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The Intellectual Capital Model


Internal Business Process

(IBP) Perspective. The strategic focus of the IBP perspective is to determine the business processes an organization must excel at to satisfy both its shareholders and customers. The strategic objectives are not merely to identify existing internal business processes, but also to identify new ones that may have the greatest impact on customer satisfaction and deliver greater financial returns to shareholders. Internal business processes are defined widely to include "long-term value creation wave" or innovation processes, and "short-term value creation wave" or production and other operations, and postsale services. Because these processes have different needs, they require separate treatment. The BSC model deals with them separately, which amounts to the creation of subperspectives. These subperspectives make the IBP perspective the most complex.

For the innovation process, the BSC model indicates that management should choose measures that enable a business to identify future customer preferences and deliver new products that satisfy such preferences. Typical indicators include percentage of sales from new products, new product introduction compared to competitors, time to develop next generation, and time-to-market.

For the operations process, management should focus its measures on the efficient, consistent, and timely delivery of products and services to customers. For this process, the authors suggest the use of many traditional indicators that have been developed to measure cost, quality, productivity, and cycle time.

For the postsale services process—which includes warranty, repair, and customer service— management should choose measures that ensure reliable, effective, and speedy service to customers. Typical indicators include time (response time to complaints), quality, and cost (number of customers handled on a service call).

When it comes to the service industry the authors add more measures designed to quantify how well the IBPs fare in delivery of service. Typical indicators include "long waiting times, inaccurate information, access denied or delayed, request or transaction not fulfilled, financial loss for customer, customer not treated as valued, and ineffective communication."

Measures for operations and postsale service processes have been developed and experimented with by business for decades. Some are more recent than others, but they all attempt to measure efficiency and effectiveness against some action-oriented goals and are, therefore, easier to develop. It is only when they attempt to measure customer satisfaction, for example, that business needs to be more creative. Though this is not mentioned by the authors as one of the typical indicators under the customer perspective, it still seems an important indicator for the postsale service process. Even when it comes to the typical indicators relating to the innovation process, the ones chosen by the BSC model seem to relate to the new product development process and do not con­sider factors like employee empowerment or the motivation to innovate. This is partly considered, however, under the next perspective.

Learning and Growth Perspective. The strategic focus of the learning and growth perspective is to determine how the organization will sustain its ability to change and respond to change. The strategic objective here is to fill the gaps identified under the customer and internal business process perspectives in people, systems, and organizational procedures so that the organization can achieve long-term growth and improvement. In this respect, this perspective brings together measures that also may come under other perspectives. The goal of measurement here is to monitor how well the organization is building its infrastructure to facilitate learning and growth.

The authors divide the typical indicators under this perspective into three forms. There are indicators for people to monitor learning (e.g., employee satisfaction, retention rate, training, and skills); indicators for monitoring the IT system's efficiency, and provision of critical information to employees on the frontline to enable effective decision making; and indicators to monitor procedures to ensure that employees are motivated, empowered, and aligned with the organizational strategy.

It is interesting that under this perspective the authors focus on monitoring aspects that fall into the definition of human capital under the IC concept. The authors explain that under this perspective an organization can focus on development of its employees by identifying the core competencies the organization needs to meet its growth goals.

Is It Only a Control Panel of Measures? According to the BSC Collaborative, in 2001, 40 percent of Fortune 500 companies in the United States had adopted the BSC model.27 Despite its wide acceptance, the BSC model has been criticized on a number of grounds.

One criticism is the model's overreliance on measures. This is particularly true where measures are tied to employee evaluation and bonuses. Bonuses for branch managers of Citibank branches in California have been tied to BSC measures. The performance of each branch manager was evaluated as "below par," "par" or "above par," even though it is clearly stated in the company manual that lacking an objective indicator for people performance, evaluation and bonuses will be based on the subjective judgment of the branch manager's superior.

Pfeffer and Sutton warn against such practices, citing a similar BSC implementation at a financial institution where the superior's evaluation of branch managers was conducted through quarterly meetings where they merely sat down and talked for half an hour. A branch manager who trained his team members and helped them move up was evaluated as "par" because he failed to retain talent in his team. The branch manager was frustrated by the evaluation and could not understand how his performance could be evaluated as "par" when he was developing talent in the division as a whole. Such use of measurement has an adverse effect on employee morale, satisfaction, and loyalty. On a similar note, Sveiby expresses frustration with executives from the United States and Australia who approach him to implement his model to gain "control" of their employees.

Furthermore, overreliance on measures of any type in ICM hampers the application of tacit knowledge and wisdom. With heavily regulated measures, management is limited in its use of tacit knowledge, as it must justify its decisions by reference to measures. These problems can be avoided simply by not tying measures to performance, and by using measures as a guide rather than a straitjacket. However, problems with the BSC model go deeper.

Because the BSC model is not based on an IC model, it can be implemented under any business model. As such, it is based on the assumption that to enhance future performance in the new economy all an organization needs to do is to widen and balance its perspectives to include non-financial perspectives. Though useful in bringing some forms of IC to the attention of top management through the strategic planning phase, it fails to challenge or transform the underlying business management model. In that respect, the BSC model seems to be more suited to organizations that are not ready to transform the way they do business but still want to find a way to recognize and measure IC. It is important to understand that if the organization's business model accommodates the IC concept, then the BSC model is as good as any other IC measurement system. Otherwise, the traditional business management model of control will permeate the BSC model and eventually render it yet another control mechanism.

Another criticism of the BSC model, which applies to the other IC measurement systems as well, is its complexity and the time and cost required for its implementation compared to its "low ease of use."31 The complexity and difficulty lie in the choice of effective measures. Roos et al. explain that for performance measures to be effective they have to be reliable and consistent with the actions of the unit, and with the short- and long-term goals of the whole organization. Finding measures that are specific to the unit, yet general enough to reflect the strategy of the organization, and that incorporate long- and short-term views seems to be too optimistic. Consider the example of the branch manager discussed earlier; although he was losing talent on his team, he was developing human capital for other divisions, units, and the organization as a whole. This may be the reason the BSC model's authors stress the need to apply the model as a guide, not a full-blown plan.

Moreover, it may be a stretch to say that the BSC model creates an IC language in an organization. Even though it imparts IC jargon, its implementation does not require an underlying IC model. Challenging traditional business models and transforming an organization's understanding and resultant management of IC is what Sveiby sets out to achieve with his IAM model.