MEASURING

INTELLECTUAL
CAPITAL

Submitted By:
Angad Singh
Gaurav Kaul
Navrose Kaur
Sanyam Grover
 INTRODUCTION

The world is fast changing from industrial to knowledge

economy and Indian economy has attracted the attention
of the whole globe with its fast growing knowledge sector.
Business dynamics of the 21st century are increasingly
determined and driven by Intellectual Capital (IC)
elements.
Intellectual capitalis the intangible value of a business,
covering its people (human capital), the value inherent in its
relationships (Relational capital), and everything that is left (
Structural capital), of whichIntellectual property(IP) is one
component.It is the sum of everything everybody in a
company knows that gives it a competitive edge.The term is
used in an attempt to account for the value of intangible
assets not listed explicitly on a company's balance sheets.
 WHY TO MEASURE
INTELLECTUAL CAPITAL ?
Companies may want to measure IC for a variety of reasons
Helps an organization to formulate business strategy &
gain a competitive advantage
Leads to the development of key performance indicators
that will help evaluate the execution of strategy.
Assists in evaluating mergers and acquisitions (M&A),
particularly to determine the prices paid by the acquiring firms.
To communicate to external stakeholders what intellectual
property the firm owns.
For many service, knowledge
intensive companies:

Market value >> Book value

What accounts for this

difference?

Intellectual Capital
History - Financial Focus

Today - Customer Focus, Human Focus, Process Focus

Tomorrow - Renewal & Development Focus

 HOW INTELLECTUAL CAPITAL IS
CREATED ?
Projects and activities create knowledge
Acquisitions allow for effective transfer of knowledge in all
its dimensions
Be more open to external sources of knowledge
Specific mechanisms for knowledge capture
There are a plethora of intellectual capital measurement and
reporting models that have been developed by academics,
consultants and practitioners. Popular models used to
construct reports on intellectual capital include:

Kaplan and Nortons Balanced Scorecard (Kaplan

and Norton, 1992),
Karl-Erik Sveibys Intangible Assets Monitor
(Sveiby, 1997) and
Skandias Value Scheme (Edvinsson and Malone,
1997).
 BALANCED SCORECARD

The balanced scorecard is a

strategic planning and management systemthat is used
extensively in business and industry, government, and
nonprofit organizations worldwide to align business
activities to the vision and strategy of the organization,
improve internal and external communications, and
monitor organization performance against strategic
goals.
BALANCED SCORECARD SUGGESTS THAT WE
VIEW THE ORGANIZATION FROM
FOUR PERSPECTIVES, AND TO DEVELOP
METRICS, COLLECT DATA AND ANALYZE IT
RELATIVE TO EACH OF THESE
PERSPECTIVES:
A Balanced Scorecard should result in:
Improved processes
Motivated/educated employees
Enhanced information systems
Monitored progress
Greater customer satisfaction
Increased financial usage
 TYPES OF
INTELLECTUAL
CAPITAL
 TYPES.

Intellectual capital is a heavy word.

Fancy and MBA-ish.
But, we need to see what exactly it means and what
it encompasses.
Now well see what all comes under Intellectual
Capital
BOOM!
 RELAX!
Dont worry.. All the 59 boxes you saw in the previous slide
are not what we intend to cover.
It is actually very difficult to say exactly what all is covered
under intellectual capital, but most studies and experts
agree on it being classified under three broad categories:
1. Human Capital
2. Structural Capital
3. Relational Capital
THIS IS MORE LIKE WHAT WE WANT TO SHOW
 1. HUMAN CAPITAL
This group is made of different
knowledge assets of the person,
such as peoples knowledge
backlog coming from training,
skills and previous innovations.
 1. HUMAN CAPITAL

Intellectual Capital What it encompasses

Backlog Knowledge
Skills
Innovation

HUMAN CAPITAL Values

Experience
Know-how
Loyalty
Performance
Development
Attitude
 2. STRUCTURAL CAPITAL
The second group of the
intellectual capital
classification arises after
intangible assets are
implemented in the
organization and
contribute to the value
creation, such as
processes, methods,
systems, information
technology, software,
among others.
 2. STRUCTURAL CAPITAL
Intellectual Capital What it encompasses

Investment in R & D

Innovative processes

Information Technology
STRUCTURAL CAPITAL
Culture

Administration and Management

Business strategy
 3. RELATIONAL CAPITAL
Relational capital
consists of a group of
intangibles that have a
direct relation to the
activities outside the
organization that
involves customer,
government authority
relationship and
international operations,
among others
 3. RELATIONAL CAPITAL

Intellectual Capital What it encompasses

Customers

Suppliers

Partners

Relational Capital Shareholders

Stakeholders

Consultants and assessors

Government relations
 MEASUREMENT METHODS
There are several group of methods of measuring the
Intellectual Capital, which can be used in order to evaluate this
asset. Some of these methods were attempts made by
different companies for their internal use rather than the
development of a universal measuring method. But they still
exist and are basis to create new methods.
 CLASSIFICATION OF METHODS

According to Luthy (1998) and Williams (2000) all methods

can be divided into four main groups:

Direct Intellectual Capital Methods

(DICM)
Market Capitalization Methods (MCM)
Return on Assets Methods (ROA)
Scorecard Methods (SC)
 MEASUREMENT METHODS

1. Direct Intellectual Capital Methods (DICM)

estimate the dollar value of intangible assets by
identifying its various components. Once these
components are identified, they can be directly
evaluated, either individually or as an aggregated
coefficient.
2. Market Capitalization Methods (MCM) calculate
the difference between a companys market
capitalization and its stockholders equity as the value of
its intellectual capital or intangible assets.
INTELLECTUAL CAPITAL
REPORTING
3.Return on Assets Methods (ROA) average pre-tax
earnings of a company and divide them by the
average tangible assets of the company. The result is a
company ROA that is then compared with its industry
average. The difference is multiplied by the companys
average tangible assets to calculate an average annual
earning from intangibles. By dividing the above-average
earnings by the companys weighted average cost of
capital or an interest rate, one can derive an estimate of
the value of its intangible assets or intellectual capital.
4. Scorecard Methods (SC) identify various
components of intangible assets or intellectual capital
and indicators and indices are generated and reported in
scorecard or as graphs. SC methods are similar to DIC
methods, except that no estimate is made of the dollar
value of intangible assets.
 INTELLECTUAL CAPITAL
REPORTING
An IC report is an official assessment of the Intellectual
Capital of the Company.
It is a Balance Sheet of the companys knowledge.
It is in the interest of every company to measure and
publish their own IC report, perhaps as an additional
chapter in their annual report, in order to:
Enable the company to manage its growth in a better way
Communicate the intrinsic value of a companys stock to
the investors and lendors
EXAMPLE

Net Worth: Rs. 2,860 Crores

Market Capitalization: Rs. 26, 847 Crores

PEOPLE
Education Index of all staff 44,972 (31,385)
Value-added/Sw engineer* 26.06 (23.95)
Value-added/employee* 23.73 (21.61)
Average age 26.6 (26.6)
* Rs. lakhs
 INTERNAL STRUCTURE
IT investment/value added 4.31% (4.57%)
R&D/value added 0.47% (0.66%)
Total investment in orgn/VA 7.21% (14.41%)
Avg proportion of support 8.9% (9.8%)
Sales/support staff 316 (257)
Avg age of support staff 32.1 (30.9)
 EXTERNAL STRUCTURE: GROWTH & RENEWAL
Revenue growth 39% (37%)
% revenue from
Fortune 1000 56 (56)
% revenue from exports 98 (98)
# of new clients added 92 (116)
 EXTERNAL STRUCTURE: EFFICIENCY
Sales/client (Rs. Lakhs) 1050 (889)
EXTERNAL STRUCTURE: STABILITY
Repeat business/total revenue 92% (88%)
Sales from top client/total 5.8% (6.1%)
Sales from 5 largest/total 23.4% (24.1%)
Sales from 10 largest/total 37.3% (39.4%)
 EXTERNAL STRUCTURE: STABILITY
# of Million $ clients 115 (83)
# of 5 Million $ clients 41 (25)
# of 10 Million $ clients 16 (16)
# of 20 Million $ clients 9 (6)
# of 30 Million $ clients 3 (1)
# of 40 Million $ clients 2 (0)
 VALUATION OF HUMAN RESOURCES
Present value of future earnings of employees
Number of employees 15,356 (10,738)
Value in Rs. Crores 10,417 (9,539)
Sw revenue/Value of HR 0.35 (0.27)
Value added/Value of HR 0.29 (0.23)
Value of HR/employee 0.68 (0.89)
Employee cost/HR value 16.1% (11.72%)
Return on HR value 9.2% (8.47%)
 INTELLECTUAL CAPITAL
INFORMATION DISCLOSURE OF TOP
INDIAN CORPORATIONS

The sample used in this study is 20 listed

firms in India
The study uses the annual reports of F.Y.
2013-14
The method used in this research is content
analysis.
Intellectual Capital Search Terms-
38
Content-wise Analysis
of Intellectual Capital
Terms
 ANALYSIS AND FINDINGS

Only 43% of the intellectual capital terms were reported

by top 20 firms in India.
The most popular term reported was Intellectual property
which includes patents, trademarks, brand valuation etc.
3 components of Intellectual Capital namely Customer
Capital, Relational Capital and Structural Capital did not
find place in any of the annual reports
Company wise Disclosures of IC
Terms
 Infosys had reported the maximum number (09) of IC-
related items.
The first Indian corporation to win the Most Admired
Knowledge Enterprise in Asia award in the year 2002.
Infosys is the only IT-corporation in India, which has been
regularly reporting its Intangible Assets Score Sheet, as
a measure of intangible assets
 INFOSYS TECHNOLOGIES LTD.

Infosys is one of the pioneers in valuation and reporting

of intangibles in India.
The intangible assets of the company are classified into
four major categories- human resources, intellectual
property assets, internal assets and external assets.
 N.S. RAGHAVAN
EMPLOYEE NO. 1 OF INFOSYS
Infosys tagline, "Powered by intellect, driven by values.
Learnability' was the most critical factor for success in
the software profession.
The first blue-blooded software company to recruit fresh
engineers from a variety of backgrounds. To select the
best, they relied on the Arithmetical Reasoning (AR) and
Analytical Thinking (AT) tests
 The most significant intervention for emotionally
engaging Infoscions was the creation of Employees Stock
Offer Plan (ESOP), long before any regulatory guidelines
were available.
An optimal solution was developed, where the
outstanding contributors were given large numbers of
ESOPs through the 'Chairman's quota' whereas most of
the good performers earned smaller number of ESOPs
over a period, based on their yearly contributions.
 It created the largest number of dollar and rupee
millionaires by any company, and more importantly,
created a sense of ownership and belonging among all
our employees.
As a measure of our commitment to transparency and
openness, I made it a point to visit all Infosys campuses
in April every year, to personally explain the rationale
behind the salary revisions, promotions, loan policies,
ESOP allocations, etc.
THANK YOU