What's in a name? - Defining the terms

How we define something impacts the way we perceive it, and the way we perceive it in turn affects how we deal with it. Terms have meanings and connotations that trigger impressions and expectations with a number of underlying assumptions. What we call intangible assets or hidden resources will have practical implications on how they are identified and managed. At this writing, there is still disagreement as to how to define and classify an organization's intangible assets. Even after apparent consensus on the use of one term over another, producing a definition of the term sets off a chain reaction of explanations about it. As it stands today, academics and practitioners use the term intellectual capital more consistently to refer to the intangible assets that a business can use to create value.

Replacing the word capital, the word assets has also been used. Sometimes the words are used interchangeably, and other times "assets" refers to specifically identified items of IC such as best practices or patents. Despite general acceptance of the terms capital and assets, these terms generate controversy because they have distinct definitions in the context of financial accounting.

The generally accepted meaning of the term asset refers to items that are both ascertainable and transferable. The problem is that intellectual capabilities, with the exclusion of intellectual property (IP), are not readily ascertainable or transferable. Human intellectual resources, whether originating in an employee or a customer, defy ownership by a business, are not transferable, and fall out of the realm of "assets," in the strict sense of the word. Even when it comes to IP, the uncertainty that surrounds its value makes describing it as transferable assets questionable. More­over, the fact that IP can lose its value if mismanaged, infringed, or invalidated makes its value, even if it is ascertainable, elusive.

The term capital may seem less problematic. Capital is defined as "accumulated goods devoted to the production of other goods," or "accumulated possessions calculated to bring in income."1 Assuming that the words goods and possessions include intangibles, the term capital implies that such goods can be used to create value and are not necessarily transferable. Unlike tangible goods, however, defining or measuring the perceived value of intangible goods is problematic, since there is no market for it until after it is transformed into a marketable product. Furthermore, the term capital becomes more objectionable when used to refer to human resources, since a business can never really own or possess employee brainpower or customers' relations, though it presumably has access to both.

Regardless of the foregoing arguments against the use of the term capital, it seems to be accepted by a majority of practitioners in the field, perhaps because the term triggers images of economic value, liquidity, money, moneymaking potential, and investment potential. It also implies flow and flexibility.

The other term used to refer to intangible resources and capabilities is intellectual. Though apparently less controversial, one might ask if we are limiting our ability to perceive intangible resources and capabilities by limiting them to what is intellectual? In other words, can the term intellectual include such capabilities and resources that are not, strictly speaking, intellectual? For example, does it include the emotional intelligence of a team and its leader, an essential factor for the success of the project? Does it include interpersonal qualities, like the ability to lead, inspire, and initiate trust, essential for effective knowledge sharing? Does intellectual include the shared values and culture an organization has built through the years? Strictly speaking, it does not.

By defining intangible resources as intellectual capital, is our pool of resources restricted to only those produced by the left rather than the right side of the brain, or the mind as opposed to the heart? Wouldn't the term exclude tacit knowledge, which is formed from intuition and gut feeling? Indeed, the term intellectual capital needs to be stretched to new semantic boundaries if it is to include all that is also a right brain, heart or gut, activity.

As with any other body of knowledge, those skilled in it usually define the terms and the underlying assumptions. Similarly, practitioners in the field of ICM have expanded the meaning of the term intellectual capital to include other intangible assets that are not intellectual, and to broaden the meanings of the words assets and capital beyond their meanings as financial accounting terms.

Skandia, a Swedish financial and insurance services company and a pioneer in the field of ICM, first coined the term intellectual capital. In its first IC supplement to its annual report of 1994, the term referred to all intangible resources that the organization has including human, process, and organizational capital. Leif Edvinsson, the architect of Skandia's model, defines intellectual capital as the collective sum of knowledge of an organization's members and their transformation of this knowledge into intangible assets, later equating IC with any intangible asset that is used to create value.2 In other words, IC comprises all resources, capabilities, rela­tions, and networks, whether intellectual like knowledge and ideas, or emotional and interpersonal like attitude, culture, and values, that enable an organization to create and maximize value. A definition of intellectual capital is an essential step in recognizing what we are talking about. But to manage intellectual capital, we need more than definitions. We need frames of reference that enable us to understand, locate, and collectively refer to various forms of intellectual capital. Such frames of reference serve two main functions. First, they create a conceptual context necessary for the recognition of invisible assets. Second, they provide an operational context in which to define the scope of objectives that can be achieved from the management of these assets. A function closely connected to the second function of defining management objectives is to provide a platform for designing measurements. The following discussion examines the most popular IC classification models (the circles) and their measurement systems.