Intellectual capital: Ten years later, how far we've come
Thomas A Stewart. Fortune. New York: May 28, 2001. Vol. 143, Iss. 11; pg. 192, 2 pgs


Abstract (Summary) The phrase "intellectual capital" dates back at least to 1958. But since 1991, what has been won? Four accomplishments stand out. The biggest is the simple fact that any board today will listen if you bring up the subject. Second, with fame come fads. Third, the concept of a "community of practice" has assumed what looks like permanent, high place in management thinking. Fourth, most companies seem to have changed from a smug, knowledge-hoarding mentality to one of knowledge sharing.



Copyright Time Incorporated May 28, 2001

Deutsche Bank took out a big ad in the Wall Street Journal a few weeks ago. Its headline: IDEAS ARE CAPITAL. THE REST IS JUST MONEY. J.P. Morgan Chase, in its debut annual report, proclaims in bold type, "The power of intellectual capital is the ability to breed ideas that ignite value."
We've come a long way, baby. Ten years ago, in the June 3, 1991, issue of FORTUNE, my story, "Brainpower," was, I'm 99% sure, the first time the business press wrote about intellectual capital. It's hard to recall the blank looks that greeted the phrase a decade ago, the puzzled "You mean like patents?" queries, or the flippant "Smart's nice, but I like money" superciliousnesses.
The phrase "intellectual capital" dates back at least to 1958-but that story a decade ago gave a push to something that has become big. Anniversaries are a good excuse for taking stock. In ten years, what's been won? Lawrence Prusak, director of the Knowledge Management Institute at IBM, raised that question; what follows is my take on it, which owes something to his. (All of us concerned with intellectual capital owe Larry.) Four accomplishments stand out.
The biggest is the simple fact that any board today will listen if you bring up the subject. The idea that know-how is a competitive advantage wasn't exactly shocking back in the Eocene, but companies then didn't think about knowledge as a resource or about what their knowledge assets were. You heard "core business" but not "core competence." Criticism of accounting-that it looked backward, that it ignored important nonfinancial stuff-- didn't translate into interest in intangible assets. Today the Balanced Scorecard-- which provides a method for selecting and measuring nonfinancial performance indicators-seems like a big "duh, of course"; but Robert Kaplan and David Norton proposed it only in 1992.
The first time I met Jack Welch, just after that 1991 story, he said excitedly, "Intellectual capital is what it's all about. Releasing the ideas of your people is what we're trying to do, what we've got to do if we're going to win." The air came out of my vanity when I learned that Welch is always excited-but he meant it. In the past year or so, GE added a new item to its values: "Prize global intellectual capital and the people that provide it ... build diverse teams to maximize it."
Second, with fame come fads. Before intellectual capital became a GE value, it made it to the Dilbert Website; it's used in Dilbert's random Mission Statement Generator (http:/www.dilbert.com/comics/dilbert/career/bin/ms2.cgi), which just offered me this uplifting aim: "Our mission is to continue to assertively customize cost effective content as well as to continually revolutionize market-driven intellectual capital." You betcha!
Surviving fad-dom is not a trivial accomplishment, especially since I bet that so far more money has been wasted than made in knowledge management. At one point Forrester Research estimated that six out of seven knowledge-management projects were undertaken with no promised return on investment, and I'm sure they delivered handsomely on that commitment. A few companies-Coca-Cola, Morgan Stanley-have appointed chief knowledge officers and then let them go.
Eppur si muove, "and yet it moves," as Galileo purportedly said on his way from the Inquisition's chambers: My files bulge with stories about organizations, from the World Bank to British Petroleum, that have improved performance by managing knowledge more effectively. When the effort goes wrong, it's usually because it's done for faddish reasons-"Get us some of that, Hoskins!"-without thought for the ends to which it might be the means. More and more I see companies looking first to discover their knowledge business, their knowledge value proposition-what they know that they can sell, and how to sell it profitably-and then figuring out how to manage knowledge. That approach works.
Third, the concept of a "community of practice" has assumed what looks like a permanent, high place in management thinking. Companies' informal organizations became a matter of practical urgency as well as academic interest after 1987, when Etienne Wenger and Jean Lave of the Institute for Research on Learning in Palo Alto identified these special groups. Communities of practice are groups that emerge around a discipline or problem-a work-related subject like graphic design or the behavior of derivative financial instruments. They have no agenda; they are defined by the subject that engages them, not by project, rank, department, or even corporate affiliation. They are where learning and innovation occur -"the shop floor of human capital," I once wrote.
Learning is social, we have learned. Managers who focus on communities and teams can improve performance and grow social capital (about which Prusak and Don Cohen write in a new book, In Good Company). The mere fact that management cares about learning at all is an accomplishment. Bosses used to try to break up the gang by the water cooler and send everybody back to work. Now they support them with Websites and offsites (and foosball tables, which is going too far).
Fourth, most companies seem to have changed from a smug, knowledge-hoarding mentality to one of knowledge sharing. Benchmarking got started in the 1980s under the aegis of the quality movement and was spurred by the Malcolm Baldrige awards; every company in America, it seemed, trekked to Freeport, Me., to see how L.L. Bean handled shipping. GE, a bellwether in this too, started systematically sharing best practices with other companies in 1988. The International Benchmarking Clearinghouse of the American Productivity and Quality Center in Houston was established in 1991 and led the group into knowledge management. Best-practice sharing, along with intellectual capital theory and two key collaborative information technologies, Lotus Notes and HTML (the software protocol behind the Web), made knowledge management happen.

[Photograph]
A first shot


Departments or companies that once scorned anything "not invented here" now boast of good ideas "probably found elsewhere" in the company or around the world. Information hoarding, which began with Adam's cover-up, will persist as long as ambition, vainglory, and politics dothat is, till the last of his descendants turns up his toes. But the ethos of sharing, like the realization that learning is social, seems stronger than ever.
That's four; there's more. It's no small deal that there's a mostly agreed-upon vocabulary for describing intellectual capital. Without terms like human, structural, and customer capital, tacit and explicit knowledge, it would be impossible to create a management discipline. Learning about storytelling as a management tool-one narrative is worth a thousand PowerPoint slides-is another big win for a decade's work.
There's also a great deal more to learn. The body of knowledge about intellectual capital is a half-grown, funny-looking thing. What knowledge-management projects are sure-fire moneymakers? How reliably can intellectual capital be measured? Why is knowledge leaky and flowing in some environments, sticky and parochial in others? What are the best links between training and improved performance? What technologies are most cost-effective? The list is as endless as art is long, but life is short and magazine stories shorter.
There are three kinds of columns: Olympian, choleric, and ironic. If you sense another, valedictory tone in this one, you're right. This month marks the sixth birthday of The Leading Edge, and the time has come to shelve it. (I continue to write an online column, "Barely Managing," fortnightly for FORTUNE's sibling eCompany Now. Subscribe [free] at http:// www.ecompanynow.com.)
I've enjoyed this gig.
I loved arguing that HR should be abolished and Power-- Point banned, and relished naming CEOs who extolled their fabulous employees while firing them en masse. Columns are also a great way to broach ideas. Managing in real time is a big new idea, and you read it here first. Same for the concept that people should be thought of not as hired hands or even as assets but as investors who put their talent-their human capital-into an enterprise. And you've read a lot about intellectual capital and knowledge management, of course.
There's much more to say about all these topics, but there are fresher ways to say it.
I've been itching to write other stories-idea stories, company stories. I'll be writing them in what magazines call the "middle of the book," which is also the middle of the fray, for both FORTUNE and eCompany Now. Today's business landscape is as wild and fantastical as anything conceived of by a Romantic painter. We stand at the beginning of a new century, in the middle of a technological revolution, and at the end of a great stock market bubble-virgin territory, construction sites, and ruins, all at once. Let's go.