You Think Your Company's So Smart? Prove It
By Thomas A. Stewart

(FORTUNE Magazine) – A whole lot of people are monkeying with accounting to uncover ways to measure--and so to manage--knowledge assets (see "Accounting Gets Radical" in the fortune.com archive). But some of the coolest work is nonfinancial--designed not so much for reporting to shareholders as for helping managers improve their businesses. A new idea I particularly like comes out of an advertising agency: Bates Gruppen, the Norwegian arm of Bates Worldwide, part of giant Cordiant Communications Group.

Ad agencies are in the business of intangible assets--brand equity especially--which partly explains why Bates, Norway's second-biggest shop, got onto the subject. Bates also wanted to manage itself better. Says Jan Blichfeldt, a director of the company: "The only capital we have is intellectual capital--we need to learn about it."

Bates calls its measurement system CompanyIQ. What makes it ingenious is its ability to score a company's knowledge assets against those of other companies. Here's how it works.

Step No. 1: Identify why people buy from you rather than from a rival. In a daylong workshop, management selects eight, ten, a dozen attributes--items like rapid response, breadth of product line, innovativeness, good design. The list goes to employees and customers, who rate each attribute twice--for its value to customers and for uniqueness (how different it is from competitors')--on a scale of one to seven. When the results are in, the attributes are dealt into the quadrants of a standard two-by-two chart, with value on one axis, uniqueness on the other. Three or four items may make it into the upper-right quadrant. These are what management, employees, and customers agree are your company's highly valuable, unique capabilities. Says Bastian Lie-Nielsen, a strategy consultant at Bates: "That by itself is an eye opener."

Step No. 2: Find the capabilities--intellectual assets--that produce those advantages. Bates uses the standard scheme of saying that intellectual capital comprises human capital (talent), structural capital (knowledge artifacts like intellectual property, methodologies, and software), and customer capital (client relationships). Every company has all three, but emphases differ. A three-star restaurant emphasizes the chef's human capital; Burger King relies on the structural capital of recipes and processes; a local diner thrives thanks to customer capital--the waitress who calls you "Hon" and knows you like your coffee with milk, no sugar.

Management returns to a workshop. Using a list Bates developed--and concocting items of its own--it compiles a set of about 100 knowledge assets, divided roughly equally among human, structural, and customer capital. All must be measurable, either in absolute terms (such as training expenses) or on a scale (say, for customer satisfaction). All should relate to the core advantages uncovered earlier; if response time is key for you, measure attributes having to do with speed. And at least 60% of the items must be comparable, apples to apples, to data from reputable benchmarking studies or from the PIMS database.

PIMS (profit impact of market strategy) began at General Electric in the 1960s when GE was studying how to manage its portfolio of businesses. Now owned by PIMS-Europe in London, it's a repository of data on quality, pricing, innovation, advertising, R&D, and so on from thousands of companies. PIMS didn't set out to gather info on human, structural, and customer capital, but much of what it has can be put into those categories.

Step No. 3: Calculate your CompanyIQ. To do this, scores on the 100 measurements must first be weighted (for relative impact on profitability, a figure PIMS produces), then compared with similar companies in the database. As with IQ, Bates pegs the median at 100. If you're above the median, you'll get a CompanyIQ of, say, 112. That's what Bates got for one of its divisions, Bates Design.

Once you have your score, you can look inside it for strengths and weaknesses. Bates Design's IQ, for example, was strongest in human capital, weakest in structural capital. "We were very dependent on a few stars," says Lie-Nielsen. That led to various decisions--most important, to increase structural capital by working with the star performers to see if some of their skills could be distilled into processes others could use.

CompanyIQ is now being beta-tested, so to speak, by a consortium of eight Scandinavian companies. Its virtues seem evident. It requires top management participation but won't tie the company in knots for months. It uses company-specific data yet produces results that can be compared with reliable numbers from a broad range of companies. And it gives a clear link to follow-up management actions. The real test, of course, will be to see how brainpower and bankroll match up. "If you're so smart, why ain't you rich?" is not a taunt that CEOs want to hear.

FEEDBACK: tstewart@fortunemail.com