apartfrom financial measurements, market and human capital measures are of central interest in themeasurement systems. However, the ambition is normally to be “holistic”, thereby incorporating not only

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financial, market, and human capital but also other elements, such as process capital, into the system.Although the influence of the balanced scorecard (Kaplan & Norton, 1992) on the development of thesystem is difficult to determine, the holistic ambition conveys many associations with the balancedscorecard approach.

52. In this section, key elements of the measurement system will be highlighted.

Labels and pictures that are practised

53. Every firm uses its personal label of the measurement system.

Table 9.

Officeequipment

PRconsultants

Tele-communication


Constructioncompany


The officeequipmentmanagementmodel

Structurecapital

The Tele-communicationintegratedmeasurementtools

Tools for thefuture

Thebenchmarkingmodel

Controlindicators inthemanagementprocess

Human capitalindex –a tool fordevelopment

54. However, these labels are not exciting, not revealing the vision to communicate, and not utilisedthroughout the company. Top management may use the label but middle management is likely to use it lessseldom and supervisors may not use it at all. However, what is repeatedly practised in most of the cases isone or a couple of pictures describing the vision to communicate. We illustrate by utilising an examplefrom the Tele-communication Company.

This figure briefly describes how different intangibles interact and what variables are being measured.Neither what is visualised in the present figure nor in any other figure demonstrates how action in the firmis mobilised. The figures concentrate on the content of the measurement system.

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Figure 2.

Profitability

MC HC

Efficiency

Competence tocreate value

Value for thecustomer

1The company’sImage

The units performance

2 Products

3 Meeting the customer

4 Share of corecustomers Correlation analysis provide

knowledge about customerloyalty

Base forimprovementactions

As a dependent variablein the correlationanalyses an index basedon the followingquestions has beendone;The total satisfaction ofthe customers andResults in relation toexpectations

Intangibles open to measurement

55. The basic classification scheme with reference to what is measured is rather simple. The maincategories are given below.

Table 10.

Bank (A) Market capital Humancapital

Tele-communication

Market capital Humancapital

Constructioncompany

Customers Employees


Customers People Organisation

Bank (B) Customers Employees Processes Development

Transportation company

Customers Employees Processes Development

PRconsultants

Officeequipment

Customer andmarket

Humanresourcemanagement

Businessprocessmanagement

Informationutilisation andquality tools

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56. However, closer inspection of this classification scheme reveals that categories are not alwayslogically consistent. Some of the items, for instance, could have been classified into categories other thanto the categories they were assigned. Further, the classes contain a mixture of (a) individual andorganisational human capital, (b) competence and relational issues (Haanes & Lowendahl, 1997), and (c)human and structure capital.

57. In all eight cases, intangibles are measured in an ample number of ways. Using the Tele-communication Company as an illustration, the market capital contains (1) the organisation’s image, whichis measured by 10 items; (2) customers satisfaction towards products, which is measured with 15 items;and (3) customer satisfaction in relation to the employees, which is measured using 16 items.

58. Human capital is measured by means of basic values and culture, competence, motivation,responsibility and initiative, authorities, employee awareness of targets and strategies, co-operationabilities, organisational efficiency, and leadership. Some of these human capital categories are also subjectto self-esteem from the employee and estimation from a superior in a dialogue that is commented uponbelow. The categories discussed in this “target dialogue” are businessman-ship, administrative ability,initiative and problem solving capacity, customer relations, transformation of knowledge/competence,ability to co-operate, and responsibility.

59. Finally, in the case of the Tele-communication Company economic efficiency is measured byprofit development, cost efficiency and cash flow in mature business, income increase in new business,results after depreciation, profit marginal, and time to reach break even.

60. At the departmental level the financial indicators consist of (only) budgeted costs and estimatedrevenues. For a long period now, there has been developmental work in the direction of distributingoverhead costs.

The accomplishment of the measurement system

61. In most cases, the holistic models are anchored in (1) financial measurements, (2) attitudesurveys measuring the market and human capital, and (3) measurements of other intangibles, e.g., processcapital. A typical statement is the following: “All the different pieces have been there for a long time. Noweverything is brought together and written down. This is more efficient.”

Table 11.

Officeequipment

PR consult-ants

Tele-com-munication


Constructioncompany


Attitudesurveys

HC, MC HC, MC HC, MC HC, MC HC, MC HC, MC

Highestcontinuityof HCsurveys

Every halfyear

Annually Annually Monthly Annually Annually Annually Annually

Highestcontinuityof MCsurveys

Daily Annually Monthly Annually Daily After projecttermination

Annually

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62. The continuity of the measurement system differs from firm-to-firm. The most frequentcontinuity is found in the Office Equipment Company and in the Transportation Company, both regardingthe market capital. The Office Equipment Company performs customer surveys 48 hours and 90 days afterdelivery. Additionally, they accomplish two other customer attitude investigations annually.

63. Data collection is achieved in a variety of ways (e.g., by telephone interviews or questionnaires);in some cases, the firm itself achieves the aggregation of data whereas in other cases it is achieved from theexternal consultant.

64. The practise accomplished by the Tele-communication Company can be described in thefollowing way. Attitude surveys have been performed in 1996, 1997, and 1998 in about 100 differentorganisational units. Some aspects of the surveys have been practised for several years before 1996.

65. The human capital questionnaire is standardised throughout the Tele-communication Company,whereas the market capital measurement differs between organisational units. Questions specific to thebusiness area are appended at a later time. About 80 questions are included in the human capitalmeasurement. Because a specific day is assigned within the entire organisation for completion of thequestionnaire, the response rate is high, around 94%. Human capital measurements are done once a year inNovember.

66. Market capital measurements are performed via telephone interviews conducted by externalconsultants. In each of the sales areas, 400 customers are randomly selected. When responses are obtainedfrom the first 100 customers, all further interviews are cancelled.

67. Budgets are not conducted any longer. However, annual business plans are performed eachautumn. These plans are scenario oriented, i.e., of interest are the probable outcomes of different changesin the market place or in society. Performance indicators are an integral part of the business plans. Toobtain short reports the plans have been summarised in 1998 on one paper, “a scorecard”.

68. The overall scorecard is broken down and performed at company and office levels.

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Figure 3.

Financial Efficiency Human Capital Market Capital Businessinvestments

Strategy Stable profitdevelopment with abalance between on-going and newbusiness

Motivatedemployees

Satisfied and loyalcustomers

Value creatingprocesses withinspecific geographicalareas and thecompanies brands

Success-factors

Cost efficiency andcash flow in maturebusiness,

Increased revenuesin new business

Competencedevelopment,

Recruitment of newcompetencies

Customer care,

Product care,

Communication

Flexibility,

Market adjustments,

Clearly identifiedrevenues potential,

Target setting withclear decisioninstances

Key Ratios The result afterdepreciation,

Profit marginal,

Time to break even

Human capitalindex,

Number of trainingdays per employee,

Sick leave

Market capital index,

Repurchase margin,

Number of customercomplains

Break even marginalobtained within amaximum of X years

Goals Result over XX SKr,

X% Contributionmargin for ongoingbusiness,

Revenues from newbusiness plus X% toXX SKr

Human Capital indexplus X%,

Sick leave underX%,

Increased number oftraining days peremployee

Market capital indexplus X%,’

Repurchase margin >X%,

Number ofcustomers complainsminus X%

X% of the revenuesfrom new business1998,

Number ofcustomers by the endof 1998.

Development costsmaximum X% oftotal cost

69. These scorecards are targets for the coming period. The general intention is to report thescorecards quarterly. The development of financial indicators lags behind. Despite a long development,work costs are not yet sufficiently dissected and figures are delivered too late to be weighed in when takingaction at operating levels.

The measurement system. Part 2 – the management control process

70. The measurement system comprises not only visions of important intangibles and measurementsof these intangibles but also a subsystem of taking care, communicating, and encouraging action based onthe figures revealed. Change is supposed to be encouraged by means of stating ownership, communicatingvisions and figures and, in some cases, salary bonuses.

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Ownership of indicators

71. As a part of the measurement system, the ownership of every indicator is clearly addressed in themajority of the cases, i.e., the Office Equipment Company, the Tele-communication Company, Bank Aand B, the Transportation Company, and the Construction Company. Except for the two banks, the word"owner" is stated explicitly in all these cases. For the two banks, ownership is addressed using groupmeetings, i.e., representatives of top management visit each of the local offices to discuss howimprovement could be attained. In this way contracts with respect to improvement is settled between boththe employee and his/her superior or the group and top management.

Table 12.

Officeequipment

PRconsultants

Tele-communication


Constructioncompany


Individualcontract

Individualcontract

Groupcontract

Groupcontract

Individualcontract

Individualcontract

Communication of visions and figures

72. It has been proposed earlier that every firm uses its own central figure to communicate importantintangibles and their connection to company success. However, the operation involved as to how thecommunication of visions and figures is performed varies considerably. Presently, it is much easier todescribe differences than it is to describe similarities. The communication process takes place betweenmanagers and subordinates and between managerial teams and subordinate groups. In the case of theOffice Equipment Company, the communication process is highly formalised into documented routines,whereas a dynamic group process is the primary component of the measurement system in Bank B.

73. The Tele-communication Company may again serve as an example. The measurements arepresented every year in January at a kick-off meeting in which all the managers in the company arepresent. At the meeting, each manager is provided with a thick package of ratios (graphs), includingcomparisons with other units. After the kick-off meeting further discussions concerning adequate activitiesto improve the scores are held at a local level. Together with his or her personnel, every departmentalmanager performs a work plan to improve the index.

74. At the individual level, the following two kinds of dialogue are held between the individual andthe departmental manager:

1. A monthly dialogue with respect to results, resources, and competence.

2. A second kind of dialogue is the “target dialogue” that is performed annually. This dialoguenormally lasts between one and four hours. The discussion is standardised in the sense that asupporting document exists. The targets, according to the document, should be concrete,measurable, encouraging, realistic, and time limited. The output from the dialogue comprisesshort-sighted, sales targets in addition to long-term development targets. After the targetdialogue, a number of activities are performed. It is suggested that everything, including aperformance evaluation of the employee, should be documented. The target dialogue hasbeen performed for the first time in 1998. The document, which is produced by an externalconsultant, is a further development of earlier developmental dialogues. Whether the targetdialogue is performed or not was also measured in 1998.

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Benchmarking

75. Despite the main goal of performance enhancement, comparisons with last measurement figuresare also used for the purpose of benchmarking with other units within the organisations, e.g., in the Tele-communication Company a top 10 unit list is presented annually.

Table 13.

Officeequipment

PRconsultants

Tele-communication


Constructioncompany


Self-assessmentComparisonwith desiredstate

Benchmarkingbetween units

Bench-markingbetweenunits

Bench-markingbetweenunits

? Benchmarkingbetween units

Salary bonus

76. Because the control system should be used only as an analytical tool, one of the managers ofBank B who is responsible for the measurement system strongly argues against the idea of salaryconnection. However, in two of the other cases (the Office Equipment Company and the Tele-communication Company), employees are rewarded through a salary bonus system when improvementshave been achieved; in the Construction Company managers are rewarded bonuses as well.

77. The most “advanced” example of the salary connection system is found in the Tele-communication Company. Managers’ salaries are partly dependent on changes in scores. The maximumsalary bonus a manager can receive is a bonus that is equivalent to three monthly wages, where 60-75% ofthis bonus is due to financial performance, e.g., costs and revenues. Half of the remaining bonus is basedon improvements in human capital and the other half is based on advancements in market capital.

78. The “target” dialogue also provides a basis for agreement on salaries with the employees. Themanager and the employee agree on the employee’s performance on a scale ranging from 0 to 800. Theperformance score is then used as a basis for one part of the monthly salary.

79. The salary consists of three segments. The main segment (segment A) is a result of the annualrevision of the salaries involving the unions whereas a second segment (segment B) is a result of thejudgement mentioned above. A third segment (segment C) is affected by sales. Within the Stockholmoffice the A segment ranges from12,000 to 16,000 with an average of about 14,000 SKr. Segment B variesfrom 0 to 8,000, with an average of about 4,000 SKr. For segment C, under the condition that targets arereached, another 4,000 SKr will be added. There is no upper limit for segment C. This salary system hasbeen practised for 3 years.

Increased knowledge by statistical analysis

80. Because of the yearly measurements, extensive databases have been built up. In most of theorganisations correlation analysis has been performed, even when findings differed. Generally, the externalconsultant performs the statistical analysis. For those organisations that had performed statistical analyses,the following correlation’s were found:

23

Table 14.

Officeequipment

PRconsultants

Tele-communication


Constructioncompany


Customersatisfactionand customerloyalty

No statisticalanalysis

Leadership andmarket capital

Leadership andhuman capital,human capitaland marketcapital, marketcapital andprofitability

? No statisticalanalysis

Leadershipstyle, control,influence,competencedevelopmentand employeeperformance

No statisticalanalysis

81. Leadership appears to be a central issue relative to employee performance, market performance,and financial performance. The representatives from the Tele-communication Company have thus far beenunable to statistically discover which key variables are affecting financial performance. However, it issuggested that the connection is obvious at the “floor” level. The Construction Company holds that theconnection with financial performance indicators has been found within one of the business areas.

82. Bank A describes the connections in the following way.

Figure 4.

COMPETENCE

MANAGEMENT

ORGANISATION

MEETING THE CUSTOMER

83. The arrows signify a very strong correlation. Additionally, there is a strong correlation betweenthe employee and the customer, on one hand, and perceived bank competence, on the other. The bankcompetence issue is then correlated with customer loyalty. What makes the difference is the individualemployee’s ability to convey competence to the customer.

84. In the Tele-communication Company, combining market capital data for a certain business unitwith human capital data for employees working within that business is suggested to be very revealing. Ahigh leadership score also implies a high human capital score, and when employees have a goodunderstanding of customer needs, the human and market capital scores are high. A manifold of calculationshave been performed, resulting in 14 human capital indicators that contribute to a high market capitalwithin sales (although the correlation is very low concerning indicators with a low ranking). The top fiveindicators concern leadership: the leader is good at listening; he/she is just one of the persons in the gang;he/she is easy to co-operate with; he/she is good at dealing with new and unusual situations; and he/she issupportive of responsibility. “Teams holding that they have a good leader receive high scores bycustomers.”

85. However, further conclusions about correlations between different intangibles and financialoutcomes are too early to formulate because intangibles (e.g., leadership) are currently not measured

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uniformly. For instance, whereas the Tele-communication Company and the Construction Companyinvolve personality characteristics, Bank A includes even organisational-related issues in the measurementtool.

The outcome of the measurement system

86. Firstly, could these cases be regarded as the best, or most advanced, or most experienced practisewith respect to measuring intangibles and utilising these measurements in management control process?Best, most advanced, and most experienced practise can be defined and measured in numerous ways andthere is at present no point in trying to answer the question. The present research is an attempt tounderstand what is happening in Swedish firms that are addressed as being more advanced with respect tomeasuring intangibles.

87. Secondly, the outcome of the measurement systems of intangibles is even more preliminary sincedata collection has just started. However, data from 20 interviews and a large number of documentscontain a great deal of information. Although not all of the data have been coded, some tentativepropositions may be postulated. In some cases, these proposals will be supported by interview material.

88. It could be stated that the two small enterprises--the consultant companies--may not becomparable with the others in several respects. First, the measurement systems do not have the sameconsiderable proportions as in the other cases. Second, some guidelines are available in written formthough most of them are available only in the heads of top management.

Establishment of extensive data banks

89. As pointed out previously, extensive data banks have been established in many of the cases. Thisprovides an opportunity for each company to reveal those intangibles most important for competitiveness.Participating firms eagerly using the statistical material in search for critical intangibles.

Learning and change are central

90. The measurement system is utilised as a strategic and/or an operative instrument. To encourageaction … “we have learnt that there is not much point in measuring at the company level; rather, measuringmust occur at the unit level of business. A mean value of different business units is not as interesting as thedifferent values. There is no need to measure everything. The aim of measuring is to understand andencourage change.”

91. The measurement system provides excellent feedback. “Thanks to measurement I have a verygood picture of how people feel as well as how departments and managers are functioning.” Another casereported that “It’s good to have it on paper and to be able to follow up targets. It is also helpful that there isa time limit. Efforts become more focused. It mobilises action on the operational level.”

92. Although the answers are often far from being congruent, the measurement system provides newknowledge and has the potential to focus on important issues for future learning action andcompetitiveness. “We have learnt something we did not previously know. We believed something waswrong about our customers but the measurement and analysis of the result showed that we were incorrect.”

93. However, to date it has not been possible to distinguish between expectations and intentions forthe future and what has actually been achieved.

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Influence on argumentation

94. Individuals can easily refer to communication situations in which data from the measurementsystem or data from the system itself have made a difference. The measurement system “… providespeople with arguments for doing something,” and from another firm: “Before I always got excuses when Imade presentations. With this new way, I do not get any excuses. Rather, the discussion is very rapidlyturning into supplying suggestions with respect to improvements.” A glimpse of the measurement system'srole as support in persuasion situations is eloquently unveiled in the following quotation. “There is actuallynothing new that we did not previously know; this is an affirmation on something that we already knew. Itis an established fact from which to increase credibility.”

Integration of the measurement system

95. Most of the sources (i.e., respondents and documents) hold that this is the way that some units inthe firm are now being run. “This is currently a big issue. Many things have happened. It is the way inwhich management control is obtained in this firm.” From yet another case, the following was reported.“We do not reflect upon this any longer. It has become natural to us.” Even if these quotations are verycommonplace, it is somewhat surprising that a statement like the following has been provided from one ofthe eight firms. “The description of our measurement system in the annual report is empty rhetoric.”

Measuring without acting is less satisfactory than not measuring at all

96. One respondent noted that continuous feedback is of crucial importance to the employees, butothers invariably suggest that measuring without taking action might be worse than not measuring at all. “Itis important that discussions start about how it is and what we want to obtain.” This is because once youstart to measure it is important to act. “Measuring without doing anything is worse than not measuring. It isa must to work with it.” Another firm points out that “The quality of future investigations depends on howresults are treated.”

The measurement system – a product for sale

Although this was not the initial reason for the development of the measurement system, both consultingfirms promote their own measurement model as does the Office Equipment Company.

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