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Appendix a.

Start-up meeting of NIF pre-project

Nordic Harmonized Knowledge

Indicators

Harmonized guidelines for IC reporting in the Nordic IT industry

Copenhagen 23. june 2003

1

Appendix a.

Agenda for Start-up meeting of NIF pre-project

Harmonized guidelines for IC reporting in the Nordic IT industry

When: 23rd of June from 13.30pm to 17.30pm

Where: Dansk Industri, H.C. Andersens Boulevard nr. 18, 1787 København V.

Agenda:

1. 13.30- 13.45 Welcome, introduction of partners and approval of agenda

2. 13.45 – 14.15 Review of the project vision, objectives and expectations

3. 14.15 – 14.45 Contract - approval of cooperation agreement and Fiancial plan

Break

4. 15.15 – 15.45 Workplan, organisational matter and activities

a. Making a detailed plan for the coming months

b. Workshop in Iceland end 29 – 30 th of August or 5-6th of September

5. 15.45 – 17.15 Further discussion of contents and activities

a. What has been done so far

b. Establishing a nordic network primary tasks

i. The projects relational capital

For any enquires please contact the project leader Ásta Thorleifsdottir

([email protected])

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Appendix a.

Slide 1

Intellectual Capitaland

Knowledge assessments

Building Nordic Company Networks for harmonizing IC accounting

a feasibility study

Nordic harmonized knowledge indicators Asta Thorleifsdottir 2003

Slide 2 The Projects

• The Nordica project introduced IC in theory to the nordic industries. A lot of research putting the Nordic countries in the lead of IC. Run by Academia for the industry as a research material. Excellent results www.nordica.net (NIF)

• The Frame project is a project on common frames for how companies can manage and communicate their Intellectual Capital (IC). Frame provided seminars to introduce IC ideology and assist in building individual IC assesst models for an orgaisation. www.icframe.net

• Both good projects but did not leave us with a hands on, step by step working method. For SME’s this is vital – provide a “This is how you do it” – For the IT idustry more than most!

Slide 3 The Theory:Managing Intellectual Capital (IC), is a two-fold strategy for

developing the company's knowledge and communicating it

• Developing IC– Knowledge sharing– Tools for managing

knowledge resources – Learning

• Communicating IC– Framework & indicators– Monitoring– External communication

and reporting – Language

Our project goal is:To provide a practical follow up of Nordica and FrameA “Step by step” method for first timers

Slide 4 A little backgroundIC Iceland – the difference

• Introduced by the NORDICA project (NIF)– Just an introduction to an ideology

• No academics involved– 4 icelandic firms participated (IT, Finance, insurance)

• First individually, then cooperated • Finding that most was the same! For all (values and indicators)

• Followed up by the Frame project – So Establising an Interest group : 40 –50 – Voluntary, innovative work

• Extensive Networking• Knowledge sharing

– Resulting in a prototype guideline and demo report• Resembling the Meritum guideline

Slide 5 Why – The motivation

• Why should an organisation report IC ?• Who are the stakeholders

– Customers – present and future– Investors - present and future– Future employees– The Organisation

• Better systematic career development /training• Ongoing knowledge management• More efficient integration of knowledge• Increased job satisfaction• Less employee turnover • Increased profits

Investor

Slide 6 Why form an interest group

By sharing knowledge we hope to achieve:• A methodology and framework for reporting • A strategy to carry out vision• A strategy for performance rating and measurement

– Benchmarking (internal )– Quarterly, annually.....

• A list of harmonized key performance indicators– Common –same for all – Specialized/selected– Categorizing

• Leading /signaling the future performance• Lagging/ past performance

A monthly local breakfast-meeting!

3

Appendix a.

Slide 7 How to assess- the initial method !• Brainstorming a group from different org. areas• Classification of ideas• Comparison with the company strategy, vision• Ideas prioritised by importance• Entering and processing ideas to a model• Determining where data can be retrieved• Defining and collecting indicators • Determine the target group,

– internal or external• The annual report

– – a narrative supported by indicators

Slide 8 The most valuable assets examples

Human CapitalEducation – training

Career Attitude– Loyality

Setting GoalsInnovation

Human CapitalHuman CapitalEducation Education –– trainingtraining

Career Career AttitudeAttitude–– LoyalityLoyality

Setting GoalsSetting GoalsInnovationInnovation

Customer capitalStrong Vision

Customer catigoriesHonesty and Service quality

Financial strengthImage / goodwill

Networking

Customer capitalCustomer capitalStrong VisionStrong Vision

Customer catigoriesCustomer catigoriesHonesty and Service qualityHonesty and Service quality

Financial strengthFinancial strengthImage / goodwillImage / goodwill

NetworkingNetworking

StructureISO certificationSteering model

•Clear objectives/ StrategyMeasuring indicators

•IT systems

StructureStructureISO certificationISO certificationSteering modelSteering model

••Clear objectives/ StrategyClear objectives/ StrategyMeasuring indicatorsMeasuring indicators

••IT systemsIT systems

Slide 9 A knowledge model

All around09-17

Market value

Structuralcapital

Book value Intellectual capital

Education Attitude

Job / Careerdevelopment

SkillsCapabilities

Knowledge

ProcessesInformation

systems

Goodwill

Image

Knowledgemanagement system

Working hours Round the clock assets

Humancapital

Workenvironment

Culture

Marketexpectations?

Relationalcapital

Networks

Slide 10 • IC assessment

– Annual report– Quarterly

• A recurrent process – for an ever-changing future

• Dayly– Knowledge management

• To fulfil – the objectives and goals – in line with vision and mission

• The Carrot

– A vital ingredient for any steering model• BSC, EFQM, ISO, Benchmarking etc.

T h e f u t u re

S t ra te g yG o a ls

E m p h a s is

C h a l le n g e sR e f o rm sA c t io n s

I n d ic a t o r s

I n f o rm a t io ns y s t e m s

I C A s se s s m e n t

Slide 11 IC assessments for IT an org.Can be a Definite asset!(ISO like)– Certification of know-how

• Constant improvement of processes• Asset in competition

– Increasing market value

– Increased importance of internal proceedures• Thorough documentation and processes• Improved products

– satisfied customers and employees

• Important strategic weapon– ready for changes• Lateral distribution of responsibilities!

Slide 12 A Knowledge organization

A breeding station fornew ideas and innovation

To the profit of owners and employees

Innovation doesn’t always look so good?

4

Appendix a.

Slide 13

Our project

Slide 14 The project covers following activities

-Establishing Nordic network with partners from IT companies associations. Each association will define 2 SME members to participate in a workgroup.

• Define a detailed workplan.• Investigation of harmonized methods and tools for reporting

IC valuables.• Investigation of popular organisational steering models and

their relation with IC valuables.• Recommendations for further activities, reporting, promotion

and exploitation• Deliver a proposal for a project on developing a

model for harmonized IC reporting for the Nordic IT industry.

Slide 15 A measurable criteria of success:

• -A creation of Nordic IC Forum in the IT industry with the aim to agree on a proposal on an agreement on harmonized indicators in IC reporting.

• -Harmonized IC reporting in Nordic IT companies will form a basis for more comprehensive Nordic actions that supports the use of such reporting and the value of use for those companies.

• Creation of a benchmarking tool available through IT org. websites

Slide 16 Timeplan

• 1. Identification and mobilisation of participants………… June• 2. Detailed work plan - Acceptance..............................…… June• 3. Investigation and definition of harmonized IC values… Aug.- Sept.• 4. Investigation of popular organisational steering models...Aug- Sept.• 5. Proposal, results and recommendations.............................Sept.- Oct.• 6. Reporting, promotion and exploitation..............................Okt. –Nov.

• Deadline is end of October – so that if the group finds it feasible to carry out the task of harmonising IC indicators for the IT environment a Proposal to request further funding can be submitted to the NIF call

Meeting minutes

The first consortium meeting, Copehagen 23. June 2003

Once the Network of the primary stakeholders was established a consortium of the Information technology industrial federations of the Nordic countries met in Copenhagen. The aim was to formally introduce and discuss the proproject propsal. Prior to the meeting the representatives of the meeting had received important introductive material reguarding the project. The meeting was attended by members of six federations, five in IT there of two danish and a representative of the danish management råd. The representaive form Finland was unable to participate. During the meeting a common understanding was created as all the participants agreed upon the message of the preproject. There was an interesting discussion that formulated

5

Appendix a.

further actions. During the meeting it was agreed to carry out the work in a seminar in the first week of september and by that time 2 IT organisations with an interest in promoting the importance of IC accounting and reporting from all the participating countries should have been located and invited. To promote the idea among the members of the Federations a short account was made incorporating the highligths. The aim of of the preproject was clear – to transfer the academic princples sofar ruling the IC accounting into a practical, useful step by step model as to enable even the smallest companies the possiblitiy of explaining their existance and potential to stakeholders and to promote innovation by realising the knowledge sources and thow those can transform the operation and environment of a company. Now that the key players had met a real network was established and put into use.

6

Appendix a.

7

Appendix b.

Nordic Harmonized Knowledge Indicators

Workshop Brjánsstaðir Iceland

4. – 6. September 2003

Report

1/16 Brjánsstaðir Workshop

Appendix b.

Nordic harmonized Knowledge indicators workshop Information and Agenda Iceland 4. – 6.th of September Thursday 4th

Arrival

Transfer to Brjánsstaðir, Southern Iceland Friday 5th

09.00 09.15

Introduction to the project ideology. The need for IC accounting and reporting

09.15- 10.00 10.10- 11.00

Status of IC accounting and reporting in the Nordic countries* a) presented by representatives of the IT industry organisations 10 minutes each b) presented by the companies participating 10 minutes each. What they are doing in IC issues now and what they hope to achieve by participating

11.00-11.30

IC reporting best practice: The Use and Analysis IC reports

11.30-12.30

IC indicators, measurement and meaning, interpretation and benchmarking

12.30 LUNCH

13.30-14.30

IC reporting and managerial steering models. A great value to SME’s?

14.30-15.00

The role of the IT organisation in the IC benchmarking project – creating a comparative benchmarking tool for the IT industry

-15.30 COFFEE

15.30 – 17.00

The final outcome: A full scale project application Why, Who, How

18.00 Dinner

20.00 Evening excursion to Gullfoss, Geysir and Skalholt Saturday 6th

09.00 – 12.00

The Project outcome – working on a project plan Discussion forum – executing the project in each country

12.00 Lunch

13.00 – 14.00

Continuation Defining roles

15.00+ Arriving in Reykjavík


Appendix b.

Following is a summary of material presented at the workshop. This summary also represents the minutes of the workshop. The workshop was chaired by Ásta Þorleifsdóttir, project leader of the pre-project. List of participants: Participants: C Email Organisation

Asta Thorleifsdottir, IS [email protected], GoPro

Eggert Claessen, IS [email protected] Tölvumiðlun

Gudmundur Asmundsson IS [email protected] Icelandic Ass.of Software Industry

Björn Axelsson SE [email protected] Svenska IT-företagens Organisation

Claes Malmquist SE [email protected] InfoService Sweden AB.

Anders Heimerson SE [email protected] Ciceronen Telecom AB

Lars Ørum Andersen DK [email protected] ITEK

Henrik Madsen DK [email protected] Studio1-2 A/S

Fredrik Syversen NO [email protected] IKT-Norge

Eilert Hanoa NO [email protected] Mamut ASA

Liisa Nakari FI [email protected] Fed. of the Finnish Information Industries

Annukka Kostiainen FI [email protected] Novo Group plc

Tomi Rauste FI [email protected] Creanor Oy

Henrik Egede Dk [email protected] Danish IT industry ass.

Summary of presentations: 09.00 - 09.15

Introduction to the project ideology. The need for IC accounting and reporting Eggert Claessen M.Sc. Abstract: Following the rise and fall of IT companies in market value during the years 2000-2002 the issue of reporting intangible valuables has been the topic of discussion as a mean of explaining the real values residing within IT companies. The IC report is intended to supplement the traditional financial accounts and provide a fuller understanding of the potentials of the company and/or industry in question. By better understanding its intellectual competence, a company should be able to enhance its image, both internally and externally. When using IC reporting the company reveals hidden assets that can have a major impact on the profitability and even core existence of the company. Companies need to report and manage their IC but need a less complicated entry level for using IC tools. Harmonizing IC indicators and reporting is an important step in this direction as it allows for comparison between companies and/or industries but also it creates a common context for understanding the various aspects of intangible values.


mailto:[email protected]

Appendix b.

#1 © Eggert Claessen

Introduction to the project ideology

The need for IC accounting and reporting

Eggert Claessen M.Sc.

Nordic Harmonized Knowledge Indicators Workshop

# 2 © Eggert Claessen

PreludeValuation boom in year 2000Valuation doom in year 2001Explanations please?Tools to correct


Emphasis on SME´sSME’s function differently than larger organisationIn many countries they represent the backbone of economic performanceKnowledge is recognised as a key driver of sustainable performance and innovationThis is why SME’s need to report and manage their IC


BenefitsSME´s are concerned about their ability and methods for transformation into being knowledge basedHarmonized models benefits SME´s by lowering the entry level for using IC tools and evaluating their IC base and valueTransformation process made more applicable and affordable for SME´s

09.15 - 10.00 Status of IC accounting and reporting in the Nordic countries Presented by representatives of the IT industry organisations 10 minutes each Liisa Nakari Fredrik Syversen Explained the situation in Norway. Discussed the advantages of IC reporting in terms of harmonization and best practice. Also mentioned dangers to the project and the need for co-operation and avoiding double work on the subject. Lars Ørum Andersen Explained the situation in Denmark. Discussed the work already being done in Denmark. Guðmundur Ásmundsson

# 1

Status of IC accounting and reporting in Iceland

Guðmundur ÁsmundssonFEDERATION OF ICELANDIC INDUSTRIES

www.si.is - www.ut.is

# 2

Status of IC accounting and reporting in Iceland -background

Participation in two Nordic projects funded by the Nordic Industrial Fund

NORDIKA – Nordic Project for measuring Intellectual Capital (2000-2001)The aim of the project, which was initiated and financed by the Nordic Industrial Fund, was to promote Nordic and international collaboration in this important field while helping companies to acquire and develop reliable methods for assessing the value of their IC resources.

FRAME – Joint framework for methods of knowledge management and communication (2001-2003)

FRAME is to help companies make their knowledge resources more robust and measurable, so that value created by knowledge resources can be isolated, managed and communicated. Based on Nordic management practices, the aim is to develop and consolidate tools and methods for achieving this, to disseminate these tools and methods, and to launch learning initiatives for companies.


Appendix b.

# 3

Status of IC accounting and reporting in Iceland -background

The Nordica project introduced IC in theory to the nordic industries. A lot of research putting the Nordic countries in the lead of IC. Run by Academia for the industry as a research material. www.nordica.net (NIF)

The Frame project is a project on common frames for how companies can manage and communicate their Intellectual Capital (IC). Frame provided seminars to introduce IC ideology and assist in building individual IC assesst models for an orgaisation. www.icframe.net

Both good projects but did not leave us with a hands on, step by step working method. For SME’s this is vital – provide a “This is how you do it” –For the IT idustry more than most!

# 4

Nordika/Frame - Icelandic participation and achievement

Nordika/FrameNordika - The Icelandic centre for Research – steering groupFrame - CIE - Iceland associate member

Four Icelandic enterprises participated; an IT company, a bank, a insurance firm and an IT section of Iceland Telephone corp.The four companies started a professional interest group with theobjective to encourage a dialogue between companies interested in this fieldSeminar held in Iceland to introduce IC ideology and assist in building individual IC assesst models for an orgaisationKnowledge sharing – learning process

# 5

Icelandic IC framework - Status of IC accounting and reporting

Iceland Business Excellence Organisation More than 30 Icelandic organisations are participating in an IC interest group. Meeting monthly. The objective has mainly been to harmonise indicators for IC measurements. The result of this work is published in the first Icelandic guideline or manual on how to measure and report IC The next goals of the interest group is the connection of IC as a baseline to organisational steering models such as Balanced Scorecard, Benchmarking etc. Another goal of the IC group is methods for mapping out networks for practical purposes.

IC group within Association of Icelandic Software Companies Workgroup to produce guidelines for harmonised reporting of IC assets within software companies. Identifying and reporting IC valuables within the industry and allow for comparison and analysis of individual or group of companies. May 2003 – “IC report - A guidelines for Icelandic IT companies”Few IT companies working on IC reporting

# 6

Icelandic IC framework - Status of IC accounting and reporting

Nordic harmonized knowledge indicators – preprojectNetwork – IT organisation, IT companiesProposal to NIF

Nordic harmonized knowledge indicators – full scale projectIdeal Nordic networkWill we manage to start a full scale project?

Björn Axelsson Explained the situation in Sweden. Informed about the structure of his organization. Told about various persons and groups that have dealt with IC. 10.10 - 11.00 Status of IC accounting and reporting in the Nordic countries Presented by the companies participating 10 minutes each. What they are doing in IC issues now and what they hope to achieve by participating. Anders Heimerson Business Mission of Ciceronen Telecom AB We increase the value of our customers´ telecom with IT-solutions for telecom administration and workforce management. Solution for strategic workforce management, accounting, cost and quality control. Telecom management is the continuos process of securing optimal cost and quality for delivered telecom services. About 70% of the daily contacts are taken by telecom, so it is an important field, to have control in. We are now looking for key figures to put into the standard accounting. About the Intellectual Capital and Ciceronen We are looking at the IC in this way; IC is built from Human Capital, Structural Capital, Customer Capital, Organizational Capital, Innovation Capital and Process Capital. IC can be defined and classified as intellectual capital assets – i.e. knowledge, experience and technical infrastructure, customer relations, routines and professional


Appendix b.

competences which create the future earning potential. The market value includes two parts – financial capital and IC. The latter consists of human and structural capital. MARKET VALUE ADJUSTED SHARE HOLDERS´EQUITY INTELLECTUAL FINANCIAL CAPITAL CAPITAL HUMAN CAPITAL STRUCTURAL CAPITAL CUSTOMER ORGANIZATIONAL CAPITAL CAPITAL INNOVATION PROCESS CAPITAL CAPITAL How does Ciceronen value and measure intellectual capital. The challenge as we see it is to both grow human capital and transfer it into structural capital. This implies a shift from individual and team capability growth into organization capability as well as customer capability. It all ends up in a special way of looking at the leadership. The core of this IC leadership is a focus on culture, values and relationship. This is what Ciceronen has done: Human Capital - Our working process, is to make user stories for everything, and from those stories settle the difficulties and date we have to reserve for realizing the mission. The effects will be that every employee at Ciceronen has his own responsibility, and will see and be an important link in the chain of production. - We have an environment policy - We have lunch together every day. The food is cooked in Ciceronens kitchen every day. (You are welcome to visit us and taste the food, it´s delicious.) - We have free dentist - and health services. - Every one has his own bank clerk if he wants. Structural Capital - Effective and good routines for handling helpdesk and error reporting. - Effective and correct project planning. - Good control over cash flow, and payment routines. - Routines for education both for customers and employees Customer capital - Close relationships with the customers which is vital when bringing new solutions in the market. - We try to learn about the daily work, and the common problem with our customers. There is of course much more to be done. We have not produced any key figures, so we hope that this workshop will help us to advance. WEALTH TO STAKEHOLDERS FINANCIAL CUSTOMER CAPITAL CAPITAL


Appendix b.

STRUCTURAL CAPITAL

HUMAN

CAPITAL Human capital + Structural capital Intellectual capital Eilert Hanoa

Annukka Kostiainen Representing Novo, one of the biggest IT companies in Finland, explained what her company is doing. Tomi Rauste Representing Creanor explained what his company is measuring and said that there was a lot of discussion as to what should be measured. Claes Malmquist Representing InfoService Sweden AB. Explained his work in this field. Concentrates on human capital, developing methods to make human capital more visible and gave examples of this. Henrik Madsen Representing Studio1-2 A/S said that his company was working much with IC even though it was not in a structured manner. Showed films from his collaboration with a large customer in delivering IC messages.


Appendix b.

11.00 - 11.30

IC reporting best practice: The Use and Analysis IC reports Ásta Þorleifsdóttir Abstract Can intellectual capital statements be systematically read and analysed in a way that is comparable with the reading and analysis of financial statements? Can their usability be made more transparent to stakeholders? Unlike financial statements, Intellectual capital reporting is not based on a double entry system, ensuring assets and liabilities balance. It is based on a single entry system, so ‘assets’ can exceed ‘liabilities’, thus many see intellectual capital statements as giving less credible and less relevant company evaluations. This problem with the data does exist. Not all financial statement figures are, however, as unambiguous and informative as one would like to think. Therefore, a detailed grid work of accounting standards has been established over time that specifies the correct use and interpretation of figures and concepts. One goal of the proposed project is to develop a similar set of standards for intellectual capital statement transactions to aid their interpretation. The analytical method’s goal is to create sufficient distance from the intellectual capital statement figures that a company presents in text and illustrations by grouping them in to three categories as to answer three general questions.

Intellectual capital statement

What are the company’s knowledge resources and their composition?

What has the company done to strengthen its knowledge resources?

What are the effects of the company’s knowledge work?

Most companies write their intellectual capital statements, adapting element content and interrelationships to the company’s particular situation. The content is therefore determined by the characteristics of the individual company. Intellectual capital statements therefore show wide variations, reflecting the differences in how they use knowledge resources and how knowledge is transformed to create value. The knowledge narrative, management challenges, initiatives and indicators are in principle unique to each company. Critical evaluation is therefore dependent on the reader’s ability to systematically analyse the information given in intellectual capital statements, analysis being based on statement figures. The goal of such an analysis is to evaluate whether the information provided by the company is relevant and whether the development in company activities is reasonable. An analytic tool should therefore be able to provide an overview of the company’s knowledge resources, including current knowledge resource stock, development initiatives and their effects.

# 1

Reading and analysing IC reports- The need for consensus

Harmonized Nordic Knowledge IndicatorsBrjánsstaðir, Iceland, 5. – 6. September 2002

Ásta Thorleifsdóttir Project manager GoPro

# 2

The questions

• Can intellectual capital statements be systematically read and analysed in a way that is comparable with the reading and analysis of financial statements?

• Can they become a major instrument for analysing investment options,internal and external?


Appendix b.

# 3

And if so – The goal

• The goal of analytical methods is – To set the stage– To establish an common language

• A consensus of meanings

– to create a sufficient distance from the intellectual capital statement figures• a company has chosen to present in

text and illustrations.

# 4

Financial and / or IC reports

Financial statement Intellectual capital statement

What are the company’s assets and liabilities?

What are the company’sknowledge resources?

How has the company invested?

What has the company done to strengthen its knowledge resources?

What is the company’s return on investment?

What are the effects of the company’s knowledge work?

These two sets of questions are parallel,as they relate to the same management problems.

# 5

The differences in traditional and IC accountingAre IC reports less credible?

• IC reporting is not based on a double entry system– ensuring assets and liabilities balance.

• It is based on a single entry system – ‘assets’ can therefore exceed ‘liabilities’.

• IC reports are considered – less credible – less relevant company evaluation. – Sure this problem with the data does exist

BUT• Not all financial statement figures are

– unambiguous or informative • Therefor a detailed grid-work of accounting standards exists

– specifying the correct use and interpretation of figures and concepts

Can a similar set of standards be developed for intellectual capital statement transactions?

# 6

Evaluation criteria – the present model

Three columns for assessment

# 7

So how would you read an IC report?

• The knowledge resources column provides the basis for a ‘portfolio assessment’ of the company.– The analyst will determine whether the company’s

knowledge resource portfolio is competitive and can meet the future.

• The activities column provides an evaluation-base for assessing the management’s ability to develop – the employees– the organisation – customer relationships

• The effects column provides the basis for assessing whether the company’s knowledge management set-up and activities work– giving an assessment of company stability.

# 8

Success criteria

• An absolute need for harmonizing Indicators• Creating a consensus • How else do you know what they mean by

Turnover: Staff or financial

11.30 - 12.30 IC indicators, measurement and meaning, interpretation and benchmarking Ásta Þorleifsdóttir Abstract Intellectual capital reports give an annual overview of the effectiveness of the daily handling of knowledge resources, knowledge management. Measuring IC is an internal, self-assessment and can be used for continuous improvements and organisational development. By continuously assessing the IC knowledge management becomes more in tune with the needs of management, employees and the market. Intellectual capital reports give an annual overview of the effectiveness of the daily handling of knowledge resources, knowledge management. To facilitate the first steps for IT companies towards IC accounting and reporting, We need to establish a generally accepted set of figures that can give an intellectual capital statement bottom line. Harmonizing IC the common IC indicators that form the base or bottom line is the main goal of the proposed project. Some of the basic work has already been done and is available to this project – but a lot more is needed before we can present the IT environment with a responsible working model. Which general indicators should be present in an IC report and how they are to be measured, what questions or parameters, are underlying, to ensure the comparisons of apples to apples etc. The first steps in to IC


Appendix b.

accounting can be very time consuming but then it becomes quite easy to monitor changes to these key performance indicators as the process can to a certain extent be automated. Selecting and setting general indicators and parameters, which could apply to all IT organisations, is a major task for the group. It has to be kept in mind at all stages the vital indicators to some organisations can be useless to others, depending on economic environment, field of practice and organisational structure. It must also be clear that those indicators may be vital to point out a company’s uniqueness. What makes it special in how it differs from others in its value creation? The diversity of meanings of a simple indicator sets the necessity of defining for each indicator how exactly it should be calculated or harmonized.

# 1

IndicatorsThe need for a common language =

harmonizing common indicators

# 2

A knowledge model – can it be displayed by indicators?

All around09-17

Market value

Structuralcapital


Education Attitude


SkillsCapabilities

Knowledge


systems

Goodwill

Image



Humancapital

Workenvironment

Culture

Marketexpectations?

Relationalcapital

Networks

# 3

• IC assessment– Annual report– Quarterly

• A recurrent process – for an ever-changing future

• Dayly– Knowledge management

• To fulfil – the objectives and goals – in line with vision, mission strategy

• The Carrot

– A vital ingredient for any steering model• BSC, EFQM, Benchmarking etc.

T h e f u t u re

S t ra te g yG o a ls

E m p h a s is

C h a l le n g e sR e f o rm sA c t io n s

I n d ic a t o r s

I n f o rm a t io ns y s t e m s

I C A s se s s m e n t

# 4

What is an indicator

• An indicator is a variable.• Indicators are the IC figures• A measurement is a numerical value of an

indicator• They make the IC report a tool to create

insight – To be used in follow-ups and evaluations

• Indicators allow management challenges and initiatives to be defined and formalised.

• indicators specify activities– If indicators cannot be found support an

initiative, the initiative is often defined in too general terms

# 5

Is it of profitable use?

• Both in empirical studies and theory an economic link can be established between IC activities and economic performance.

• Ernst & Young have found a number of value driver categories within Management, Relationship, and Organisation.

• The companies that are able to best pursue their strategy are more likely to profit their shareholders

– a good foundation for harmonizing indicators to enable more organisations to enhance their IC activities without extreme costs.

# 6

Selecting indicators

• Which indicators say something relevant about development in the company’s initiatives and management challenges?

Can the indicators be translated into ‘good figures’ and be administered?

3 types of indicators describing:

Effects such as quality, satisfaction and productivity Activities for developing knowledge resources, for

example through performance reviews, supplementary training, process development or meetings with customers and users

Resource such as composition of education, major accounts and technology platform etc

# 7

Indicators for initiatives and management challenges

• Definition.– They serve to define management challenges and

initiatives

• Assessment.– They make it possible to evaluate whether initiatives and

management challenges are started and implemented, and if so, to what effect?

Reporting. They are an important link in the design of the external intellectual capital statement.

# 8

A good indicator

• Be relevant, and not only express figures that are already available

• Be credible, and not only selected to show the company in a positive light

• Be reliable, and not build on imprecise definitions or too little data.

• Must make the same sense to all -


Appendix b.

# 9

An example

Group Indicator Formula Goal

Human capital

Annual Turnover

Accession rate: new employees/ total workforce

Separation rate: Employees gone/total workforce

Distribution by seniority

Cost of training

Retention of knowledge /Loss

2yrs, 5yrs, 8+yrs

Indicator describing what is - what does it mean?– the initiative of what is being done and how it is being managed

Described in a narrative; a story form = an IC report

# 10

In Iceland prototype guideline

A common Framework• Consensus on the value of IC accounting• First step harmonising indicators

– decided upon a list of some 60 common indicators.– What they described – Where they belong (HC, RC, SC)– How they are measured

• To ensure comparison of apples wiath apples– to be displayed in the narrative to support the story

being told. • The indicators should be represented in a table-

format– one single A-4 sheet– If you need more space too many indicators– Like a balance sheet in a financial account.

13.30-14.30

IC reporting and managerial steering models. A great value to SME´s Eggert Claessen M.Sc. Abstract: SME´s do not enjoy the same possibilities as larger organizations to explain themselves to the business environment and therefore have the same possibilities to raise funding capital on a fair basis that takes into consideration the intangible valuables that the company possesses. In addition, by using IC reporting, the SME reveals hidden assets that can have a major impact on the profitability and even core existence of the company. SME’s need to report and manage their IC but need a less complicated entry level for using IC tools. By developing a harmonized baseline for IC reporting, such a model will benefit SME´s. It will lower the entry level for using IC tools and evaluating their IC base and value, thereby making the transformation process more applicable and affordable. In addition this model will enable SME´s to profit and prosper from improving operations and increasing market value. The benefit of harmonizing IC indicators is their important relation to present popular organisational steering models such as Balanced Scorecard, Microscope Benchmarking, EFQM and ISO9001. As IC indicators form a baseline for these models, it is important that the rational behind measurement is harmonized. By harmonizing IC reporting and adding IC reporting to existing financial reporting it is believed that SME´s have a better chance of realising the intangible values within their companies by providing a platform for comparison for the mutual benefit for stockholders, investors and the financial community Harmonizing IC indicators and reporting is an important step in this direction as it allows for comparison between companies and/or industries but also it creates a common context for understanding the various aspects of intangible values. Such harmonization does not only affect the SME´s but has also impact on other stakeholders and thereby the value proposition that the company has to offer.


IC reporting and managerial steering models

A great value to SME’s ?




Position of SME´sSME´s at a disadvantage

Not the same possibilities as larger organizationsto explain themselvesto raise funding capital on a fair basisfor consideration of intangible valuables

Impact of IC reportingSME´s reveal hidden assets impact on the profitabilityimpact on core existence


Appendix b.


Emphasis on SME´s

SME’s function differently Backbone of economic performanceKnowledge is a key driver

of sustainable performanceof innovation

Need to report and manage their IC


Emphasis on SME´sImportance of being knowledge based

Ability for transformationMethods for transformation

Benefits of Baseline modelLowering the entry level

for using IC toolsfor evaluating IC base and value

Transformation processmore applicablemore affordable


Some management toolsActivity-Based ManagementGrowth Strategies Balanced ScorecardKnowledge Management BenchmarkingMerger Integration Teams Change Management ProgramsMission and Vision Statements Contingency PlanningOutsourcing Core Competencies Pay-For-Performance Corporate Codes of Ethics Reengineering

Corporate VenturingStock Buybacks Customer Relationship ManagementStrategic Alliances Customer SegmentationStrategic Planning Customer SurveysSupply Chain Integration DownsizingTotal Quality Management Economic Value-Added Analysis

6 © Eggert Claessen

A closer look at:Balanced ScorecardActivity Based ManagementKnowledge ManagementTQMBenchmarking


Balanced Scorecard

Source: www.bain.com


Common usageClarify or update a business’s strategyLink strategic objectives to long-term targets and annual budgetsTrack the key elements of the business strategyIncorporate strategic objectives into resource allocation processesFacilitate organizational changeCompare performance of geographically diverse business unitsIncrease company-wide understanding of the corporate vision and strategy


Activity based management



Common usageABM systems can replace traditional accounting systems or operate as stand-alone supplementsThey require a strong commitment from both top management and line employees in order to succeed To build a system that will support ABM, companies should:

Determine key activities performedDetermine cost drivers by activityGroup overhead and other indirect costs by activity using clearly identified cost driversCollect data on activity demands (by product and customer)Assign costs to products and customers (based on activity usage)


Knowledge Management



Common usage

Companies use Knowledge Management to: Improve the cost and quality of existing products or servicesStrengthen and extend current competencies through intellectual asset managementImprove and accelerate the dissemination of knowledge throughout the organizationApply new knowledge to improve behavioursEncourage faster and even more profitable innovation of new products


Appendix b.


Total Quality Management



Common usage

TQM improves profitability by focusing on quality improvement and addressing associated challenges within an organizationTQM can be used to:

Increase productivityLower scrap and rework costsImprove product reliabilityDecrease time-to-market cyclesDecrease customer service problemsIncrease competitive advantage


Benchmarking



Common usageCompanies use Benchmarking to:

Improve performanceBenchmarking identifies methods of improving operational efficiency and product design

Understand relative cost positionBenchmarking reveals a company’s relative cost position and

identifies opportunities for improvement

Gain strategic advantageBenchmarking helps companies focus on capabilities critical to building strategic advantage

Increase the rate of organizational learningBenchmarking brings new ideas into the company and facilitates experience sharing


Input

A common denominator MeasuresIndicators

Demand for useChanges in business


EffectReporting to stakeholdersCompatible informationReducing lead time for:

Alerts to changesAlerts to situationsAlerts to action


ResultImprovement in:

operationsprofitsinformation provisionmarket positioncapital access


Conclusion

Evolutionary processNeed for common languageNeed for simpler approachNot another toolClear benefits


Your views ???

Let´s discuss ☺


Appendix b.

14.30-15.00 The role of the IT organisation in the IC benchmarking project – creating a comparative benchmarking tool for the IT industry Guðmundur Ásmundsson

# 1

The role of the companies organisation

Guðmundur ÁsmundssonFEDERATION OF ICELANDIC INDUSTRIES

www.si.is - www.ut.is

# 2

Federation of Icelandic Industries

FII is the largest organisation of Icelandic employers in manufacturing industries, crafts, IT industry and related services.Membership consists of some 1.200 enterprises ranging from small family businesses to Iceland’s largest industrial enterprises.The goal and ambition of FII is to create and maintain a favourable climate for the industrial enterprises in Iceland and to further their interests at home and abroad.FII advice member companies on a wide range of subjects such as:

-Education / Vocational training -Environmental Issues-Information Technology -International Trade Agreements-Legal Issues -Public and private tenders-Quality Control -R&D-Standards -EU Issues-Marketing, conferences and exhibitions -Exports-Labourmarket issues

# 3

GA forum for all membersEight members EBTwenty one members AB 20 staff members at the head office in Reykjavik1 at the Akureyri branchOne at the Brussels office (in cooperation with CIE)

FII is a member of:Conf of Icl. Employers- CIEUnion of Confederation in Europe - UNICENordic ind. federations –DI, NHO, CSE, TTAll industrial bodies in Iceland

OfficeAkureyri

GeneralAssembly

AdisoryBoard

ExcecutiveBoard

ManagingDirector

SectorgroupsServices and Ind.Developm.

InternalServices

Opr. Environm.Int. Tr. Agreemt.

OfficeBrussel

Federation of Icelandic Industries

# 4

Association of Icelandic Software Companies (SÍH)

A forum for IT companies that are members of the FIIAssociation of Icelandic Software CompaniesAbout 40 main software companies in Iceland

The group elects its own executive board (7 members)General assembly in September each year

The board meets regulary to deal with most pressing concernsPolicy making and to decide on projectsInformation platform – Regular morning meetings and IT website (www.ut.is)Implementation of projects and issues within the operation of FII and CIE

# 5

Main emphases and projects in this working year (sept.02 – sept.03)

Revision of future vision and policy design Rules for public tenders The Icelandic tax system

Reevaluate the VAT system - IT-divisions in the public- and financial sectors excluded from the VAT systemSupportive tax system for exports and investments. Tax discount for research and development.

Cooperation with the Trade Council of Iceland on export projects for the IT industryPartnership with Universities in the field og IT Project management, quality control – PRINCE2Better “image” of the IT industry - Present the importance of the IT industry – “The IT industry day”Benchmarking project Prototype for IC reportingCertification issues – EU directivesEU issues – framework programmes - projectsVarious forms and aggrements for the IT industry

# 6

The role of the IT organisation in general

The main goal....The goal and ambition of FII is to create and maintain a favourable climate for the industrial enterprises in Iceland and to further their interests at home and abroad.

How...?Improve the business environment by influence the govenments policyIntroduce laws and rules in the business environmentMonitor internationl business development Monitor and influance Iceland’s position in internationl aggreementsEncourage better business methods among members companies Encourage cooperation among member companiesAdvice member companies on a wide range of subjectsPromote and start interesting projects in cooperation with member companies and other interested parties

Build up service-, communication-, information and security networks where the emphases are on common interests. Competiton, mistrust and such external arguments are left out.

# 7

The role of the IT organisation in the IC benchmarking project -

Build up the IC network among members companies and other interested partiesManagement issues

Project management – Why, Who, HowFinancial issues

ImplementationDissemination

IC communityNIFReports, newsletter, website

EvaluationFinal results, seminarsContinuation, update


Appendix b.

15.30 – 17.00 The final outcome: A full scale project application. Why, Who, How. Eggert Claessen M.Sc. Abstract The main goal of the pre-project is to establish if there is an interest amongst IT organisations in the Nordic countries to push forwards the objective of harmonizing IC indicators as to enable the industry to account and report its intangible assets. The proposal is based on the idea of applying for a further grant to enable that work to be accomplished. A project life of 3 years is suggested. The project is to be based and structured as four phases with active roles of companies and added value for participants. The first phase will start by identifying and harmonizing indicators where a work-group with input from participating companies will further decide on meaning of indicators. During this phase there will be efforts to create liaison networks with accountants, consultants etc. When this work is done the work group will prepare the results for dissemination. The second phase will start with implementation of indicators in participating companies. This will be done by means of seminars and follow up. When this is complete there will be external reporting of results from implementation to stakeholders and the work group will start revision based on the results to ensure the quality of the suggestions made by the project. The third phase will concentrate on identifying proper management tools for participating companies. This is done by a work group with participating companies. It is of major importance that there is a measurement of input into models provided by harmonized indicators. This is why an evaluation of contribution, both to transformation process and economic result is necessary. The fourth and final phase will include a report that contains an open source framework for transforming the knowledge base of SME´s. The results will be disseminated in each of the participating countries in co-operation with the relative IT organization. Finally the steering committee will decide on how post project continuum will be conducted.


The final outcome:

A full scale project application




General outlineProject life

3 years suggested

Built on four phasesActive role of companiesAdded value for participants


Phase OneIdentifying indicators

Work group with input from participating companies

Deciding on meaning of indicatorsWork group with input from participating companies

Creating liason networkAccountants, consultants etc.

Preparation of results for disseminationWork group


Phase Two

Implementing indicators in participating companies

Seminars and follow upExternal reporting of results from implementation

Work groupRevision based on results

Work group


Appendix b.


Phase Three

Identifying proper management tools for participating companies.

Work group with participantsMeasurement of input in new models provided by harmonized indicators.

Work groupEvaluation of contribution, both to transformation process and economic

Work group


Phase Four

Final reportOpen source framework for transforming SME´s into knowledge based firms

Work group

Dissemination

Post project continuum

Saturday 09.00 – 12.00 The Project outcome – working on a project plan. Discussion forum – executing the project in each country In the discussions that followed it was agreed on that the project leader and Icelandic IT organisation would finish the work needed to be able to submit a proposal for a project to the Nordic Industrial Fund. This should hopefully be completed for the next deadline for applications at the NIF. The participants expressed their thanks to the organisers and the project leader for an excellent workshop and looked forward to further co-operation.


Appendix c.

Harmonized guidelines for IC reporting in the Nordic IT industry An introduction to aims and objectives

Eggert Claessen M.Sc. Tolvumidlun hf. , Engjateigur 3, IS 105 Reykjavik, Iceland, e-mail: [email protected], Telephone: +354-5455000, Fax: +354-5455001

Ásta Þorleifsdóttir GoPro ltd, Skutuvogi 1b, IS 107 Reykjavik, Iceland, e-mail [email protected], Telephone: +354-5103100, Fax: +354-5103110

Prepared for 1.st. Nordic Network Meeting on Harmonising IC indicators Copenhagen June 2003

1



Appendix c.

Abstract ......................................................................................................................2 Introduction....................................................................................................................2

Prologue: Why, is there a need? ................................................................................3 Stakeholders of IC......................................................................................................5 Compatible information .............................................................................................6 The IC report..............................................................................................................7 The Icelandic framework ...........................................................................................7 The indicators...........................................................................................................10 Links to popularorganisational steering models ......................................................14 Conclusion ...............................................................................................................15

Acknowledgements......................................................................................................15 References....................................................................................................................15

Abstract

The aim of this project is to create a network of stakeholders in the Nordic countries. The group will research the possibility and feasibility of establishing a Nordic project to produce harmonized indicators for reporting IC for SME's in the IT Information technology sector of the Nordic countries. To enhance and ensure the functionality, credibility and comparison of IC accounting and reporting of organisational entities, we find it necessary to ensure that indicators presented have been measured by the same methodology and thus represent the same aspect. The concept is to ensure comparison of apples with apples and to provide all stakeholders, including auditioners, with a valualbe tool for management and evalutaion. If accepted, these indicators would benefit a wider audience than the Nordic IT industry. It could form the base for IC measurements and be a valuable input into European projects such as standards, at a later stage. Introduction

IC reporting is aimed at explaining the intangible valuables in each organization. The Nordic countries have shown an initiative by launching special Nordic projects, Nordika and FRAME, for reporting and measuring IC. These projects have resulted in reports, enabling companies to further external and internal reporting and the understanding of the intangible valuables. The importance of IC reporting applies especially to small and medium enterprizes, SME’s, which do not enjoy the same possibilities as larger organizations to explain themselves to the business environment and therefore the same possibilities to raise funding capital on a fair basis, taking into consideration the intangible valuables the company possesses. The Nordika and FRAME projects have provided an understanding of the processes behind IC reporting and knowledge processes in general. As these projects have come to an end we propose to continue along a pragmatic route as suggested in the follow-up project proposal, based on the need to harmonize methods for reporting IC valuables as a basis for external reporting and evaluation of IC.

2

Appendix c.

The benefit of harmonizing IC indicators is their important relation to present popular organisational steering models such as Balanced Scorecard, Microscope Benchmarking, EFQM and ISO9001. As IC indicators form a baseline for these models, it is important that the rational behind measurement is harmonized. Harmonizing IC reporting and adding to existing financial reporting, as a supplement, it is believed that SME´s have a better chance of realising the intangible values within their companies. Simultaneously it will provide a platform for comparison for the mutual benefit of stockholders, investors and the financial community. The aim of this project is to research the possibility and feasibility of establishing a Nordic project networking stakeholders in the Nordic countries to produce harmonized indicators for reporting IC for the Nordic countries. The network would be limited to SME's in the IT Information technology sector. If accepted, these indicators should benefit in a wider audience than the Nordic countries and could be a valuable input into European projects at a later stage.

Prologue: Why, is there a need?

Following the rise and fall of IT companies in market value during the years 2000-2002 the issue of reporting intangible valuables has been the topic of discussion as a mean of explaining the real values residing within IT companies. In order to improve the industries image and investor relations, the Association of Icelandic Software Companies (AISC) established a workgroup to produce guidelines for harmonised reporting of IC assets within software companies. The idea being that such a reporting format would create a breakthrough in identifying and reporting IC valuables within the industry and allow for comparison and analysis of individual or group of companies. It is now proposed to involve IT companies in all the Nordic countries in this prelimanry work, the first step being the formation of a Nordic network. The main aim of the network is to check the feasibility of the proposed harmonisation of IC assessment and reporting. The IC report is intended to supplement the traditional financial accounts and provide a fuller understanding of the potentials of the company and/or industry in question. The Icelandic version The Icelandic software industry experienced turbulent times in the years 2000-2002. After having been the love of investors it became the lepers of the financial community. To the people involved in the industry for some period prior to the boom in 2000 the experience was very perplexing. The majority of the software companies were SME’s in ownership of their founders and CEO´s. Due to accounting practices, the companies were not allowed to report software as assets with the exception of developmental work in progress. This left the companies charging all development as a cost, resulting in loss and diminishing owner’s equity. In turn this meant that banks would not lend the companies any money without mortgages either in company or personal property. As a result the companies built themselves slowly with non-

3

Appendix c.

existent profits or equity, funded by loans backed by personal guaranties. A unanimous source was quoted: The blessing of the industry had been the fact that nobody was prepared to invest in it except its founders and employees! The companies were perplexed when investors suddenly turned their attention to the industry, as if they had discovered some kind of miracle in disguise, as the investors clearly did not understand what the industry was about. Complex models emphasizing cash-flow projections based on exponential growth, delivered value expectations beyond dreams. The race for best investment opportunities was in progress causing investors to leave their judgement behind when deciding on investment, as the general atmosphere was that either you jumped on that train or were left behind. To a typical software company in Iceland, this meant that money poured into the companies with subsequent pressure on valuation, followed by requirements for mergers of companies to form bigger blocks of cash-flow which in turn would increase value, maximise profits and attract even more venture capital. Most if not all of the companies in the IT sector in Iceland took part in this to some degree. Banks and investment funds were quick to list the few IT companies in existence in Iceland. These companies were approached, founders were able to cash out a good part of their original investment and new equity was paid in. In addition, in some cases, heavy re-structuring occurred and grand plans for market and product expansion were unveiled. The key element was addressing world markets with scalable solutions developed for the Icelandic market, using Iceland as a platform for development, and realising profit from sale of intellectual property abroad. It is common knowledge that most of these dreams were never realized. After the collapse of the stock market in the late 2000 and 2001 and continuing in 2002 the value of IT companies has been dramatically reduced. As so many of the business models for the IT companies were based on financing instead of real income, the number of IT companies going bankrupt or having to re-engineer their existence increased rapidly. The typical founder/owner of an Icelandic software company, with up to 15 years of experience, was faced with a paradoxical situation. Meeting with investors in 2000 the entrepreneur quickly discovered that having a successful business history and real numbers was more of a hindrance than a good thing. Repeatedly he would find that non-existent Internet business ideas were better valued by investors than his experienced, performing company. When evaluating the company internally he’d value at 100, the outside investors and analysts would suggest 200, leaving everyone happy. Subsequently 30-60% of the company was sold. The owner/founder and the company would receive a heavy cash injection. In addition to the cash input, the company had a high evaluation so the founder/owner was still in possession of considerable wealth. Then the markets collapsed and things changed dramatically. In addition to loosing value the investors wanted out. In many cases the founders/owners were buying back their companies at a vast discount, if they had been sensible enough not to spend all the money they had received upon sale. It has to be emphasized that all this happened within in a very short time frame or less then 24 months resulting in extremely swift

4

Appendix c.

changes a eliminating all form of sensible planning or strategy for the companies. Inflated wages, cost structures and limited sources of funding or venture capital left most of the companies struggling and many of the have gone under or are stille fighting for their recovery. Again referring to the company, with 10 years experience prior to the boom, the owners that had joined the merry-go-around ride of the market, were left with the impression that their personal worth had gone from little to millions to nothing during these 24 months. Still nothing had changed in the core business of the company, which could have added to its client base and increased turnover. Due to the change in cost structure the company was operating on losses and struggling. The question must be raised if this treatment by the outside environment is justifiable as anything but a frenzy. It is clear that almost all the stakeholders of the companies suffered. Those who took the money and ran managed to make a profit, but most probably lost it in some other venture. The lesson learned must be that there should have been some mechanism to avert this situation from occurring. Clearly the judgement of the investors was clouded by unrealistic expectations, as very few understood the nature or potential of the business, this was possible. It is clear that traditional financial accounting cannot explain this phenomenon. As explained earlier it is not approved to report value for intellectual property, thus when reading the accounts of a software company the reader could just as well think it was a car rental, as it, in some cases, had to supply key employees with cars and cars were allowed as assets! This prologue indicates why the Federation of Icelandic Software Companies has launched the IC reporting initiative. The goal is to educate both the market and the companies, as it is believed that IC reporting is the right tool. In addition, a decision has been made to produce guidelines for harmonised reporting of IC valuables within software companies. The idea being that such a reporting format would create a breakthrough in identifying and reporting IC valuables within the industry and allow for comparison and analysis of individual or group of companies. The IC report is intended to supplement the traditional financial accounts and provide fuller understanding of the company and/or industry in question.

Stakeholders of IC

The IC report is a document, consisting of a narrative, a description supported by indicators, that describe the intangible values within an organization. The indicators, are measured or counted values provided to validate the text and give indication of trends and goals, by comparing enabling comparison with previous periods. The parties that benefit from the IC report have been identified as stakeholders. Companies like Coloplast1 in Denmark include their IC report within their annual financial accounts by providing a special stakeholder report section that addresses IC values within the company. For most organisations the following parties can be described as stakeholders: Investors are a target group for IC reports as they provide the formal investments and venture capital. By reading IC reports, investors get real values indicating intangible

5

Appendix c.

elements. They are therefor better equipped to argue the expectations and potentials for the valuations of companies and justify their market value. This is very important as there are many investment opportunities available and IC reports, especially if audited, provide an invaluable tool for comparing them. Customers and suppliers of the company benefit from IC reporting as it allows them to evaluate and investigate the competences of the company. They can also use this as a basis for selecting partners, who not only are financially stable but also enjoy the intellectual competences and potential necessary for a given project. Auditioners will benefit as they become obliged to signal on the near future of the company to the market. Employees, present and future, can benefit from IC reporting. It seems obvious that companies want to have the most competent employees available and that they offer a desirable workplace. Many of the factors influencing the decision of the employee when selecting a position or place of work are based on non-financial elements. The IC report enables both existing and future employees to evaluate their knowledge, poetential, position and the company. Thus they can better fulfil the expectations set forth in the vision and strategy the company has set to influence innovation and progress within the company. The company itself benefits from IC reporting. Creating abetter understanding of its intellectual competence, a company is able to enhance its image, not only towards the outside environment facing the company but also the within itself. When using IC reporting the company reveals hidden assets that can have a major impact on the profitability and even core existence of the company. Last but not least active knowledgemanagement depends on providing measureble indicators to provide internal and external benchmarking.

Compatible information

It is necessary to make it clear that IC accounting and reporting is not meant to place a monetary value on intellectual capital. By describing these values and visualising them and showing trends it is possible to enable comparison and understanding of potentials to make a better forecast. IC reporting is intended to support subjective judgement of the value of intangibles. It is imperative that there is a common understanding of the meaning of the description and indicators in an IC report. It is the objective of the IC reporting initiative to provide guidelines for the composition of IC reports and a given set of indicators. This will provide the companies with the first version of their IC report and for the industry there will be IC reports that can be compared and analysed from a common denominator. It is the hope of the parties involved that this will be a breakthrough in identifying and reporting IC valuables within the industry and allow for comparison and analysis of individual or groups of companies, as well as assisting the companies to drawing out their special capabilities, where they differ from others.

6

Appendix c.

The IC report

The IC report is intended to supplement the traditional financial accounts and provide a fuller understanding of the company and/or industry in question. This is why the IC report, sometimes known as IC accounting, is closely related to a regular financial account. In a financial account the reader has a narrative from the chairman on the events of the year in question along with expectations for the year(s) to come. These claims are made without indicators supporting it’s truthfulness. The narraatuve is meant to supplement the financial data in the balance sheet where all the monetary values of the business are listed. The IC report is intended to fill in the blanks when it comes to intangible assets within the company and explain to the reader what the business is about. The IC report is aimed at being an integrated part of the annual report, so it is necessary that the information provided be validated in the same way as other information in the report. The guidelines therefore recommend that accountants verify the sanity of the IC report just as they do with the financial information in the annual report. This will increase the validity and value of the information provided in the IC report. The IC reporting initiative is based on experience in the Nordic countries for the last 4 years, since the foundation of the Nordika2 project. After the completion of the Nordika project, an IC interest group was established within The Business Excellence Iceland organisation to keep on the good work. When discussing the proper framework for IC reporting in Iceland the group concluded that the most practical way to use the IC reports is to base them on common or harmonised indicators. Resulting in the most valuable contribution from the group, a framework for harmonized IC indicators on which IC reports could be based on. The IC groups guideline was published in May 2003 to provide a draft methodology and support Icelandic companies with there first steps of IC accounting. It should be noted that as of 2002 very few companies in Iceland issue formal IC reports even though there have been close to 40 representatives from all kinds of companies involved in the workgroup. Never the less the work has made valuable contribution to internal organisation, knowledge management, IC reporting and as a baseline for implementing managerial steering models such as Balanced Scorecard.

The Icelandic framework

The framework for the guideline is intended as an aid for companies when constructing their IC report. The framework assumes that the IC report is made up of two parts, a narrative supported by a table with indicator values. The narrative will always take its form and content from the company it is describing. As mention earlier, the IC Interest group within Business Excellence Iceland has reached a consensus as to what common key indicators should be published and last but least the group has established what measurements and/or questions form the basis for the indicators. This is very important because this ensures that the IC reports are comparable between companies and/or industries. Not to forget the timesafing of knowing how to measure and represetn key performance indicators. The guideline suggest that the report has the following chapters:

7

Appendix c.

The company and board report with a summary from financial accounts and auditors report Human capital Structural capital Relational/ customer capital Tabel of key performance Indicators The company and board -report section is intended to describe briefly the content and rationale behind the IC report. It should touch briefly on subjects such as the company’s vision and strategy, the business model, innovation processes, re-engineering processes and knowledge- transfer and -management. It should contain a short account of milestones in company history and a description of the core-business. It must focus slightly on subjects like main products or assignments, competition, client base, sale of software licences, patents, trademarks, as well as consulting, product development, both tools and processes, quality certifications and resources, human or other. The last part of this section should touch briefly on values and the various goals that the company is setting itself in areas like finance, marketing, product development, training and quality. Last but not least, it should also contain a confirmation of accoutning methodology by the company auditors. The human capital section is intended to list the items that affect the value and the potential of the human capital within the company. The goal of this section is to attempt to validate the companies potential in fulfilling its mission and reaching its goals. It is preferable that the company explains its HR policies and the values it supports in context with the indicators associated with human capital as described in the guidelines issued by Business Excellence Iceland. The structural capital section is intended to list and explain how the company is equipped to reach its goals and what intangible assets rest inside the company. The structural capital represents the knowledge captivated and preserved in the internal structures of the company as information, a major ingredient fro all knowledge transformation. These assets can be in various forms such as processes in software production and service provision. Assets also include quality standards certification, internal information systems and last but not least developed products or software processes not valued in financial accounts. Prior history and experience in development is also important. It is vital that the challenges the company faces are explained and how the company’s structure is designed to meet these challenges. It must also explain what the company intended to do and how it succeeded based on indicators and other values. The relational capital section is intended to explain goodwill in relation to its client base and networking, number of customers, contracts, copyrights and other items that ensure market access for the company in the present and in the future. This section may be difficult to compose as the values of the indicators and how they are derived might be considered classified. This is why it is recommended that the company at least publish percentages that give signs of trends to support any claims made in the narrative. Relational capital is to some degree meant to describe the processes involved transfer of knowledge from the human capital to the structural capital. This section deals with what the company is selling and who the customers are. The customers are the centre of attention as to size, number, type, satisfaction and loyalty

8

Appendix c.

along with how the company has faired in maintaining customer relations and other related trends. As with the other sections, the indicators support it decided on by Business Excellence Iceland. The final section of the IC report is a listing of the harmonized indicators and finally an appendix that describes the details or definitions behind indicators, where needed.

9

Appendix c.

The indicators

Human capital – suggested indicators

Group Indicators and signs Source/ formulae Employees Number of staff Fjöldi starfsmanna í

árslok/fjöldi á launaskrá Staff turnover Nýliðun= Nýir/

Brottfall= Hættir /Fjöldi stöðugilda

Median age Lífaldur starfsmanna/Fjöldi á launaskrá í árslok

Seniority Meðaltal starfstíma allra Gender Hlutfall hvors kyns af

heildarfjölda starfsmanna Gender – executives Hlutfall kvenna/karla í

stjórnunarstöðum Turnover Turnover per full time employee

Notað sem grunnur í mælingar Framlegð: Velta/fjöldi stöðugilda

Education Classification by education Háskólamenntun Stúdentspróf Starfsnám/iðnnám Vottuð sérþekking

HR development Education Hlutfall vinnustunda skráðra á þekkingaröflun/námskeið Starfsþróunarkostnaður/Veltu

Attitudes and expectations (*see detailed description in appendix)

*Employee satisfaction

Meðaltal fullyrðinga Líkar vel við starfið og líður vel í vinnunni

*Carrier opportunities Gefst tækifæri til að afla sér og nýta nýja þekkingu

*Use of personal knowledge Finnst menntun og hæfileikar nýtast

*Equal opportunity Kynin eiga jafnmikla möguleika á stöðuhækkun

*Pay and compensation Sambærileg og réttlát miðað við ábyrgð í starfi

*Staff loyalty Áætlaður starfstími til framtíðar

*Staff morale / team spirit Andrúmsloft: Góður andi og samvinna

Competence (*see descript. in appendix)

*Employee initiative Umboð til athafna

*Innovation Er umhverfi og stjórnun hvetjandi fyrir frumkvæði og nýsköpun ? Mæling: upplifun starfsmanna,viðhorf, meðferð nýrra hugmyndum

*Mutual respect Framkoma, stuðningur, hvatning

*Professional work Þekking og færni, tengist gæðum

*Þjónustuvilji Samskipti og frumkvæði Knowledge of service supply Sérstök þjónustukönnun –

viðhorf Management competence *Staff attitude towards Hvatning og endurgjöf

10

Appendix c.

(*see detailed description in appendix)

management Stuðningur og traust Aðgengi að stjórnendum Þekking stjórnenda á starfsemi

*Attitude towards service given Viðmót viðskiptavina hjá starfsmönnum

*Communication and strategy formulation

Hve oft er stefna endurskoðuð Þátttaka starfsmanna í stefnumótun og skýrt ábyrgðarsvið

Company environment and culture (*see detailed description in appendix)

*Work pressure, balance between work and private life

Sveigjanlegur vinnutími Jafnvægi einkalífs og vinnu. Hefur með streitu að gera og ánægju starfsmanns með starf

*Starfsaðstaða Viðhorf: Sjá vinnustaðagreiningu

Encouragement Er árangurstengt hvatakerfi? Umbun önnur en laun? Kaupréttarsamningar (tiltrú) Hlutfall starfsmanna sem eiga í fyrirtækinu

Structural capital – suggested indicators

Group Indicators and signs

Source

Information systems

Informations channels Fjöldi upplýsingakerfa Póstkerfi Hópvinnukerfi Innranet Starfsmannakerfi/fræðslugrunnur/starfsþróun Skjalakerfi

How well do systems support core business

Vinnustaðagreining; Fást / nýtast upplýsingar um viðskiptasögu viðskiptavinar ? Fást / nýtast upplýsingar úr um möguleika á aukinni þjónustu-/vöruframboði ? Fást / nýtast upplýsingar um þörf á betri þjónustu til viðskiptavinar ? Notar þú þekkingargrunn til að miðla þekkingu og/eða reynslu ? Mælikvarðar til samanburðar; Kostnaður v. upplýsingakerfa pr. starfsmann

Investment in information systems

Mælikvarðar; Fjárfesting og rekstur upplýsingakerfa / Velta Kostnaður v.upplýsingakerfa / heildarstjórnunarkostnaði Kostnaður við rekstur/Starfsmannafjöldi Heildartekjur / fjöldi stoðdeildarstarfsmanna Kostnaður vegna stodeildarstarfsmanna / heildartekjur

Intranet Er til staðar; Já / Nei Ef já; - Viðhorfskönnun; Nýtast upplýsingar á innraneti þér í starfi? Mælikvarðar til samanburðar;

11

Appendix c.

Fjöldi uppfærsla upplýsinga að meðaltali á viku ? Meðalfjöldi heimsókna á starfsmann á innranet á viku ?

Document system Er til staðar; Já / Nei Group work system Er til staðar; Já/nei

Virkni = fjöldi verkefna/stöðugildi Number of staff visits on

company networks Mælikvarðar til samanburðar; Fjöldi heimsókna á þekkingargrunn / fjöldi starfsmanna

Web access/ web base workplace

Hlutfall starfsmanna með vefaðgang Fjöldi starfsmanna með fartölvu / heildarfjöldi starfsmanna Fjöldi heimsókna um vefgátt/ fjöldi starfsmanna

Quality system Quality handbook Er til staðar; Já / Nei Viðhorfskönnun; Notar þú lýsingar í Gæðahandbók ?

Documented, defined processes

Hversu oft nýtast ferlar úr gæðahandbók Eru framsett mælanleg gæðamarkmið ?

Process revision – how often?

Formlegar endurbætur

Results of quality/internal reviews

Uppfylling mælanlegra gæðamarkmiða – Frammistaða / Gæðamarkmið

Quality certification Er til staðar; Já / Nei Service and production processes

Help desk Tölfræði frá þjónustuborði / símkerfi; fjöldi símtala innan settra marka / heildarfjölda símtala Ánægja viðskiptavina í þjónustukönnun

Service requests Tölfræði úr verkbókhaldi / þjónustuborði; heildarfjöldi verk-/þjónustubeiðna / svartími Endurskoðun á markmiðum um ásættanlegan svartíma að teknu tilliti til niðurstöðu þjónustukönnunar / ánægju viðskiptavini

Hlutfall verk-/þjónustubeiðna skilar sér í vöru / sölu

Tölfræði úr verkbókhaldi og sölukerfi Þróunarkostnaður &kostnaður vegna tilboðsgerða / tekjur af nýrri sölu

Ability to innovate

Environment for innovation Fjöldi nýrra hugmynda / fjöldi starfsmanna Endurgjöf á innkomnar hugmyndir, ferli

Suggestion or idea database Formleg leið til að koma hugmyndum á framfæri R&D expenditure Kostnaður vegna rannsókna og vöruþróunar sem

hlutfall veltu Man years in R&D Flokkað eftir starfi og menntun rannsóknafólks New product / product

development Velta eða fjöldi nýrra eða verulega breyttra afurða eða þjónustu af heildarveltu. Fjöldi einkaleyfa /nýrra vörumerkja, umboða eða veittra leyfa

Starfsþróun (framlag fyrirtækis)

Employee interviews Mælikvarði; Hlutfall starfssamtala/fjöldi starfsmanna Viðhorfskönnun; Leiða starfsmannasamtöl til úrbóta / framþróunar þér í starfi ?

Starfsþróunaráætlun Eru gerðar starfsþróunaráætlanir? Hlutfall starfsþróunaráætlana sem koma til framkvæmda

Fóstrakerfi Já / Nei : innleiða nýja starfsmenn? Relational / Market capital – suggested indicators

12

Appendix c.

Group Indicators and signs Source Market position Turnover by customer group Velta flokkuð eftir tegund starfsemi

t.d. 30% opinberir aðilar Turnover by customer size Customer loyalty Flokkun viðskiptamanna eftir tíma

í víðskiptum New customers Hlutfall heildarsölu til nýrra

viðskiptamanna Market share Samkvæmt mælingum ef til Market cost Heildarmarkaðskostnaður sem

hlutfall af veltu Distribution channels Frásögn: Viðskiptanet;hvernig

vörum er komið á framfæri Market image Þjónustukönnun: Þekking og

viðhorf til fyrirtækis New products Fjöldi nýrra eða breyttra vara/

heildarvörufjöldi Image (Customer attitudes)

Satisfied customers Meðaltal úr þjónustukönnun: Eru gæði afurða, búnaðar, afgreiðslu og þjónustu í lagi.

Competitor comparison Þjónustukönnun: Er vara og þjónusta jafngóð, betri eða verri?

Integrity Sýnir fyrirtækið heilindi í viðskiptum

Initiative Nægilegt frumkvæði í samskiptum við viðskiptavini

Co-operation Samstarf um vöruþróun eða nýsköpun; fjöldi verkefna

Visibility of knowledge

Viðurkennd sérstaða Frásögn: Er vitnað til sérfræðiþekkingar fyrirtækisins. Eru starfsmenn þess viðurkenndir sérfræðingar á sínu sviði?

Web page Fjöldi heimsókna á heimsíðu/ fjöldi áhugasamra um starfsemi fyrirtækis

Articles, lectures etc. Fjöldi greina og kynninga unnin af starfsmönnum

Public coverage Umfjöllun eða upplýsingar um verkefni / starfsemi fyrirtækisins – fjöldi / heildarfjölda verkefna

13

Appendix c.

Links to popularorganisational steering models

As indicated in the pre-project application a major benefit of harmonizing IC indicators is their important relation to present popular organisational steering models such as Balanced Scorecard, Microcope Benchmarking, EFQM and ISO9001. As IC indicators form a baseline for these models, it is important that the rational behind measurement is harmonized. The need for establishing a connection between harmonised IC indicators and popular steering models is important for the validity of the work done in this project. If research shows that harmonised indicators can be used as input in said models the entry level for companies has been greatly reduced as this enables the companies to use these models in a cost-effective way. There is no exhaustive list covering methods and models to increase productivity and competetiveness within companies. However the following listing should provide some insight as to what is available. This of course needs to be researched further as a part of the project. The suggested methods and models to begin with are: 0 Defects 6-Sigma ABC Balanced Scorecard Concurrent Engineering Conjoint analysis Core Competencies CPR Creative Destruction Customer Retention Cycle Time Reduction Data Mining Delphi Technique Empowerment Experience Curves Groupware Growth Strategies ISO 9000 JIT Learning Organizations Life Cycle Analysis

Market Disruption Analysis Mass Customization MBO Mission and Vision Statements One-to-One Marketing OVA Pay-for Performance PIMS Analysis Portfolio Analysis Quality Circles Re-engineering Scenario Planning SPC Strategic Alliances Strategic Planning SVA System Dynamics TQM Value Chain Analysin Virtual Teams Zero-Based Budgets

These are only an example but clearly indicate that it would be costly for companies to test them all or to use many of them unless for a clear benefit. When looking at some of these methods and models one finds that there are many similarites and same factors used in them. This means that if a common set of factors can be developed, companies can use a larger variety of methods and models at a lower cost and hopefully to a greater benefit.

14

Appendix c.

Conclusion

We suggest that the present work on IC guidelines in Iceland and Denmark be used as a basis for a prototype for IC accounting and reporting in the Nordic IT industry. The need for assessment of Intellectual Capital is steadily increasing, following the great fluctuation in market value, often due to little, lacking or misleading information. This applies especially to IT companies often do not enjoy the same possibilities as larger organizations to explain themselves to the business environment or the same possibilities to raise funding capital on a fair basis considering the intangible valuables that the company possesses. Knowledge is recognised as a key driver of sustainable performance and innovation. IT companies base their operations on knowledge, enhancing the need for them to report and manage their IC. IT companies are concerned about their strategy, performance ability and methods for knowledge transformation to increase efficiency and competitiveness. The guidelines for IC reporting suggested in this paper, orignally to Icelandic IT companies by the AISC, are intended to aid and support companies when constructing their first steps towards IC reporting. The development of a Harmonized Indicator baseline for IC reporting will create a methodology for managing, accounting and reporting IC. It is believed the model will benefit the Nordic IT companies by lowering the entry level for using ICT tools and evaluating their performance, potential and value. Simultaneously the transformation process is made more applicable and affordable for the companies. A very few companies in the IT sector have published an IC report or attempted to report intangible valuables. It is the belief of the board of AISC that the guidelines will create a breakthrough in identifying and reporting IC valuables within the industry and allow for comparison and analysis of individual or group of companies. The report is seen as a supplement to the traditional financial accounts and will provide fuller understanding of the company/ies and/or industry in question. Acknowledgements

The Association of Icelandic Software Companies, workgroup on intangibles 2003

References

1. Coloplast A. Annual accounts for 2001. 2002 2. Nordika. The nordika project. 2000

15

Appendix c.

16

Appendix d.

Setting and understanding the Indicators

The need for a common language = harmonizing common indicators Both in empirical studies and theory the economic link can be established between IC activities and economic performance. This is makes a good foundation for harmonizing indicators to enable more organisations to enhance their IC activites without extreme costs. In their work, Ernst & Young have found a number of value driver categories within Management, Relationship, and Organisation. In the case of non-durable manufacturing, the high-ranking drivers have been found to be Network and Alliances; Brand Equity; Technology & Processes; and Human Capital (Jonathan Low). The companies that are able to best pursue their strategy are more likely to profit their shareholders.

The main reason for participating in a workgroup on IC is, for most organisations, based on the following hopes for gain A strategy for performance rating and

measurement of IC A common methodology and framework for

reporting A common understanding of the value of such a

method, both internally and externally The first step towards an IC report is to agree on a comparative model of how the intangible assets are placed within an organisation. The aim being to give a holistic view of a company, based on well-defined indicators on the basis of strategy, goals and values. IC can be divided into two main blocks of assets, human capital and structural capital. Traditionally human capital is that part of IC which is possessed by the employees and leaves the company by the end of a day. Structural capital is on the other hand the part of the IC that is embedded in internal systems, processes and information systems as well as some of the marketing assets such as customer relation/image. These assets still remain within the organisation after daily closure and secure work procedures, quality and to some extend, traditions available to new employees upon their arrival, as well as market assets. The third block, relational capital sometimes referred to as customer capital, lies

interactively above and within the formerly mentioned. Relational capital is therefore divided in to goodwill/image (customer capital) meaning factors related to the market on one hand, internal organisation and processes on the other, none the less given a added value by highly skilled staff with good networking.

Visionthe future

StrategyGoals

Emphasis

ChallengesReformsActions

Indicators

Informationsystems

IC Assessmentannually?

Considering the dimensions set by the proposed prototype analytical model IC were the first categorizes the indicators according to the knowledge resource they relate to (HC, RC, SC) and the second dimension is used to show the company’s knowledge

Appendix d.

resource composition, acquisition and use. Most indicators already contain the information required to classify them in both dimensions. The dimensions can be considered to be inherent in the figures, referring to a particular aspect of a particular type of knowledge resource. This is often the case, but in practice it is often difficult to set boundaries. Rules of thumb are also used in accounting standards to classify financial transactions, are used to classify in several ways.

Market value

Structuralcapital


Education Attitude


SkillsCapabilities

Knowledge


systems

Goodwill

Image



Humancapital

Workenvironment

Culture

Marketexpectations?

Relationalcapital

Fig 1 Organisational structure

For resource figures, classifying the indicators according to type of knowledge resource usually will not present any major problems. Activity figures often create confusion, because some activities upgrade two (or more) different types of knowledge resources at the same time. For example, sending employees on process optimisation courses can qualify as both an employee and process activity. The rule of thumb in this case can be to position the figure on the knowledge resource put most in focus. Customer group meetings should therefore be positioned under customer resources and not under employee resources. This also applies to conference representation, because the company’s image (customer resource) is in focus. The employee resource is not in focus even though employees represent the company at the conference. Special problems can arise where effect indicators are to be positioned in the model, because they may relate to more than one type of knowledge resource. For example, where ‘employee satisfaction with technologies’ and ‘customer satisfaction with employee competencies’ are to be positioned. In best practice a figure is classified according to the qualities it describes. So ‘employee satisfaction with technologies’ should be considered to be a technology quality and should therefore be positioned as a technology resource. Applying the same principle means that ‘customer satisfaction with employee competencies’ should be classified as an employee resource.

Appendix d.

Many IC reports use abstract categories which, not suitable for indicator classification. For example, ‘innovation’, ‘flexibility’, ‘customer-orientation’ and ‘strong culture’ are all abstract concepts not initiatives, and are rather knowledge narrative elements. Some companies for example measure ‘innovation’ as ‘the proportion of turnover generated by new products’. Others use ‘the R&D expenses/turnover ratio’, ‘the number of patents’ and even employees’ formal educational qualifications. So how do you go about harmonizing indicators?

Most important indicators in the measurement of intellectual capital Once the intangibles of value = Knowledge resources, have been identified it is necessary to locate their indicators. Harmonizing a bulk of indicators is a great help when setting of on an Intellectual Capital mission. Most of the work of the Iceland IC interest group last year was spent evaluating the viability and usefulness of various indicators thought best to represent particular intangibles. Also indicators specify activities. If indicators cannot be found that can follow up an initiative, the initiative is often defined in too general terms Selecting and setting general indicators and parameters, which could apply to all organisations, has so far been major task of the interest group. It had to be kept in mind at all stages the vital indicators to some organisations can be useless to others, depending on economic environment, field of practice and organisational structure. It must also be clear that those indicators may be vital to point out a company’s uniqueness. What makes it special in how it differs from others in its value creation? It is necessary to document the process of how indicators were found to ensure comparison. Which general indicators should be present in an IC report and how they are to be measured? What questions or parameters, are underlying? Can you ensure the comparisons of apples to apples, or establish a common language? After the initial measurement it becomes quite easy to monitor changes to these key performance indicators as the process can to a certain extent be automated. The required indicators and the way they are to be measured can be presented in a table. Prior to that, considerable analytical work and dialogue is needed. The building of a consensus doesn’t happen overnight. Many of the Indicators are open to debate, how do you measure for example, even thought to be simple indicators, employee turnover? There are many different opinions of what is the meaning of turnover and how it is measured. The diversity of meanings of a simple indicator set the route of defining for each indicator how exactly it should be calculated. Here is one example:

Group Indicator Formula Goal Human capital Annual Turnover

Accession rate: new employees/ total workforce Separation rate: Employees gone/total workforce Distributed by seniority

Cost of training /expenditure Retention of knowledge /Loss 2yrs, 5yrs, 8+yrs

In the IC report Accession rate (rookie rate) is one way of showing IC growth, the training of new staff is an initiative, adding new knowledge to the knowledge pool and as such it enhances the possibility of innovation?

So a management challenge can be formulated as ‘the recruitment and retention of personnel’. But it is still general and has no real content until initiatives and indicators

Appendix d.

are defined. Initiatives tell whether it is recruitment or retention that is needed and also who is to be recruited or retained. Many software companies see recruitment or retention of highly skilled software engineers as a management challenge.

In Iceland the interest group has decided upon a list of some 60 indicators in the prototype guideline. These indicators are to be displayed in the narrative as to support the story being told. The indicators should also be represented in a table-format on one single A-4 sheet, somewhat like in a financial account.

The list of indicators and how they are measured is Open source – none the less it brings a lot of new challenges to consulting companies as IC accounting and reporting calls for a lot of new interpretation of measurement and should therefore be considered as an opportunity for the consultants rather then a threat.

Common and specific indicators Selecting and setting general indicators and parameters, which can apply to all organisations, non-dependant on their field of specialization, public or private is a major task – but not impossible. Providing a good method for measuring and assessing common indicators is a resonable task. Attention must also be drawn to the fact that even common indicators like employee and customer satisfaction may correlate stronger with financial results in service-orientated industries with high direct customer contact, such as hotels and the banking industry – and less in industries with higher rates of R&D and creative professionals, since they are often motivated by different things. Employee Customer satisfaction satisfaction In all organisations indicators must be evaluated on the merit of their contribution to the strategic vision of the organisation – for this is where their impact on economic performance is vital. Specific indicators are time-dependant as they change over time with new management challenges, strategy or vision. The aim of specific indicators is to draw the attention to the company’s business case. The main thrust of the selection process must be geared towards finding indicators, relevant for the core business of the organisation. Management must keep in mind that indicators are but means to register

Appendix d.

tendencies. Comparison over time will give the management an idea of the development of the indicators. With the tool in hand it is possible to detect changes and developments in the company early on and make the necessary adjustments. It has to be kept in mind that indicators vital to one organisation can be useless to others, depending on the economic environment, field of practice and organisational structure. It must also be clear that those indicators may be vital to point out a company’s uniqueness. What makes it special in how it differs from others in its value creation? The proposed project can only try to assist in assessing specific indicators through proposing a good working model for a holistic approach of analysing the intangible assets of an organisation.

Appendix e.

Reading and analyzing IC reports

- The need for consensus

Can intellectual capital statements be systematically read and analysed in a way that is comparable with the reading and analysis of financial statements?

Can they become a major instrument for analysing investment possibilities?

The goal of introducing analytical methods is to create a sufficient distance from the intellectual capital statement figures a company has chosen to present in text and illustrations.

The starting point is to group intellectual capital statement figures in such a way that the three general questions can be answered. The table below shows that the same types of questions are found in financial statement analysis. Financial statement Intellectual capital statement

What are the company’s assets and liabilities?

What are the company’s knowledge resources?

How has the company invested? What has the company done to strengthen its knowledge resources?

What is the company’s return on investment? What are the effects of the company’s knowledge work?

These two sets of questions are fully parallel, as they relate to the same management problems. They are, however, not identical as their answers are based on different types of data.

Intellectual capital reporting is not based on a double entry system, ensuring assets and liabilities balance. It is based on a single entry system and ‘assets’ can therefore exceed ‘liabilities’. Many readers will therefore see intellectual capital statements as giving a less credible and less relevant company evaluation. This problem with the data does exist. Not all financial statement figures are, however, as unambiguous and informative as one would like to think. Therefore, a detailed grid work of accounting standards has been established over time that specifies the correct use and interpretation of figures and concepts. A similar set of standards needs to be developed for intellectual capital statement transactions.

Harmonizing Nordic Knowledge Indicators, Brjánsstaðir, Iceland 5.6. Sept. 2003 Ásta Thorleifsdóttir, [email protected]

1

Appendix e.

It will probably be some time before there is established a generally accepted set of figures that can give an Intellectual capital statement bottom line. To achieve this, the first requirement is that it is possible (in principle) to read from statements a company’s handling of the previously mentioned questions in an analytical way.

Most companies use some sort a model or a set of principles to write their intellectual capital statements, adapting the content and interrelationships to the company’s particular situation. As intellectual capital statement content are therefore determined by the characteristics of the individual company, intellectual capital statements show wide variations. These variations also reflect the differences in how companies use their knowledge resources to create value for their stakeholders. The knowledge narrative, management challenges, initiatives and indicators are therefore in principle unique to each company. Most Intellectual capital reports/statements will have the same critical elements, a knowledge narrative and the evaluation of management challenge and initiatives, supported by indicators.

Critical evaluation is therefore dependent on the reader’s ability to systematically analyse the information given in the intellectual capital statement, the analysis being based on statement figures, derived from the given indicators, based on measurement. The goal of such an analysis is to evaluate whether the information provided by the company is relevant and whether the development in company activities is reasonable. An analytic tool should therefore be able to provide an overview of the company’s knowledge resources, including current knowledge resource stock, development initiatives and their effects.

Readers interested in the analytical aspects will, however, not only be interested in the unique but want a more general insight into a company’s knowledge resources based on the three previously mentioned evaluation criteria of resources, activities and effects. Figures reported in intellectual capital statements inform the reader of management challenges, initiatives implemented and their success in achieving the company’s knowledge management strategy goals. Bringing back the vision and major goals of the project proposed by giving the analytical stakeholder a tool to enable the analysis of whether the performance of an organisation is up to the standards set and if it is accounted for. The first dimension of the intellectual capital statement categorizes figures according to the knowledge resource they relate to. These will typically be employees (human capital), customers (relational capital), processes and technologies (structural capital). The knowledge resource list is, however, not fixed or final. New resources can be


2

Appendix e.

added, such as suppliers, management and universities. Others may lose significance over time. Experience does however show that (at this point in time) the four types encompass nearly all key- knowledge resources for most companies.

The second dimension, through the three evaluation criteria, is used to show the company’s knowledge resource composition, acquisition and use, which in other words are ‘the resources the company has’, ‘what the company does with them’, and ‘what the company gets out of them’. Each indicator should therefore be positioned with respect to which of the three knowledge resource aspects it relates to. Evaluating whether resource composition, acquisition and use is appropriate requires examination of indicator development over time. Evaluation criteria The Analytical model as proposed by the danish minstry Resource figures are the portfolio of company knowledge resources, which is the stock and composition of resources within employees, customers, processes and technologies. These figures represent the company’s ‘stock’ of knowledge resources and define which ‘resource building blocks’ the company has at its disposal. The figures relate to relatively stable units such as ‘a customer’, ‘an employee’, ‘a computer’, ‘a process’ etc. They answer questions such as ‘how many?’ and ‘what proportion’ and show how large, how varied, how complex and how intertwined these knowledge resources are. Linked to this are management actions, which are portfolio decisions determining how many knowledge resources of each type the company is to own.

Activity figures describe the company’s activities for upgrading knowledge resources, which are activities implemented to upgrade, strengthen or develop the resource portfolio. The figures also answer questions such as: What is being done? Describing the investment in Knowledge resources, through further training, investments in processes, activities to educate or attract customers, presentations and other public activities answering the key question: What does the company do to develop and improve its knowledge resources? The management actions linked to these are therefore upgrading activities. Effect figures express the consequences or the total effect of the company’s development and application of knowledge resources. Just as in an accounting system, the model only shows the effects and does not attempt to explain where they come from. Such explanations are for the analyst to find based on the model but not within it. So reading an IC report could be done as follows:


3

Appendix e.

The knowledge resources column provides the basis for a ‘portfolio assessment’ of the company. The analyst will determine whether the company’s knowledge resource portfolio is competitive and can meet the future. The activities column allows the management’s ability to develop the

employees, the organisation and customer relationships to be evaluated. The effects column provides the basis for assessing whether the company’s

knowledge management set-up and activities work, giving an assessment of company stability.

External or internal – does it matter? The need for consensus The analytical model must accommodate for two groups – the readers of international and external IC reports despite the fact that they display information slightly differently. External IC reporting is made in order to provide documentation for factors that management finds important and able to change. It is a communication of factors that management finds important for external partners to know in order to better understand the company, its situation and the strategy followed. In contrast internal reporting is a monitoring tool, which enables the management to follow the activities and actions taken to carry out the company’s particular strategy. In this aspect the IC accounting is a tool to strengthen Knowledge management and as such the foundation for innovation. Communicating externally to change things internally may be useful sometimes, but most often has little success and at the same time there is a risk of mixed communication with the external target groups. Reading through a myriad of IC reports makes the need to establish a consensus of meaning, a semantical basis for knowledge assessments painfully obvious. The necessary first step along that route is toharmonize key performance indicators.


4

Appendix f.

nordic harmonized knowledge indicators - sinhki.si.is/media/nhki/appencies.pdf · nordic harmonized...

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