Intellectual Capital at Skandia

Maylun Bucklew
Ernst & Young Center for Information Technology and
Strategy
Leif Edvinsson, Skandia AFS

The Hidden Value of Companies

The "dawning of new insight" has struck executives after they have spent a decade
running companies based on bottomline. Executives are rethinking quality management,
core competencies, and the value of employees, their knowledge, and experience on the
job. This profile looks at what Skandia, an international, knowledge intensive company,
has done since 1991 to highlight the hidden value of a company. Skandia uses, in
addition to the standard book value of the official balance sheet, a new systematised
approach to make tangible these hidden values. Factors such as competence base and well
managed performance procedures contribute to the total value of a company. Competence
base is defined as employees' professional insights, applied experience, and
organisational learning. Performance procedures are defined as how customers are
handled, and how the operations, processes, business development and logistics are
conducted. The more knowledge intensive a company is, the more important are these
soft dimensions.

Skandia and its Growth

Skandia, a multinational insurance and financial services company, is based in

Stockholm, Sweden. In 1855, Skandia was founded as an international insurance
company. In 1900, Skandia was the first non-British reinsurer to have a New York office.
Today, five divisions comprise Skandia: Skandia Norden, Direct Insurance Nonlife,
Assurance and Financial Services, Skandia Investment Management, and Reinsurance.
Employing approximately 11,000 people worldwide, Skandia has total assets of $35
billion.

Assurance and Financial Services, AFS is the division with which this profile is
concerned. AFS addresses individual clients' financial well being through programs of
long-term savings solutions. The most rapidly growing division within Skandia, AFS has
grown swiftly more than 30% annually during the last six years. Spanning 10 countries
with 1200 employees and actively engaging more than 12.000 brokers, AFS takes care of
almost 500.000 customers. True of most growth companies, Skandia is interested in
attracting investors, and in having current as well as prospective investors understand and
recognize the full value of the company.
While most companies appoint directors of finance and operations and focus company
valuation on finance and operations, they lack a function to deal with hidden values. To
address this, AFS created a position that focuses on developing and applying a systematic
approach to hidden values. It has a director of intellectual capital. The mission of this
function is to identify and improve the visibility of intangible and non material items, to
capture and package these items for transfer to users, to cultivate and develop these items
through training and knowledge networking, and to capitalize and economize on these
items through rapid recycling of knowledge and increased commercialization.

The Director of Intellectual Capital at Skandia AFS, Leif Edvinsson, reports to the Chief
Operating Officer of the AFS division and is a member of the COO team. Charged with
enhancing and systematically developing the intellectual capital of the division, Leif
Edvinsson works through project teams. He faces the challenge of leveraging work
related to intellectual capital through other functions such as human resources,
information technology, and business development.

With this approach, AFS is trying to build more than a "learning organization." AFS
strives for an "intelligent organization." This is a dynamic learning and teaching
organization that continuously renews its performance. Critical for this development is a
federated global organization with competencies and alliances built on intellectual
capital, information technology, and leadership around core cultural values.

Describing Intellectual Capital

Leif Edvinsson uses the metaphor of a tree to describe hidden value. "Hidden value," he
says, "is the root system for the tree." In order for it to flourish and bear fruit, the tree
must have healthy, strong roots to provide the nutrients and nourishment necessary for its
growth and production of fruit The quality of the fruit, which you can see, is dependent
on the roots, which you cannot see. The same goes for financial capital. To get it to
flourish, you must cultivate the roots. In effect, this search for new indicators in the
knowledge area turns traditional bottom line accounting upside down. Since Leif has
been director, recognition of the importance of hidden values and their systematic
management has increased within Skandia and AFS.

To demonstrate what intellectual capital is, take the following example. A software
company has a value 15 times greater than the published book value. This greater value
goes beyond the finite software products delivered. The accounting gap is due to
unaccounted factors such as the millions of customers, intensive research and
development, a strong market position, company brand name, etc. Very detailed financial
accounting exists for the sales of software products. Rare, however, is any systematic
accounting for the hidden value of customer bases, knowledge levels of people,
replacement costs of information technology systems, and the return on investment for
training and development. Each employee comes equipped with his/her unique set of
experiences, education, background, skills, and outside interests that amplify intelligence
and combine knowledge. This set is called a competence base. What does not appear in
the book value is the inherent value of the existing people, their bright ideas and
competence bases, the systems, the organizational infrastructure, R & D portfolios, and
customer base.

As another example, consider a film processing company. Once a chemically based

operation, the company has had to transform its operations to use computer technology
and electronic processing to stay competitive. This has caused the company to shift its
competence base from chemistry to electronics. Such a shift is costly and not positively
reflected in traditional accounting procedures. In fact, the valuation of the company may
even decrease with current accounting practices. The costs of replacing staff, developing
or acquiring new talent to accommodate and support the shift, maintaining that talent, and
transferring the knowledge are significant. However, in terms of the company's future in
image and film processing industry, such costs are necessary and positive to the well
being of the company.

What led AFS to the concept of intellectual capital is the concern with speed of learning,
recycling of applied experience, and international transfer of skill. Ironically, intellectual
capital is invaluable to a company, and yet is assigned no value. Intellectual capital is the
essential root system of companies but is often invisible in the accounting systems. Such
systems show historical statistics. Intellectual capital indicates the future. Traditional
systems seldom account for and measure the worth of concepts, competence, and
innovation. AFS, therefore, is consciously making sure that the transfer of skills,
learning, and experience takes place through the procedures it puts in place. However,
managing intellectual capital is cross-functional. It is a combination of human resources
development, business development and strategy, and information technology
development. So, to reveal hidden value, AFS defines what performance items must be
measured and how those items can be made tangible. Through this process, intellectual
capital is transformed into added value.

Promoting Intellectual Capital

How does Mr. Edvinsson spend time as the Director of Intellectual Capital? Initially,
much time was spent developing a language, or taxonomy, to increase awareness and
share insights on the four functions of intellectual capital development. These functions
are: to identify, capture, cultivate, and capitalize on intellectual capital. As part of his
responsibility, Mr. Edvinsson meets with colleagues to do "missioning". A portion of his
time is spent implementing information technology with the systems group for
knowledge networking. This means communication technology is used to knit together
employees and give them access to knowledge inside and outside the company. To refine
company culture, cultivate core values, and channel leadership, he cooperates with
human resources. With people in accounting& he works to develop ways to measure
hidden value and create intellectual capital ratios. And to initiate and implement projects,
programs, and joint activities that will add to the business of AFS, he works with
operating units. Another important role for the Director is to make people within and
outside of Skandia aware of the hidden value of AFS, and engender cooperation for joint
business growth beyond the published book value. A primary focus is to identify and
measure, or "map," critical intellectual capital items within each operating unit of AFS.
Through this, the importance of information technology (IT) in developing intellectual
capital has become evident

Measuring Intellectual Capital

Skandia has started to describe intellectual capital through measurement of new

indicators. Periodically, a balance scorecard for measuring performance on financial
capital and various intellectual capital dimensions is presented to Skandia management.
To define what to measure, each of the operating units of Skandia (located in the U.S.,
England, Columbia, Spain, Germany, and Switzerland) identified the five most relevant
and critical intellectual capital items for itself, using a proprietary list of over 30
intellectual capital items. Identification was done through dialogue with local
management. From these sets of the five most relevant and critical items, a set of three
major intellectual capital dimensions (or categories) was derived. These are customer
capital ratios, human capital ratios, and structural capital ratios. Within each of these
dimensions, a number of intellectual capital ratios can be defined. Each intellectual
capital item was discussed with management and accounting to establish a baseline ratio.

As an example, suppose the number of existing customer accounts is one ratio for which
a baseline is established. That ratio can be used to measure how well the business is
doing in terms of that intellectual capital item. We would score the number of new
customer accounts or the growth per account. This number would be compared with the
strategic goal, and then, we would look at the effect on the business by examining the
profit per customer. By computing the ratio periodically, a performance controller or
manager can plot the trend of the ratio and determine what intellectual capital factors
should be focused on and changed in the business to improve the performance of the
company.

In the interest of intellectual capital AFS invests in training and development of its
employees, places value on their applied experience and competence, and seeks
crossfertilization within the organization. Such cross-fertilization adds to another critical
ratio, innovation and development. This is one of the most important ratios to follow for
the future value of a company.

This procedure produces more balanced reporting through the addition of intellectual
capital items to traditional financial ones. Such reporting leads to more systematic
management of hidden values. To sum up, this whole intellectual capital and hidden
value pursuit is very much a pedagogical one. The hidden value of the company, which is
not shown in traditional accounting is articulated and made tangible to provide deeper
insight into future growth. The mission is to reveal hidden values which are strategic to
the company's future, in order to fertilize continued growth of AFS. Transnational and
global development of AFS as an entity is heavily based on further development of
concepts, systems, competencies, alliances, customer bases, and organizational issues,
and on packaging and dissemination of nonmaterial values throughout AFS. The speed of
development relies on linking human capital to structural capital. This calls for
systematic management of human and structural capital.
Intellectual capital managed this way also cultivates investors' relationships. The first
time information about intellectual capital values was presented, verbally, was in the
1992 Skandia annual report. Now, such information supplements are provided quarterly
as a number of balanced performance indicators for AFS. These supplements also serves
to deepen the perspectives of analysts and investors.

Costs and Gains from Intellectual Capital

The intellectual capital effort is expected to save a significant amount of money over
time. By using the prototyping process, AFS has reduced startup time for a new office by
one third or more. For a 30% growth rate in new businesses, this amounts to sizable
savings. In the area of competence development, the computer based training and
network are expected to reduce traveling and expenditures for training. The savings each
year are projected to be several times the cost of developing the systems. Other major
gains are increased speed of strategic learning, systematic focusing of leadership, and
increases in valuation of the company over the book value.

The Reach on to Intellectual Capital

Externally and internally, reactions to intellectual capital have been very good. Senior
managers have been very supportive. They agree with the concept, appreciate the new
insights, and promote key activities related to intellectual capital. Middle managers have
also been supportive. They have experienced a growing need for a formal approach to
intellectual capital issues in recent years. Frontline staff and the union agree with the
concept and actively participate.

Many people still mistakenly view intellectual capital as a resurrection of human resource
accounting of companies. Twenty years ago, European companies tried to establish
connected audit systems to monitor training and people's attitudes, behavior, and
performance. Eventually, the effort was abandoned. In contrast, the intellectual capital
approach covers both human and structural capital, joining them together for more rapid
growth.

The Importance of Intellectual Capital

Systematic treatment of intellectual capital at AFS highlights how important intellectual

capital is. Company value depends on and includes the total worth of individuals plus
company structure. That worth encompasses the knowledge, skills, and in house
experience of each person, as well as the shared knowledge, skills and experience of all
employees combined, and the organizational procedures followed in the business. That
worth is dynamic and difficult to measure. AFS, however, has started to articulate and
make tangible, ratios for systematic management of these factors. For AFS, intellectual
capital increases company value and makes business operations more efficient. AFS is
showing investors that the value of a company is dynamic and is more than just hard
financial ratios.
In addition, the sharing of competencies requires management of information.
Information management and intellectual capital are, therefore, related. Intellectual
capital at AFS involves human resources, information technology, business strategy, and
the participation of employees, in order to rapidly transfer experience in the company. It
is energizing and charging both the national and transnational operations at AFS.

To get people to share competencies, a company must facilitate exchange of knowledge

among employees. The company must inform people of intelligence that is available,
make people and intelligence accessible, and train everyone to use the information and
any supporting technology.

AFS has developed vehicles to do this, using technology when appropriate. The
technology and its degree of sophistication are less important than the organizational
intelligence and competence of the employees. Leadership and organizational design are
crucial to this process.

Measuring and valuing intellectual capital, as AFS does, promotes strategic

organizational learning and teaching, and a balanced management focus on hidden values
which encourages organizational survival. Intellectual capital gives sharing of knowledge
legitimacy, establishes the worth of competence in a company, and places value on
combined and individual silos and experience of coworkers. Intellectual capital is
invaluable and intangible. However, it manifests itself in business through productive,
consistent, and efficient operations, and management that adds value. Leadership must
focus on linking human capital to structural capital and producing sustained value. The
ultimate target is to transform IQ into ECU (European Currency Units). In other words,
the gray cells and intelligence are translated into hard currency.