Defining Intangible Capital

Intangible capital includes all the knowledge assets of an organization.

The study of intangibles emerged as a field in the 1990’s to explain the significant shift in our economy and businesses fueled by information technology. Today,  knowledge is the key source of competitive advantage in the global market. This shift reversed the historical pattern where tangibles made up 80% of  corporate value. Today, the exact opposite is true. Tangibles make up just 18% of corporate value and the remaining 82% is intangible.

How to describe this critical asset class? The field is still emerging and as such, there can be confusion about the meaning and usage of different words and phrases....

The terms intangible capital, intellectual capital, intangibles and intangible assets are often used interchangeably. Although we prefer the phrase “intangible capital” because it has a more precise definition (see below), “intangibles” is also frequently used. Below, for your reference, are some definitions of these and related terms:

INTANGIBLES/INTANGIBLE ASSETS

The roots of the concept of an “intangible” come from the field of accounting. Today's accounting standards were optimized during the industrial era and are designed to measure tangible infrastructure such as property, plant and equipment. These standards are not built to track today's infrastructure such as people, brands, knowledge and relationships. Today, roughly 80% of the value of today’s corporation is intangible (necessitating the need for ICountants to identify and measure intangibles).

INTANGIBLE CAPITAL (IC)*

This is a phrase and a concept that comes out of the study of intangibles in an organization. The field of IC has identified four main categories of knowledge intangibles, each of which has a different character. It is important to understand individual intangibles as well as how they work together as a whole:

  • Human Capital - This includes all the talent, competencies and experience of your employees and managers. This is the intangible capital that “goes home at night.”
  • Relationship Capital – This includes all key external relationships that drive your business, with customers, suppliers, partners, outsourcing and financing partners, to name a few. This kind of capital also includes organizational brand and reputation. Due to the growing importance of networks in organizational structures, this is also sometimes called Network Capital.
  • Structural Capital – This includes all knowledge that stays behind when your employees go home at the end of the day. There is significant structural capital in today’s organizations including recorded knowledge, processes, software and intellectual property.
  • Strategic Capital – This is a category that is not always included in academic definitions of IC. However, in our experience, this category of knowledge is the glue that holds the whole system together. It gives logic and purpose that attracts the right people, partners and knowledge to your organization--and puts it to work inside a business model that connects with a market need to generate the revenues and profits to sustain the organization. It includes culture, business model and external factors.

INTELLECTUAL PROPERTY (IP)

This is a specific asset class that is protected legally through copyrights, trademarks and patents. It is a subset of Structural Capital.

* We use intangible capital rather than intellectual capital for two reasons:

  1. People always confuse intellectual capital with intellectual property and
  2. Intellectual sounds too elitest–intangibles are real and practical so let’s not make them sound inaccessible. Every company has intangible capital and can benefit from identifying, measuring and managing it as well as possible.

 

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