Business Benefits Beyond GIS
C. Warren Ferguson President and Chief Operating Officer Smallworld Systems, Inc. 5600 Greenwood Plaza Blvd. Suite 300 Englewood, CO 80111 USA phone 303-779-6980 fax 303-779-1051 email: cwferguson@smallworld-us.com
Introduction
AM/FM/GIS implementations that integrate complex applications with business processes, such as outage and network management, utility business geographies, or operational support systems, are applications of mainstream information technology. They produce great business benefits Beyond GIS. Intellectual capital (IC) accounting provides objective measures for valuing these benefits, many of which have been difficult to quantify with traditional accounting techniques and methodologies. IC is a rather new concept. Some call it “revolutionary.” IC was first documented in an article by Fortune editor Thomas A. Stewart, and was published in that magazine in early 1991. In 1997, two books entitled Intellectual Capital were published, one of which was authored by Stewart (1997). Leif Edvinsson, the Corporate Director of Intellectual Capital at Skandia ABS, and Michael S. Malone, a prominent business and high technology writer, co-authored the other book (1997). Both are excellent sources, and should be read for additional information on this topic. This paper follows two others written by this author for recent conferences (Ferguson, 1996; Ferguson, 1997). Intellectual Capital Described Intellectual capital is an economic product of the information age where knowledge and communication are the fundamental sources of wealth. It is a 1990s response to the increased value of intellectual assets within companies, corporations, and organizations throughout the world. Intellectual capital is intellectual material—knowledge, information, intellectual property, and experience—that can be used to create wealth. Another description of IC is the difference between a company’s balance sheet net worth and its market capitalization (the number of shares outstanding times the share price). While only a few corporate balance sheets presently record IC, knowledgeable market analysts treat non-financial performance data as leading indicators of future financial performance. While there are some differences in their definitions, Stewart (1997) and Edvinsson and Malone ( 1997) generally define IC as human capital plus customer capital plus structural capital.
Human Capital There is a huge amount of economic and management literature about human capital. The economic value of human capital does not need to be proved. It is common knowledge that people are our most important asset. Some employees are immensely valuable assets, but others are more costly. Robert Shiner of Yale University calculates that 72. 1% of U.S. household wealth consists of human capital. He defines it as the present value of expected lifetime earnings. We usually think of employees in terms of their pay. But what is their real value? How much is the job really worth? Consider a person earning $100,000 per year plus a 5% annual raise. If this person were run over by the proverbial bus and wanted to leave assets equal to the value of their career, they would have to leave $1.54 million of Treasury bonds at 6.5% for the heirs to receive an income of $100,000 per year. In 1996, AT&T downsized 40,000 people—a 4 to 8 billion dollar human capital write-off. This figure represented about one third of the company’s property plant and equipment at that time. Smart workers work smarter. In a 1995 report, the National Center on the Educational Quality of the Workforce showed that a 10% increase in the workforce education level led to an 8.6% gain in total productivity. By comparison, a 10’%increase in the value of equipment increased productivity by just 3.4%. The value of investing in human capital is nearly three times greater than the value of investing in machinery. Community is one element in building human capital. Communities of practice—safe places where people can share concepts about work, exchange tips, and generate ideas with the support of bosses and bureaucrats—are the best way to use the power of human knowledge and disseminate more information that is useful to the organization. Communities of practice are the shop floor of human capital. Very often a formal structure will erect learning barriers. Primary causes are a failure to use available knowledge, withholding important knowledge because of mistrust or conflicts between individuals or groups, holding discussions without key people, failure to heed important information from other sources, and failure to value divergent viewpoints. How can communities of practice be encouraged? Recognize them and their importance. Give them the resources they need. Customer Capital Customer capital, or the value of a company’s ongoing relationships with the people or organizations to whom it sells, is critically important. Cash flow starts with the customer. Measuring the strength and loyalty of customers is the primary challenge in assessing customer capital. Measures of satisfaction, longevity, price sensitivity, and the financial well-being of long-term customers are critical to the determination of customer capital. In spite of its obvious importance, customer capital is probably the most neglected of all intangible assets. Many organizations either do not know who their customers are, treat them as adversaries, or convey a “take it or leave it” arrogance. Mismanagement ,or worse, no management, of customer capital explains why U.S. companies typically lose half of their customers every five years. Today’s customers take charge. Modern electronic data interchange between customers and organizations provide customers with more information than ever before. Collaborative innovation between customers and organizations is mutually beneficial. Innovative customers who observe the organization’s corporate philosophy significantly increase their understanding of the market. For the organization, the challenge is to turn the customer’s elevated perceptions into customer capital. This requires organizations to respond and collaborate to meet the customer’s requirements. The more organizations understand about their customer’s business, the better they can serve the customer. Applying that principal in the area of intellectual capital results in learning the customer’s business and teaching them yours. The nature of most customer/organization relationships focuses on purchasing and sales. However, the relationship should resemble a diamond, where counterparts within both companies interact directly, adding value and synergy. This dynamic model elevates the relationship’s value exponentially, far beyond the sum of all the parts. Structural Capital The third category of IC is structural capital. Structural capital can be described as tools to augment the body of knowledge from human and customer capital by bringing relevant data or expertise to people when they need them. It includes such things as information technology systems, company images, proprietary databases, organizational concepts, and documentation. Structural capital is comprised of three types of capital. First, organizational capital is the investment in systems, tools, and operating philosophy that speeds the flow of knowledge throughout the organization. It is the systemized, packaged, and codified competence of the organization, as well as the systems for leveraging that capability. Second, innovation capital refers to renewal capability—the results of innovation in the form of protected commercial rights that can be used to create and rapidly bring new products and services to the market. Third, process capital is the work processes, techniques, and employee programs that augment and enhance the efficiency of production or delivery of services. It is the kind of practical knowledge used to continuously increase value. Open communication is essential. Knowledge-based companies cannot succeed if their intellectual capital is kept secret. In the past, security concerns dictated that access to information be restricted to people with a need to know. Today, information users should have reasonable access to data that can help them perform their jobs. Information shared broadly and fully throughout an organization, without filtering it through a hierarchy, empowers both managers and workers. With IC defined, the question of ownership arises. Organizations do not own human or customer capital. They either rent it or share its ownership with employees or customers. Only by recognizing this shared ownership can a company manage and profit from these assets. Structural capital, on the other hand, is owned by the organization. Paradoxically, it is what customers care the least about. Therefore, organizations should make it easy for their customers to work directly with its people. Business Benefits Beyond GIS Today, most utility organizations are in a hyper-competitive marketplace where customers take charge, competition is tougher, and change is constant. Customers are seeking business benefits Beyond GIS. Industry leaders are seeking to exploit GIS in ways that integrate complex applications with business processes, such as outage and network management, operational support systems, and utility business geographies. They are seeking productivity improvements from their staff, improved competitive performance, and the flexibility to succeed in the years ahead. The implementation of complex applications within the framework of new AM/FM/GIS technologies enables a simple information system architecture to provide a great benefit Beyond GIS. Some operational benefits include a single set of software tools to use and maintain; an enterprise data source that is created, maintained, and exploited by all staff members as they perform their daily work; a rapid application development and deployment environment; and seam less and easy to use applications. Techniques now exist for implementing near real-time operational systems within the AM/FM/GIS framework. Network management components like SCADA, outage and distribution management, and maintenance management, are closely linked with traditional AM/FM/GIS applications in the utility workflow process. There are substantial benefits when they are implemented in a common environment, thereby reducing redundancies in data capture and maintenance costs as well as greatly improving the workflow within the utility. Strategic investments in mainstream AM/FM/GIS technologies produce numerous intangible benefits, shaped largely from items that IC accounting tools and techniques can appropriately value. These benefits may be categorized as follows:
Again, it is easy to see that these factors consist of items with a large IC content and are best measured by IC indices or ratios. The next generation of AM/FM/GIS implementations can be a smart interface—an intelligent, sensing, perhaps even interactive, interface—between customer preferences and utility network operations. When this occurs, the IC content in the utility/customer relationship will dramatically increase. From the examples cited above, it is obvious that many benefits Beyond GIS are from AM/FM/GIS implementations that integrate complex applications with business processes. Customers and organizations are directly impacted in many and varied ways. The value of an investment in mainstream IT projects cannot be properly described without understanding their impact on an organization’s IC. Intellectual Capital Measures IC is most often measured or reported as an index or a ratio. Evidinsson and Malone identified over 300 indices or ratios that measure certain IC parameters, and others have identified many more. The indices or ratios tend to be one of four types: cumulative, competitive, comparative, or combined. Each must posses four inherent characteristics: relevance, precision, dimensionlessness, and measurability. For human capital, a few indices are: average years of professional experience; competence enhancing customer relationships; total years of technical expertise; average education level; efficiency; value added per expert; value added per employee;, expert turnover rates; expert seniority in years; and median age of all employees. For customer capital a few indices are: revenue growth in enhancing customer images;, changes in sales/customers; repeat orders; and the five largest customers’ percentages. For structural capital some indices are: IT investment percentage value added; organization enhancing customers; product R & D value added; total investment in organization percentage value added; change in the proportion of administrative staffi sales per administrative staff growth; administrative staff turnover; administrative staff seniority years; and the ratio of inexperienced employees. Will there be standardization in valuing IC investments? Probably. The FASB and the SEC in the U.S., Asia, and Latin America; and the Accounting Council of the EU in Europe, will not act quickly to standardize. Rather, as some IC theorists say, it is likely that some de facto standards will enable organizations to value their IC investment and the extent to which it:
It is not enough to have the three IC factors—human, customer and structural capital-in a stand-alone mode. They must compliment one another. At the intersection of the three factors lies the value platform-the primary source of value creation for an organization. Two equally important messages are embodied in this reality. The first is that corporate value does not arise directly from any of its IC factors, but from the interaction of all of them. Second, no matter how strong an organization is in one or two of these factors, if the third one is weak or misdirected, the organization has no potential to turn its IC into corporate value. For some organizations this is a frightening reality and a clear warning. IC Value of Business Benefits Beyond GIS The new measures of IC accounting provide techniques and methodologies to value business benefits Beyond GIS. Customers, as well as people throughout the organization, are directly impacted in many and varied ways when these complex applications are implemented within business processes. When the investment in these implementations results in improved productivity and greater organizational flexibility and competitiveness, a large portion of the investment value can be measured with IC accounting techniques and methodologies. Valid techniques can calculate the value of applying flexibility to a project. Flexibility, if it costs less than the project risks, can increase the value of an AM/FM/GIS project. Three of the many intangibles are: response to unanticipated events, general intangibles, and revenue generation. The value of responding to unanticipated events maybe large or small depending on the event. Today it is important to calculate the cost of not responding to unanticipated events. Investment analysis provides a structured, three-step quantification technique to convert general intangible benefits into measurable dollars. Once the benefits are identified, IC accounting techniques and methodologies can measure the value of intangibles through their ability to:
If Organization Intellectual Capital= i C, where C is some value of IC in dollars, and i is the organization’s coefficient of efficiency in using that IC. i, the organization’s coefficient of efficiency is defined to be the average of the individual efficiency indices. First we must choose appropriate measures. Edvisson and Malone cite an example where there are nine measures for an organization with an organization having $800 million in IC;
These measures yield an efficiency coefficient of i = 75.4% and result in an overall common IC measure for the organization of $603.2 million. A Beyond GIS implementation that integrates complex applications with business processes might make a difference in an organization’s IC. For example, a utility’s design, maintenance and outage application with work order generation could cause an increase in market share, satisfied customer index, leadership index, motivation index, performance/quality goals, employee retention, and administrative efficiency/revenues. These yield an efficiency coefficient of i = 79.1% and result in an overall common IC measure for the organization of $632.8 million, an increase in IC of $29.6 million (refer to the Beyond GIS index values in the third column above). This increase in IC value from business benefits Beyond GIS is an important element of a complete investment analysis. It might also be an essential part of justifying a Beyond GIS reengineering application project. Summary New AM/FM/GIS technologies enable complex applications to be integrated with business processes. This provides previously unattainable benefits to those who move Beyond GIS. These benefits include greater organizational flexibility and competitiveness, improved individual productivity, and stronger customer relationships. Intellectual capital accounting measures and provides values for many elements of this new benefit model for utilities and municipalities. Organizations that understand the benefits attainable and the intellectual capital accounting techniques and methodologies used to value these benefits, will use this knowledge to exploit their opportunities and provide their stakeholders with greater value. Their future will indeed be brighter. Referemces
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