What is Intellectual Capital?

Intellectual property is the value of a company or organization's employee knowledge, skills, business training or any proprietary information that may provide the company with a competitive advantage. Intellectual capital is considered an asset, and can broadly be defined as the collection of all informational resources a company has at its disposal that can be used to drive profits, gain new customers, create new products or otherwise improve the business. It is the sum of employee expertise, organizational processes, and other intangibles that contribute to a company's bottom line.

Some of the subsets of intellectual capital include human capital, information capital, brand awareness and instructional capital.

Understanding Intellectual Capital

Intellectual capital is a business asset, although measuring it is a very subjective task. This asset to a firm is not booked on the balance sheet as "intellectual capital"; instead, to the extent possible, it is integrated into intellectual property (as part of intangibles and goodwill on the balance sheet), which in itself is difficult to measure. Companies spend much time and resources developing management expertise and training their employees in business-specific areas to add to the 'mental capacity,' so to speak, of their enterprise. This capital employed to enhance intellectual capital provides a return to the company, though difficult to quantify, but something that can contribute toward many years' worth of business value.

Various methods exist to measure intellectual capital but there is no consistency or uniform standard accepted in the industry. For example, the Balanced Scorecard measures four perspectives of an employee as part of its efforts to quantify intellectual capital. The perspectives are financial, customer, internal processes, and organization capacity.

On the other hand, Danish company Skandia considers the transformation of human capital into structural capital as the mission of intellectual capital. The company has designed a house-like structure with financial focus as the roof, customer focus and process roof as the walls, and renewable and development focus for sustainability as the platform to measure intellectual capital.

Because of the nebulous nature and defining features of intellectual capital, it is also referred to as intangible assets and environment.

Key Takeaways

  • Intellectual capital refers to the intangible assets that contribute to a company's bottom line. These assets include the expertise of employees, organizational processes, and sum of knowledge contained within the organization.
  • There is no standard method to measure intellectual capital, and standards for measurement vary across organizations.

Examples of Intellectual Capital

Simple examples of intellectual capital include knowledge that a factory line worker has developed over many years, a specific way of marketing a product, a method to cut down time on a critical research project or a mysterious, secret formulation (e.g., Coca-Cola soft drink). A company can also bolster its intellectual capital by hiring qualified individuals and process experts who contribute to its bottom line.

As technology and process improvements become more of a differentiating factor within modern companies, intellectual capital becomes a greater factor in achieving success in a competitive marketplace.