Wednesday, February 23, 2011

Developing and Applying Intellectual Capital is the Key to Creating Value

In our knowledge-based economy, effectively developing and applying intellectual capital is the key to creating value. One of the fundamental tenets of lean is the reduction of underutilized human potential. What exactly does this mean? Systems2win defines the underutilization of human potential elegantly:

Restricting employee's authority and responsibility to make routine decisions. Having highly paid staff do routine tasks that don't require their unique expertise. Not providing the business tools needed to perform and continuously improve each employee's assigned work. Not trusting your people to stop production to stop and fix a problem (jidoka). Not trusting your people to be responsible for the cleanliness, maintenance, and organization of their own work area. Not trusting people with a flat organization structure of largely self-directed teams. Not expecting (and measuring) every person to contribute to continuous improvement.
The intriguing concept in this statement is the inability to trust. This lack of trust speaks to the ecosystem of current organizational structures. Peter F. Drucker stated that the organization hierarchy in most organizations today developed as a result of World War II and the attempt to create efficiencies by structuring the firm like the military. While this organizational structure may have made sense 50 years ago, the command and control model is one which does not support the facilitation of human capital to better your organization. Through my research I would argue the military type structures in place today are ineffective in developing and applying intellectual capital and need to change.

Leveraging Knowledge
In my experience, about 80% of a company's knowledge is undocumented or unshared and thus lives in the tacit knowledge world while the remaining 20% of explicit knowledge lives in documents or procedures which in that are often ignored. Think about that ratio in terms of your organization. If you are only utilizing 20% of the knowledge of your employees, what is the opportunity cost to your firm for what you miss out of your intellectual capital? If 80% of your organization's capital resides in the knowledge of your workers, managers are hobbled in their ability to make decisions regarding how those assets are utilized.

CEO's are frequently asked "What is the most important asset to your organization?" The standard response is, "Our people." While this is often the general response, it is rarely true. When asked to further define why people are an organization’s most important asset, most managers will resort to primitive answers such as, "They make our products," or "Without them we can't do anything." While these responses are certainly correct, they are a subtle gauge of a lack of trust because they only refer to the physical output of the employee.

This line of thinking is not only broken, it's dangerous for the future of your organization. Regardless of your product or service, your greatest asset is your people; not in what they do but in what they know. Their intellectual capital (tacit knowledge) is something that can move you from being a good company to being a great company. With knowledge empowering people, your organization can develop products your competition simply can't given the same resources.

The failure to leverage employees’ knowledge creates the opposite result. We have seen companies falter when people retire from firms that have failed to create an environment of successful knowledge transfer.

Creating Transformation
This problem is not easy to tackle. How do you transform an organization with a culture that doesn't adequately value intellectual capital into one which lives off it? What components must be in place in order to facilitate this change? It starts with management. Once management truly supports an investment in intellectual capital, significant advances can be made by following a few recommendations. As with all change, these take time and effort but they can turn your organization into a world-class institution:

  1. As executives, dedicate yourselves to supporting substantial efforts to prevent lost knowledge but culturally and physically.
  2. Create a culture of lean which empowers knowledge workers. Empowerment is a book in itself but to create this environment you must create what Forrester calls HERO (highly empowered and resourceful operatives). Creating a process of improvement through value streaming and Kaizen where management recruits intellectual capital accepts the recommendations for change.
  3. Emphasize teamwork over teams. Teams refer to small groups of people working together toward a common purpose. Teamwork refers to an environment in the larger organization that creates and sustains relationships of trust, support, respect, independence and collaboration. Creating highly empowered teams that work without titles can create the shift of culture to one that prizes intellectual capital.
  4. Focus on knowledge capture and allowing knowledge transfer. Several methods can entice team members to transfer knowledge, including mentoring, paired teams, work shadowing and simulations.
Utilizing human potential is a complex topic. Although many organizations view capturing the remaining 80% of tacit knowledge as a lost cause, it is certainly worth the effort. In reality, most firms do little to try to capture and use their human potential. However, doing so can provide exponential returns and will enable your organization to achieve greater success with minimal additional resources. I encourage delving into some of the lean communities for more advice on how to utilize human potential within your organization.

Patrick Phillips and Jen Browne


  1. Thanks for your insights. I like the way you link lean and intellectual capital.

    I would like to challenge you with an expanded definition of IC--one that in addition to human capital, also includes relationship capital and structural knowledge.

    The advantages you mention of effectively tapping into the knowledge of people also extends to the knowledge of external relationships too--customers and partners are key sources of innovative thinking.

    Structural capital gets at the concept of operationalized knowledge which is at the core of lean thinking--how to convert the best of your human and relationship capital into shared work patterns and processes that help everyone work smarter.

    I find that helping organizations to see these three elements (people, relationships, process) as a system automatically gives human potential more value and respect because it becomes clear that the system won't work without constant infusions of human capital.

  2. Mary, this expanded definition of IC is excellent. Structural knowledge is certainly an idea that applies to creating value in an organization and one that deserves more attention in a future blog post.

    The concept of relationship capital is one I haven't explored fully but it seems very intuitive. With only a few minutes' thought I can identify several times that people within organization with which I work relied on relationship capital to move a project forward. I'm going to keep it on my radar over the next few weeks and note times that relationship capital is leveraged internally and externally by myself and my colleagues.


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