Intellectual Capital

Intellectual Capital is the knowledge of an organization's human resources that can be used for money-making or any other information or knowledge that provides the organization with a competitive advantage. In other words, it is an asset of the company as it is the informational resource that the company can use to make profits, attract customers, create a new product, enhance existing products, or improve business.

Intellectual capital investments account for a significant part of the organization’s valuation. The contribution towards the growth of the organization comes from the expertise and knowledge of its workforce, the systems and patents, and the relationship with customers and suppliers. It is identified by subtracting the fair value of the company from the total purchase price of its net identifiable assets.

Intellectual capital is considered a business asset as any organization contributes to employee training, boosts customers relationship, product development, goodwill building, etc. it includes human capital, relational capital, structural capital, intellectual property, know-how, copyrights, patents, or any other information or resources that give a competitive advantage. It isn't easy to measure only goodwill, patents, and copyright to be recognized. If quantifiable, all rest are difficult to measure and hence cannot be recognized in the accounts.

Therefore, Intellectual Capital is the capital that adds to the wealth of the organization. It includes relational capital, human capital, and structural capital. All the things or procedures that add to the competitive advantage and can be used to create money can be added to the company's intellectual capital. It is the real wealth of an organization in terms of name, fame, values, etc.

Let us understand the components with the intellectual capital examples for better understanding of the concept.

#1 - Human Capital

Human capital includes employees, their knowledge and experience, the organization's relationship with employees, employee training and appraisal, employee satisfaction, employee review of the organization, etc., which all contribute to the organization's capital. If an organization has a lower employee turnover rate, there are chances of high intellectual capital.

Example - Leadership and managerial skills, key employees and their knowledge, professional abilities, work ethics, and work culture, employee training, etc.

#2 - Relational Capital

Relational capital includes the organization's relationship with employees, its investors, its customers, its suppliers, etc. review of all investors, customers, suppliers, and employees. Feedback also matters, and ways of improving and developing contribute to relational capital. For example, an organization with low employee turnover, honest customers, etc., has a high intellectual capital base.

Example - Customer satisfaction, relationship with employees, customers and stakeholders, contracts with service providers, reputation in the community, investor feedback rating, etc.

#3 - Structural Capital

It is organization processes, databases, policies, culture, vision, mission and value statement, etc., that contribute to the organization's capital. For example, if the organization's work culture is good, it provides quality products, its reputation in the market, its competitive advantage, etc., are real intellectual capital for the organization.

Example - Vision, Mission, Structures, goals of the organization, its work culture, its approach towards employees training and providing knowledge, its tools, programs ways of working, and best practices.

For a company like Infosys, its employees working with them, work culture, client and investor relationships, key employees, training process, its reputation in the industry, its work culture, vision, mission and values, databases, the experience of employees and management are the intellectual capital.

Similarly, SONY is known for its quality products, so the main intellectual asset for Sony is its quality services and reputation in the market.

An organization’s Intellectual capital investments constitute a fair value of its net worth. However, it might be tricky to identify and measure the value it adds to the company’s worth. Let us understand how to measure through the discussion below.

• Measurement of intellectual capital is difficult in financial terms; hence, recognizing it can be difficult. Only recognizing goodwill, know-how, copyrights, patents, etc., in the accounts make them measurable.
• It is non-financial capital and very important for the organization, and it's the real wealth of the organization. Though measurement in financial terms is difficult, it is of much value in non-financial terms and real wealth. If the organization has satisfied employees, investors, and customers, then it is the real wealth of the organization and an indicator that its intellectual capital is high.

Let us understand the importance of intellectual capital investments through the discussion below.

• Intellectual capital is all that the organization has at its disposal, i.e., if the organization has nothing in terms of financial terms, its non-financial capital can revive the business by applying the knowledge, developing new products, creating new customers, and all other information that can contribute and give competitive advantage and gives the addition in terms of intellectual capital. It is most important for any organization as it's the real capital and worth of the company through which the company can also restart at zero.
• It adds to the reputation of the organization in the market. Hence it is most important for the survival of the organization. For making an organization at the top, there is the contribution of human efforts like employees, management, suppliers, customers, etc. There is also the contribution of work culture, the organization's relationship with internal and external human contributors, relationship with investors, goals, and vision of the organization, etc. If all these factors are favorable, then the organization can survive in the market for many decades also, and hence it has very high intellectual capital.