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Intellectual capital is the magic: How are you managing yours?

March 15, 2022 - 17 min read

startup-team-meeting-intellectual-capital

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What is intellectual capital, and why is it important?

What are the 3 major categories of intellectual capital?

What are examples of intellectual capital?

How to measure intellectual capital

How to increase your intellectual capital

Intellectual capital versus human capital: what’s the difference?

Most leaders these days are aware of the importance of human capital. It’s the intangible value their employees contribute to their organization. 

But the most successful businesses are those that know how to leverage their intellectual capital. 

Intellectual capital is the total value of all of an organization’s intangible assets. It includes human capital but goes beyond it. It takes a holistic view of all the aspects of a business that give it a competitive advantage. 

This includes original data, customer satisfaction, employee experience, and internal processes and structures.

Companies that measure their intellectual capital can use it to: 

  • Create more value
  • Improve products and services
  • Drive sales and growth 
  • Increase efficiency
  • And, deepen customer and partner relationships

That last point is key. Managing intellectual capital well can actually create more intellectual capital. That makes you tough to compete against.

So let’s take a deep dive into what intellectual capital is, examples of intellectual capital, and how to increase your intellectual capital.

What is intellectual capital, and why is it important? 

Intellectual assets include:

  • Knowledge and skills of individual team members
  • Research and innovation capabilities
  • Organizational structure
  • Information systems
  • Training
  • Any other intellectual property created by the company

Intellectual capital also includes strong relationships with customers and strategic partnerships with other businesses.

It can also cover product development, any innovation or discovery made by the company, and any patents or copyrights that it owns.

Original research and investigations also contribute to a company's intellectual capital. So do any data generated by the research.

The impact of intellectual capital should not be underestimated. Understanding it can help you improve your human resources management.

It can inform your decision-making processes and help you create strategies that improve your business. Building intellectual capital can improve business performance by contributing to the knowledge economy.

Organizations can improve their intellectual capital by: 

What are the 3 major categories of intellectual capital?

Intellectual capital is broadly divided into three main categories:

  • Human capital
  • Relational capital
  • Structural capital

Let’s take a closer look at each one.

Human capital

Human capital refers to the value of the human resources within an organization. It includes all the skills, know-how, core competencies, and experience of each employee. This value isn’t reflected in the company’s balance sheet.

young-employees-speaking-in-meeting-intellectual-capital

Organizations with strong human capital management usually have high employee satisfaction and retention. They also tend to score high on employee experience.

Employee turnover causes the company to lose skills and knowledge. This decreases both its human and intellectual capital. Employee retention is therefore crucial for strengthening intellectual capital.

Performance reviews can help boost human capital, as they help identify skills gaps. They can then address those gaps through: 

Relational capital

Relational capital refers to the value of the relationships the organization has with:

  • Customers
  • Suppliers
  • Employees
  • Investors
  • Other actors in the sector, including its competitors

Customer capital falls under relational capital. It refers to the customer relationships and levels of satisfaction among existing customers.

Relational capital also refers to the company’s reputation among potential customers. It includes branding, brand awareness, and brand perception.

But relational capital doesn’t only refer to customers. It also includes the company's reputation among investors, stakeholders, suppliers, and competitors.

Structural capital

Structural capital refers to the organizational structures and systems for the management of:

  • Employees
  • Assets
  • Finances
  • Products and services
  • Customers
  • Suppliers

Structural capital is the behind-the-scenes stuff that is the secret of a truly successful business.

This includes its:

  • Policies and processes
  • Vision
  • Mission
  • Value statement
  • Company culture
  • HR management
  • Financial management
  • Tools
  • Ways of working
  • Best practices

What are examples of intellectual capital? 

Since intellectual capital is intangible, you might be wondering what actually classifies as intellectual capital. So let’s take a look at a few examples for each component of intellectual capital.

Human capital examples

Examples of human capital include the most in-demand skills in a given industry. They include technical skills, soft skills, and personal attributes. 

Examples of technical skills include:

  • Software development
  • Project management
  • Marketing
  • Coding
  • Sales
  • UX design
  • Artificial intelligence and machine learning
  • Social media management
  • Healthcare
  • Video and audio editing
  • Software development

Examples of soft skills include:

Personal attributes include: 

Relational capital examples

Relational capital refers to the network of employees, leaders, and external stakeholders that enables an organization to carry out its work. This includes external partners and anyone who makes the company’s work possible. 

For example, the relational capital of a legal firm may comprise:

  • Attorneys
  • Clients
  • Employees
  • Leadership team
  • Board members
  • Referral partners
  • Intermediaries
  • Suppliers

lawyer-speaking-to-her-client-intellectual-capital

Whereas the relational capital of a PR agency may comprise:

  • Creative team
  • Sales team
  • Clients
  • Leadership team
  • Media partners
  • Journalists
  • Sector experts
  • Audio-visual production companies
  • Suppliers

Relational capital also includes brand awareness. This means that all branding, marketing, and advertising form part of a company’s relational capital. 

Structural capital examples

Structural capital is unique to each organization and will depend on the sector it’s in. For example, the structural capital of a construction company may include:

  • Buildings such as office buildings and warehouses
  • Safety regulations
  • Employee code of conduct
  • Pay structure
  • Employee training and manuals
  • Database of customers
  • Database of suppliers
  • Processes for receiving and fulfilling orders
  • Client contract templates
  • Tools and machinery
  • Trade secrets or proprietary methods
  • Automations

How to measure intellectual capital

Intellectual capital is not easy to determine just by looking at financial statements or a company’s balance sheets. 

Since it’s intangible, there’s no set way to measure it. However, three main methods are generally used.

1. The balanced scorecard method

The balanced scorecard aims to help you see which of four key areas are out of balance in your business.

They are:

  • Customer perspective: how do your customers see you?
  • Internal perspective: what are your strengths? What do you excel at?
  • Innovation and learning perspective: where can you continue to grow and improve? Where are you falling short?
  • Financial perspective: are you fulfilling your commitments to shareholders?

This simple methodology can help leaders get a detailed overview without information overload.

2. The Skandia Navigator 

The Skandia Navigator method consists of a series of markers. Together, they give a holistic overview of an organization’s performance. 

There are five areas of focus that make up the Skandia Navigator.

Financial focus: this takes into account the financial health of the organization. If profitability and growth are high, it’s a good indicator for intellectual capital.

Customer focus: this includes customer satisfaction levels and churn rates. For example, if most of your sales are coming from new rather than returning customers, you may need to improve your customer experience.

Process focus: this looks at the efficiency and effectiveness of internal processes and procedures. 

Renewal and development focus: this area focuses on long-term strategy and sustainability.

Human focus: this focus is at the center of all the others. It takes into account employees’ knowledge and skills and looks at employee experience and well-being.

happy-employee-in-video-conference-intellectual-capital

3. Market value-to-book value ratio 

The market value-to-book value ratio is a valuation method of intellectual capital. It is calculated by comparing a company’s book value with its market value. 

This ratio helps to identify undervalued or overvalued assets. It determines the company's actual value, which may be different from the market value. 

If the ratio is above one, you may have undervalued assets in intellectual capital that you can use to make your business more competitive. 

If it’s lower than one, it may mean you’re overvaluing your intellectual capital and need to take action to see where you can strengthen it.

How to increase your intellectual capital 

If you’re ready to increase your intellectual capital, apply the following tips:

  • Hire employees with specific skillsets that you’re lacking.
  • Improve your employee experience and decrease turnover. By improving your employer branding, you can attract and keep talent.
  • Invest in training and development.
  • Improve your systems and processes. Audit your systems to see what can be improved
  • Strengthen your branding.
  • Gather data. Carry out original research and investigations
  • Innovate. Create new products and get patents

Intellectual capital versus human capital: what’s the difference?

Human capital is a subset of intellectual capital, along with relational capital and structural capital. 

Other subsets of intellectual capital include information capital, instructional capital, and brand awareness. 

Let’s take a look at each to understand how they differ from intellectual capital.

Human capital

We’ve already discussed human capital, but let’s explore it in more detail.

Human capital refers to the total economic value of an organization’s employees. The longer an employee stays in a company, the greater the value they add by gaining more skills and competencies. 

It consists of the technical and soft skills and personal attributes mentioned above. These include communication and problem-solving skills, but also mental fitness and physical health.

Just as human capital can increase, it can also decrease. For example, if a colleague falls ill and has a lot of sick days, the value they add to the organization will decrease. 

Similarly, if an employee doesn’t consistently prioritize self-directed learning, their skills may no longer be relevant or up-to-date after a period of time. They will therefore contribute less value to the company.

Information capital

Information capital refers to the intrinsic value of information. This might be data regarding your customers or performance. It could also be information about market trends or competitors.

It's a vague concept. But information capital includes all the information that an organization has access to. This information can contribute to the achievement of its goals.

big-data-analyst-working-intellectual-capital

Instructional capital

Instructional capital refers to the value generated by investing in training and development. Training, learning, and development all fall under instructional capital. 

Instructional capital can add value to your organization by increasing employees' knowledge. This increases human capital.

Brand awareness

How your brand is perceived by consumers is of utmost importance to your business. With low brand awareness or a poor brand image, it will be difficult to grow. Increasing brand awareness can increase your intellectual capital.

Build your intellectual capital for business success 

Correct management of intellectual capital can make your business more efficient and competitive. 

Ultimately, improving and managing your intellectual capital will boost sales while driving down overheads.

If you need support in harnessing your intellectual capital, request a demo with BetterUp. We specialize in helping businesses optimize their processes and employee experience for maximum results.

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Published March 15, 2022

Maggie Wooll

Managing Editor

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