Here’s the story told through the construction of a model of this knowledge factory using Legos. 

1. It started with the competencies of a couple students: advanced math and computer science (human capital), applied to the problem of Internet search.
2. The pair built a search engine which is basically a piece of software (structural capital) that determines the value of a webpage by the number and quality of links to the site. The quality of the links is also determined by number and quality of the links to the referring site. You can see how the solution counts all these links and the fact that this quickly becomes a very complex math problem. The wonderful side benefit to this design was that the more use the Internet got, the more links there were and the “smarter” the program became.
3. The quality of the search engine attracted more and more users (relationship capital) However, the users were not paying for the service. So Page and Brin had a wildly successful tool but they didn’t have a business.
4. They remedied that through the creation of another piece of software (structural capital) that enabled advertisers to send ads just to people that were searching for their kind of product. This piece of structural capital should be gold because it is how the factory is monetized.
5. Of course, the ad service attracted advertisers (relationship capital) and Google was now a business.
6. Over time, they added competencies and continued to improve the software. But it is essentially this basic business model that has pushed the Google search business over $20 billion by 2008.

You can see that all the different pieces of IC work together to make this business. And the pieces fit together as the infrastructure of this business. That’s why we call it a knowledge factory. Managing this business is about managing this knowledge factory.

A narrated version of the construction of this model, “You Can Grow Like Google is available on YouTube.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

One of the big reasons that folks don’t do more explicit thinking about intangible capital is that they have no frameworks or mental models about IC.

We see this disconnect in a lot of businesses. Just about every manager knows that our economy has shifted. They know that knowledge is an important driver of their company’s success. But very few have a vision of how to operationalize this understanding. We believe that visualization is an important first step.

We have struggled with the need for a good visual model of intangible capital over the last decade. Many approaches in use today use diagrams and flow charts to show how all the components of IC work together. But the truth is that there is no one way model that describes every business. that knowledge intangibles are put together in a company. In our client work, our writing and speaking and our continued research, we often help our clients create their own models.

Why do we put so much emphasis on a model? Because models, drawings, graphics are an important aid to clear thinking. They are the visual corollary to stories, which are another powerful form of communication. Every businessperson today is so overwhelmed with data and information that they easily lose sight of the big picture. Visuals help them see it.

We actually used guides on visualization and communication in developing this book. Two books influenced us. The first, Made to Stick by Dan and Chip Heath, helped us come up with the ideas for the ten chapters in this book—breaking down the elements of intangible capital into digestible concepts and making the connection between each and its knowledge-era equivalent. The second, Back of the Napkin by Dan Roam, helped us think about how to represent the elements of intangible capital in a visual way, a journey that eventually led us to the family room of our house and the tub of Lego blocks belonging to our two sons.

We began using the Legos when we were struggling to come up with a way to model a client’s business. We started using the physical bricks. Then we discovered that Lego also has a free drawing tool so now we also create pictures of the models. We start with a knowledge inventory, similar to the one described in Chapter 2. We use a worksheet to assign each of the items on the inventory to one of the four different shapes we have picked to represent the three traditional kinds of intangible capital plus one for products. The only color that has meaning is gold—it is used for any knowledge or product for which a company gets paid. Then we put them all together.

There are a couple ways to approach this:

• Start with competencies. Build the model from there, attaching processes to related competencies then adding relationships.
• Start with your revenue (gold) blocks. Link these with the processes, competencies and relationships together in a way that illustrates how work gets done.

As we work, we try to link related assets directly together. For example, unionized workers (human capital) should be connected to the union (relationship capital) as well as the processes that they support (structural capital). A product needs to be linked with all the processes that are needed to produce and distribute it.

When you are starting out, we recommend that you don’t focus on the support services that each of the businesses have such IT and human resources. Each of these could be modeled as well. One situation where you might want to model support services is when you are doing extensive outsourcing, so that you are clear where the knowledge for that function is coming from.

Over the next few days, we’ll run some examples of models of specific businesses.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

The modern knowledge business can also be understood as a factory, a place where the knowledge raw materials get put to work. This factory is where you create value for customers and make money. The story of the intangible economy is the story of organizing and running the knowledge factory in combination with physical processes.

The combination of all the intangibles in an organization is intangible capital (IC), sometimes also called intellectual capital. We see IC as a system which is what led us to the creation of the concept of the knowledge factory. By getting you to think of your knowledge assets—your intangible capital—as a factory, we want to get inside your head and change the way you think about your business—hopefully forever.

Don’t think about and manage human, relationship and structural capital as separate components. Manage them as a system. Think of yourself as head of the knowledge factory of your team, your division, your organization. Maximize the effectiveness of each by putting them to work in a powerful system that can’t be stopped.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

We learned about this last category of knowledge assets from our colleagues in Sweden, Henrik Martin and Peder Hofman-Bang. If you just look at the three traditional categories of knowledge assets—human, relationship and structural knowledge—you still haven’t addressed how this is a business. By adding this fourth category, you will be able to identify the shared knowledge, experience, and vision of the organization as it has been translated into a business model.

Business recipe is basically a combination of your market opportunity and your organization’s strategy to take advantage of that opportunity.

The viability of your market can be judged by traditional tools already in the hands of most businesspeople to analyze its size, outlook, segmentation and barriers to entry. The factors driving demand include customer needs and demographics, price and technological change.

Strategy is how you organize yourself to take advantage of the opportunity–a “knowledge factory” that creates value for your customers using your unique combination of human, relationship and structural capital.

This category is useful as a measuring stick for the rest of your IC–your goal must be to have the right IC to deliver on your business recipe.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

Most internal processes in today’s organizations already have been automated to one degree or other. There are software programs for accounting, enterprise resource management, risk management, human resources management, performance management, and many, many others. That doesn’t mean that this automation is complete. Quite to the contrary, companies at every level still have a multitude of opportunities to standardize, automate and optimize most internal processes in today’s organizations.

And there are also new horizons where automation has only just begun: backward through the supply chain and forward in customer-facing systems. Both of these directions will take companies outside their organizations—in tech terms, outside the firewall that protects internal systems from external threats. The growing importance of relationship capital to the overall success of an organization is driving these moves.

The kinds of reputational disasters that have happened at Nike, Mattel, and Kellogg were ultimately about poor process in these companies and in their suppliers’ companies. The suppliers should have had better quality controls and the multinationals should have had better audit and oversight processes to prevent these problems.

Some of the automation of the supply chain will have to come through cooperative industry efforts. The volume of transactions in the global supply chain has grown from $10 billion a day in the 1970’s to $10 billion a second today. Right now, each company keeps track of its own information flow. In one of the monthly conference calls that Mary hosts for the Intangible Asset Finance Society, Robert Rittereiser of Zhi Verden described his experiences in the 1970’s with the creation of a centralized clearing house on Wall Street when the volume of trades grew too large for the current system to handle. He predicted a similar approach in the future for global trading. 

The other horizon for new automation and processes is forward to the end user or customer. Two sources helped us understand this opportunity. The first was Lean Solutions, written by James P. Womack and Daniel T. Jones. These leaders in lean thinking cut their teeth in process improvement in a manufacturing setting. But in this book, they turn their sights on the customer experience, providing case studies of what it is like for you to get your car repaired, get a doctor’s appointment and buy electronics, among others. Their point is that most corporate improvement efforts have focused on the corporation and its cost structure. Cost and time in corporate processes have been eliminated by pushing them on what they describe as an already-overloaded consumer. The new frontier in their view is the customer’s experience and their cost (in terms of time, frustration and dollars) to do business with you.

The second was a presentation by Irving Wladawsky-Berger at the U.S. National Academies Conference on Intangible Assets in June, 2008 (by the way one of the first U.S. conferences on intangibles). Wladawsky-Berger, who works at IBM and MIT, pointed out that so much of the work in information technology done to date was in the back office, where you are dealing with machines and products (tangibles). Future work will be in market-facing solutions where you are dealing with people and services (intangibles)—a much more complex and dynamic task. Solutions here will include decision management, social networking and collaborative innovation.

Keep working to optimize your existing processes but don’t forget these important frontiers forward to your customers and backward to your suppliers.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

One support process that is newer and therefore less standardized is knowledge management (KM). This was actually one of the earliest solutions offered by the market in response to the rise of the knowledge economy. The message was simple: If we live in a knowledge economy, we need to manage knowledge. Software and consulting companies sold a lot of people on the concept of KM driven by a faith that if people in an organization could just have access to all the knowledge of their peers, everyone would be smarter and more effective. As often happens with new trends (which always walk the line of fads…) a lot of people thought that this single business function would provide the answer to management in the knowledge era. Check the box and you are a modern company. Of course, this faith was misplaced. This book is a testament to the fact that knowledge and the management of knowledge is about more than a software program.

But that does not mean that KM is irrelevant.It is actually an important tool and/or tactic that has relevance to almost every organization. The field of knowledge management continues to make contributions to the art and science of making vast amount of information available to users. There will be a need for experts that know how to create, organize and access the right data points from pools of knowledge. This aspect of KM will continue to be a discrete competency and should be operationalized into knowledge management processes within every organization.

Having said that, there are a few other points worth making. First, there are those who think that knowledge management will eventually be absorbed into all the other parts of the organization. This is an interesting argument. To us, it says that knowledge management will become a core competency of all knowledge workers. And that is true. All knowledge workers will have to develop a greater understanding of and take greater responsibility for the management of information and knowledge that they need in their work. Nevertheless, their organizations will have responsibility for building the systems and/or providing access to media that will facilitate their personal knowledge management.

Second, there are some that see social media as a replacement for KM. We think that, indeed, social media can and should replace some forms of knowledge management. In this view, social media can be seen as a tool for real-time knowledge access—when you have a question, you just put it out to the right network and chances are, you will get what you need.

This is yet another example of the top versus bottom dynamic in the knowledge era enterprise. The initial approach of knowledge management was a top-down initiative, creating the structure and then requesting (or mandating) participation. A great example of this is the management consulting firm McKinsey. Michael had a young colleague who worked at McKinsey after receiving his MBA in the early parts of the 2000s. He reported that a critical part of his job as a junior consultant was writing up information about projects so that it was available for everyone else in the firm. The motivating factor is for the junior person to get visibility for his or her work by those higher up in the organization. There is no doubt that this kind of system is created for and run from the top down. There continue to be systems run in this way.

However, there are many more examples about knowledge from the bottom-up. Some of the most striking stories come from the military, an organization traditionally associated with top-down command and control. The Army recently put a number of its field manuals on wikis open to anyone with access to the Army Internet system. This means that soldiers and officers from all levels can suggest changes to the manuals. The thought is that the best people to create manuals are those with experience on the ground. 

During the Iraq War, a number of dedicated social media sites have been created for soldiers. An example is companycommand.army.mil, a site for Company Commanders in the Army. This and similar sites provide a place for active soldiers and their leaders to share ideas, practices and tools. Here, the motivation is not to get attention from those higher up on the chain of command but, rather, to contribute to a conversation that helps the individual as well as helping his or her peers. In this case, the “knowledge management” is a bottoms-up, enthusiastic, and voluntary.

A hybrid of top down and bottom up is the Center from Army Lessons Learned (CALL) which is using Microsoft SharePoint to catalog insights and ideas from field personnel. However, most people in the field don’t have the time to record their ideas. So the Army created a team of 200 analysts to spend time in the field and identify ideas that should be shared in the CALL system.

There are pluses and minuses to both approaches (top down and bottom up)—and both will continue to play a part in KM in the future. The important thing in your own company is to ensure that there are platforms and systems that enable and encourage the sharing of knowledge. This knowledge is a rich raw material for performance and innovation.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak

Much of what is today views as “best practices” in management comes from the factories of the industrial era.

But today, a lot of process occurs inside of people’s heads, their computers and networks of computers spread across a building or across the globe. This kind of process can be harder to see and measure. The information gap begins from the initial investment, which is generally not tracked, all the way through to the end result. This lack of information keeps process off the radar of many critical stakeholders from Boards of Directors to investors and even, sometimes, a management team. Many knowledge processes, therefore, are done on an ad hoc basis with people reinventing the wheel every day, day after day, year after year.

We have experienced this gap in companies of all sizes. In one middle market commercial specialty contracting company, we found that every one of their staff members had to be an expert with extensive industry experience because there was no process supporting them. This kind of contractor knows a certain piece of the building trade such as electrical, plumbing or flooring. Success in this business requires excellence in estimating the job, buying the materials and supervising the labor. This company had grown to be one of the largest in the U.S. by hiring very experienced people. But so many of the details of the business were in the heads of their people. The bigger they got, the harder it got for individuals to remember everything. Each developed their rules of thumb for calculations and their own tracking systems. But each person’s rules of thumb were different. Further, no one had access to good information. This led to all kinds of mistakes and misunderstandings—and a volatile work environment. The company only brought us in as consultants when key people started to leave in frustration. It was slow and painful to get people to use common systems and institutionalize their collective knowledge. Key new processes were implemented. As with any company there are plenty more horizons for continuous improvement but they are now past the chaos that forced them to begin to institutionalize their processes.

We have also seen this problem in larger companies. While these may have many of their processes well-defined and institutionalized, there are often dramatic pockets where people do much of their work in their own way. One recent client had 70 people spread all across the country with only limited structural capital at their disposal—a CRM system and some marketing materials. In conversations with these people, it was clear they were looking for more “support” in the form of content and processes. Interestingly, their managers were hesitant to standardize work processes—they didn’t want to force everyone into a cookie-cutter approach. This is another good illustration of the top down/bottom up challenge facing managers of all kinds in the knowledge era. In this case, both management and employees came to see the value of creating shared content such as training materials and information systems that helped the field staff do their work more efficiently—while still leaving plenty of room for individual creativity and initiative.

It is important to note that knowledge processes and physical production processes are intersecting with greater frequency. This is because many of the marginal gains from manufacturing are now coming through automation of information or through adjustments to a process designed by employees who work on it. We have seen this in plant tours over the years. When we walk around a manufacturing plant today, most of the conversation is about how the workers organize their work teams and the flow of information. It is about the processes much more than it’s about the machines.

Another factor coming into play is the increasing rate of outsourcing. The more critical an outsourced process is to the operation of a company, the greater the need for deep understanding of the underlying process. The best kind of outsourcing is where the process and knowledge of the outsourcing company is combined with special knowledge of the company to which the process is outsourced. In the HP – UPS example cited in the last chapter, HP’s understanding of printer repair was supplemented by UPS’s logistical expertise.

Why do we call process a “superpower?” Because it is the most scalable forms of knowledge capital. Anytime that you capture the “best practices” of your organization in an automated process, you are making every employee smarter when they come to work in the morning. They do not have to think about how to solve the simple problems—because the solution is already built into the system. For example, in the specialty contracting business, standardized systems for pricing, product yields and pre-set assemblies of materials automate the estimating process. This frees the staff to think about the aspects of a project that are not standard—and how to protect the company in the structure of the bid. Then, the real opportunity comes when the information from the estimating system can be compared in real time to the actual results so there is a continuing loop of learning and improvement. Continuous use and adaptation of systems like this capture the wisdom and knowledge of each knowledgeable employee—and institutionalizes it in systems makes everyone smarter and more effective. Good systems also made it possible for people to back each other up.

Are your processes superpowers or are they ready for a tune up? It’s a question worth asking because the marginal cost of most fixes to process is very low compared with the potential return. Sounds like a good solution for any economy, especially today’s challenging one.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

Legal protection can create a significant competitive advantage, depending on the circumstances. This legal definition and protection can also create opportunities for licensing IP rights outside the corporation. This strategy is getting a lot more attention today from organizations, consultants and software companies.

However, legal protection processes can be expensive and legal protection in itself is not a guarantee of competitive advantage. So, while you want to consult a good attorney to get the intricacies of the law correct, you should also try to also seek the advice of someone that has a good grasp of the strategic role of IP. You want to make sure that you file for protection when it makes sense. This decision involves a cost-benefit analysis. Some of the factors to consider include the cost of filing, the risk of disclosing your invention (disclosure is the only way to identify the idea that your want to protect), the competitive benefit of having a protected idea and the monetary benefit of being able to enforce and/or license your rights to other. Once you win a right, there are the practical and logistical challenges of managing the rights you obtain.

But these special legal systems are not the only way to “protect” your intangible capital. Our friend, Jackie Hutter (she calls herself a “recovering patent attorney”), pointed out to us that contracts are actually one of the most important ways of protecting your intangible capital. Good management of contractual relationships can have a big influence in customer and partner relationships (relationship capital) as well as key employee relationships (human capital) and acquired knowledge (structural capital).

One of the main ways that intangible capital gets protected is through its association with a strong business model. This goes for IP as much as for other kinds of intangibles.
In fact, the power of each of the components of your intangible capital is increased when they are combined with other knowledge components. Intangibles are a great example of the saying that “the value of the whole is greater than the sum of the parts.”

While someone could steal or imitate specific aspects of your business, it is hard to duplicate the whole system. This is a major way that most companies attain and retain competitive advantage—and protect their IP. This is important to keep in mind because many in the IP community will try to tell you that the only intangibles of any value are IP assets. We strongly disagree, which is why we have taken so much time to explain all the elements of intangible capital.

We actually created a pretty big controversy when we drafted this content for our book. When we started out, we intended to define all structural knowledge as intellectual property. When we consulted colleagues in the business and legal communities on the draft, we got some strong support and some equally strong pushback. The conversation spilled over to Twitter and Mary’s blog which had a record number of comments on a post called, “What’s the right definition of intellectual property?”  The message that we wanted to communicate is that all intangibles are important and legal protection is just one of the strategies to protect your intangibles. However, it became clear to us that insistence on this definition was going to distract a lot of people from the core messages of this book. So we backed down.

So our advice is to leave the term intellectual property to the lawyers. But do not leave the protection of you intangible capital to just a legal strategy. Come to understand   and protect your intangible capital as a system. Remember the lesson of knowledge economics. The highest value knowledge is knowledge that has been operationalized, put to work. The way that this usually occurs is actually through the creation of processes.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak

This is all the knowledge that is captured and recorded in your company. This means that every product design, every process map, every training manual, every formula, every document, every email, every entry ever made in a knowledge management system is part of your organizational knowledge. It includes all the knowledge that is being captured from your human and relationship capital. And capturing it is an important first step to the process of leveraging it.

Another way to think about organizational knowledge is as your own knowledge products. Some of these products, such as white papers, may actually be created for external purposes. But the great majority of these knowledge products are created to support your internal operations for either value creation or support services. And it all melds together to form a package that is your company’s way of doing things.

We learned this lesson years ago, during the start-up phase of a project with a new client. As we spent time with staffers at all levels in this consulting and engineering company, we kept hearing a phrase over and over, “the way we do things.” We finally coined the term the “Intertech Way” as a catchall for this concept: the processes, the approach, the attitude, the know how and the systems that this company applied in everything they do. Over time, we helped the company make the Intertech Way more tangible and visible for staff as well as for clients. One of the offshoots was a giant process map that they put on the wall and used to explain their value-add to clients. After spending a couple hours talking through the process map, one prospect said, “I now understand that you know much more about this than we do and that will make you a good partner for us.”

So it pays to learn to catalog of all sorts of captured knowledge but also to see it as a system that makes you unique. Learn to see this as an internal resource and also a way of branding your organization.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.