Knowledge capital.

CEOS TODAY REALIZE THAT CORPORATE ASSETS INCLUDE MORE THAN CAPITAL, PROPERTY, TECHNOLOGY, AND PERSONNEL INCREASINGLY, THE VALUE-ADDED ADVANTAGE OF A COMPANY ISN'T WHAT IT MAKES BUT WHAT IT KNOWS. THE QUESTION IS, ARE CEOS READY TO REMAKE THEIR ORGANIZATIONS INTO KNOWLEDGE-CENTERED ENTERPRISES? ROUNDTABLE CEOS HERE EXPLORE THE STEPS TO TAKE.

That we are witnessing a traumatic change in the structure of competition is conceded by nearly everyone. Companies that once dominated their industries, such as IBM and GM, have had to reassess and regroup after falling from their perch. Thus far, others, such as GE, Gillette, HP in the U.S., and ABB in Europe, have been able to reinvent themselves either wholesale or by degrees to take advantage of an increasingly critical asset: knowledge.

Over the last 10 years, the basis of competitive advantage has shifted toward how well expertise and information can be focused on reducing costs and speeding products and services to market. According to Harvard Business School's Christopher Bartlett, commenting at a Strategic Leadership Forum colloquium, "The strategic decisions made at the top were increasingly separated from where the real knowledge and expertise resided in the organization." The varied nature of front-line operations made it difficult for senior management to understand what was going on with certainty. As external market conditions changed at rapid rates, over time the expertise assumed to be primarily at the top has shifted to the front line. Like World War I Allied generals, CEOs removed from the action find themselves reacting too little or too late.

In the following roundtable, co-sponsored with Unisys, Larry Russell, president of its Information Services Group, suggests that the knowledge transformation of business is a result of the convergence of structural changes in the marketplace with continuing trends in information technology. Most CEOs are familiar with the five structural changes: demand fragmentation, deregulation, time-based competition, disintermediation, and the virtual enterprise. These changes are coincident with technological advances beginning with the microprocessor revolution, high bandwidth telecommunication, networked-enabled computers, digitization, and human-centric computing. It's not easy disentangling whether these forces initiate or enable change or merely serve as a potential competitive weapon - sometimes they assume all three roles.

As Russell points out in the following discussion, the cost of computing power has declined faster than any technology-based product in recorded history. Information for practical purposes is free or almost free. In its raw form, much of it may be worthless, but the elements that are valuable, especially when identified early and endowed with insight, priceless. MobileComm's Mike Lorelli articulated what many in the group are grappling with: How does a CEO capitalize on a knowledge-based advantage that doesn't become eviscerated when the information becomes common knowledge to all competitors? If Pepsi identifies Coke purchasers and gives them a Pepsi coupon to woo them away at the point of sale, what's to prevent Coke from doing the same? In truth, nothing. Legacy advantages will be short-lived. As one CEO quipped, "It's war with information!"

In a benchmarking study of 20 companies, the American Productivity and Quality Center found that to be effective, companies seeking to capture and leverage knowledge require processes that help an organization find and collect internal knowledge and best practices. Second, it must share and understand these practices so they can be used. Finally, it must adapt and apply them to new situations. Roundtable participants readily accept that the command and control hierarchical models of organization clearly impede one's ability to become "information-centered." Teleglobe's Charles Sirois says that CEOs should replace the mechanical model of organization with a biological model. "The stomach doesn't wait to ask the brain how much acid it should use to digest food. Neither do your front-line employees have time to wait for approval from higher up to satisfy a customer."

Capital One's Richard Fairbank argues that CEOs serious about leveraging knowledge capital should begin with "recruiting the smartest people" because "scale and efficiency in its traditional meaning isn't as important as knowing the customer and catering to his or her real preferences." A firm practitioner of using data mining to mass customize its credit card offerings Capital One has some 3,000 different products - Fairbank believes one's IT people should be part of strategy setting just as the firm's strategists should guide the technologists in their systems decisions.

In the end, knowledge-based competition will transform the CEO's job itself. He or she will increasingly be expected to create an environment in which others can create. Extending his biological metaphor, Sirois reckons that the CEO's job is to be the organization's "genetic manipulator," substituting a piece of marketing DNA here for strands of customer amino acids there. Perhaps, suggests Butler International's Ed Kopko, the acronym CEO will ultimately represent chief entrepreneurial officer.

- J.P. Donlon

CHANGING COMPETITIVE LANDSCAPE Lawrence Russell (Unisys): The trick is identifying not just the trends, but the discontinuities. One is demand fragmentation. When the vets came back from World War I, they all accepted homes that were relatively similar. There were few periodicals. There were no supermarkets. Today, we have 150,000-square-foot stores, 50,000 stock-keeping units, bake offs, flowers, anything you could imagine, right? We're looking at Home Depots - at category killers. We're looking at, I believe, something that has been a 50-year trend, which I describe as demand fragmentation. In virtually every consumer-oriented business, demand fragmentation is real, and it's accelerating. And if you don't get it, you're in serious trouble.

Consider the impact of deregulation, re-regulation, and privatization. Do you know that 15 years ago, there were 13 major cement companies in the U.S., all owned by U.S. companies? Today, less than half are owned by U.S. companies. And think about the implications of deregulation for tracking, banking, airlines, and telecommunications.

Time-based competition and disintermediation are changing the competitive landscape. Does anyone deny that General Motors' cost of capital is less than most, if not all, major banks in the U.S.? Plus, they pay the burden of having to have capital. In effect, banks in the U.S. and in other pans of the world have lost their primary role as an intermediary in our economy.

Think about the effects of major technological advances. Computers are now connected, through LANs, WANs, the Internet, and intranets. So the concept of working against powerful servers is happening at an incredible rate.

Before digitization, little was kept in electronic files. It was written, printed, whatever. But the scanners today, and the interpreters, are capable of digitizing that information at a very efficient rate.

All of this technology that's emerging at an incredibly low price will be much easier for people to use, and we can envision this thing moving down in terms of the numbers of people that are using them.

So I would suggest to you that the convergence of technology, in terms of the real transformation of banks, is a strategic imperative and has to do with data warehousing and decision-support technology and understanding customers at a level of detail that no one has ever understood people before.

Let me do a little crystal balling for you. Let's imagine a world where technology is pervasive, unobtrusive, and the leading edge is divined by the mass - the operative word is mass market.

Hassle-free interaction and communication. Variety on a global basis. In fact, suppose we were to think about the possibility of, instead of sequentially accessing the vast array of data on the Net, parallel accessing it. Let's think about a browser with some level of artificial intelligence. You say, I want to buy a bike, and the next generation browser says, what are your characteristics or preference? And suddenly, this virtually low- or no-cost global telecommunication high bandwidth capability, almost for free, goes out and puts you, the bike manufacturer, in competition with everybody in the world that has the next generation idea.

Now, the concept of getting access to much more information is not that attractive unless the next generation of browsers - call them agents - can help you figure out what you want to see and what you don't want to see, and effectively bring to you only those things consistent with your perceived, or revealed, preferences.

We're all overloaded. We're looking for something to help us deal with this ever-increasing mountain of insight, only some of which has been analyzed. We're looking for a control panel, not only for the information we seek, but also for the things we need to do.

Michael Lorelli (MobileComm): One of the challenges is, how do you do all this and get more than just a short-term advantage? How do you not just be the first supermarket, then all the other supermarkets come in and now you're back where you started with the same market share?

Donald W. Mitchell (Mitchell and Co.): I think there are a couple of areas that might help. One is, if you're a big factor with either a subset of customers, or a big factor with all sets of customers, you may have more embedded knowledge about those customers than someone else. If you have enough knowledge, maybe you can design it in some way whereby it doesn't easily translate for the next guy.

Ed Kopko (Butler International): In the economic models that we took in school, there was the concept that information in the competitive world was freely available. And there was always a knock on the capitalistic model that there wasn't a proper attention paid to the cost of information.

Yet, a little bit of the thesis you're presenting is that the cost of information is going to zero. It's going to become much easier to get access to information. And where that fits in is whether the cost of information, or the development of information, is really the primary tool? Or is it how we actually use it, and what implications does it have for organizational structure going forward?

Howard J. Schwartz (Lynch, Jones & Ryan, Inc.): It's how you use it. That's where you have the competitive advantage. You're right, the information is generally available. But the point is that we've organized the business and the sales force around the information, became the market leader, gained the competitive advantage in that specific marketplace, and as we created the industry, as people left our company and went to other companies to form competing units, the one thing that they didn't have was the information, or the ability to organize around the information. The market share gap is enormous. The problem is how to maintain it, sustain it, without losing the edge.

Russell: The access technology is going to become ubiquitous. Scanning information, recording information, translating recorded information into a database, it's the statistical analysis, it's the interpretation, the segmentation - it's the "what do we do next?"

A lot of companies walk away from incredible information. How many things does a customer reveal to a person behind a counter that the marketing head ought to know about?

Anthony J. Nania (New Milford Savings Bank): The very nature of our system is such that getting that competitive advantage will never happen for more than a short period of time, and, in a way, that's the beauty of our system.

Arnold B. Pollard (CE): The cost of information isn't dollars, the cost is time. Because the available information is unlimited, but time is not unlimited. So you can have what you want in the way of information for nothing. But, you don't have the time to have 5 percent of what is there. Therefore, there's a new cost challenge. Being clever enough to use your time to ask for the right information. And it ties back to knowing how to use it.

Robert Lear (CE/Columbia Graduate School of Business): The question is, who's going to teach people to know how to use it? Everybody under 45 knows the computer, but not the business. Everybody over 45 knows the business, but not the computer.

Rakesh K. Kaul (Hanover Direct, Inc.): You can use technology to create a sustainable advantage and lock up that advantage, as long as that technology's centered around time-based information. We find that when customers move to a new residence, they spend more money in the three months around that move than for the next five years. If we can get a catalogue into that customer's hands just at the start of the move, the demand is exponentially higher than eight weeks later.

The fundamental flaw in American business has been this notion of measuring our performance by market share. All the agencies that have tried to create a score card have done a disservice to American business by focusing on market share at month end or quarter end. A good business should really set its only goal as being a lifelong relationship with a customer.

MANAGING IN THE INFORMATION AGE Richard M. Fairbank (Capital One Financial Corp.): With regard to competitive advantage, it is so much work and so tough to create the corporate infrastructure of an information company, that if you can do it, the magic is not in the product you create, or even the data you have. The magic is in creating a dynamic company that can take information in many different nodes in the company and respond in a very empowered way.

The corporate world really has very little idea about the radical ramifications of managing in an information age. The industrial age model of management does not work for managing in the information age.

We've had to take an operation used to dealing with a single product and create the ability to mass customize thousands of different product offerings which require state-of-the-art systems as well as a cultural change in the mind-set.

Our goal isn't scale, unless scale helps leverage flexibility. Our goal is not even efficiency. It's to create a nimble, flexible, dynamic information company. This has involved changing the roles of CEOs, where instead of having all the answers, we manage the process that gives many people the ability to challenge everything, and to seize the information that they uniquely have at their disposal. And know how to leverage that in the organization.

Charles A. Dickenson (Selectron Corp.): How have you measured progress, and have you taken the traditional financial measures and set them off to the side?

Fairbank: Almost all of you in consumer-oriented businesses are inherently managing annuities. We've created what we call horizontal accounting. We've found it absolutely crucial to measure the value of these annuities, know what we can spend for a customer and to project, on an actuarial basis, on the value of every economic component of those annuities, and to measure them in good old fashioned business school and present-value methodology.

We've then created a method of evaluating our associates on the creation of horizontal value, and they're paid on a deferred basis, based on value created. Anybody who goes out with a credit card solicitation projects every economic variable of the solicitation they're about to launch. And they put it in an archive. Someone else comes back later and goes through a process of substituting actuals for the forecast, reprojecting all the tails of this individual's forecast, creating a whole ranking in the company and a document that says this is the recalculation of the value of all the things, relative to what they were initially.

James A. Unruh (Unisys): One of the challenges for us in the services business is creating an environment where people really are going to share information. So a couple of years ago, we began implementing a Lotus groupware-based environment, on which today we have 25,000-plus of our 34,000 employees.

After some time, we found that there had been more than 3,000 databases established, but really only 300 of them were relevant to broad groups of people. The rest related to maybe 10 or 12 people. But the problem with that kind of environment is, you quickly stifle collaboration because you can't get at the information.

So we developed something we call Explorer, an internal intelligent search engine. It's like an Internet browser, but it does full-text browsing. The point is that technology, as an enabling environment to facilitate collaboration and working together, is critical. But you have to watch out for the obstacles and road blocks that are going to come up, and you've got to keep re-engineering the process. Too often organizations start with the technology, in search of the solution. It's really only after you've determined what you're trying to do that technology becomes relevant.

Peter Michel (Brinks Home Security): What we're trying to do in all our businesses is manage on an economic value-added basis on one specific customer at a time. To do that we must give knowledge tools to our lowest paid, front-line people.

Charles Sirois (Teleglobe): I'm trying to develop a model more organized as what I call the organic type of company, where the process is horizontal, where information is shared at every level, and where you have knowledge people, who react and have the autonomy to react, to the changes in their own environment. Just like your body. Your immune system does not ask your brain what it has to do when it sees a virus. It does the job. If it waits, you're dead.

TURNING TO THE WEB

John W. Allen (Spring Investment Corp.): Over the next 30 years, the Internet could have a huge impact on our lives, and our companies. If you looked at every sector of life - automobiles or stock transactions, insurance, electronic catalogues for L.L. Bean - as more people have these interactive devices on their desk, those kinds of electronic commerce decisions will be made.

R. Brad Martin (Proffitts Inc.): We've created an Internet task force to think about the topic. We need to start dealing with the Internet as a tool to drive down our cost of doing business, getting our information to our customers, getting information to our associates, information back and forth with our suppliers.

I think most of my compadres in the industry are trying to figure out how to sell you a dress over the Internet. We think you're still going to want to come in, try it on, feel the fabric. If not, we've got a lot of real estate we don't really need.

Kaul: But what we have found are some very interesting, unpredictable things happening on the Internet. International consumers are disproportionately accessing our catalogues, as opposed to the current consumers migrating from the catalogue to the Internet. What I'm truly afraid of is that the Internet suddenly in a global economy opens U.S. markets to that small manufacturer in China who's got the latest toy for Christmas time and doesn't need to go through Toys-R-Us, doesn't need to go through Hanover, but can get on the Internet and say, "Hey, guess what I've got for you?" And in a global economy, disintermediation could wreak havoc.

Heidi E. Hutter (Swiss Reinsurance Corp.): My business is a little different because the insurance-reinsurance world is a world where our cost of goods sold is actually determined after the sale, and it really does pose a very unique challenge for us. Like others, we have Internet Web sites for information dissemination. But we're all racing headlong, because everyone would like to sell their insurance products on the Internet. And you know, when you take Internet availability, and the sort of pan-global availability that comes out of that, it sounds wonderful, but when you attach it to things like intelligent drivers and search engines, what you could easily see happening is a search engine that will search out the person who made a mistake in their pricing. And suddenly the smallest company might find five million customers, all of whom have bought an underpriced product. And that's the flip side of the Internet. I can easily see the first efforts at this ending up with insolvencies.

Nania: You heard a lot, months ago, about the security issues on the Internet. I don't know how representative I am of the average consumer, but I use my credit card to buy things on the Internet, and I notice other people doing the same thing. They're not waiting to find out whether this is safe. The increase in sales has probably been logarithmic this period, as opposed to the period before. The open market is here.

But there is far too much information; there is no organizing principle. And we need what I would define as a totally new kind of Web browser - a browser that has parallel processing capabilities mechanically, but also has an organizing principle that allows access by the average inquirer to the subject that he really wants to get to, or the product that he really wants to find.

Russell: The precursors are already on the market, and they're growing at a phenomenal rate. They are database mining applications, programs that assist you in setting forth decision rules, interpreting databases, analyzing, comparing - working as "agents" in a very user-friendly way. The capacity to set agents at work into the Net, or wherever you choose to, to help you get back just what you want.

Unruh: In our idea factory at Unisys, we have technical and other people spread all over the world. We wanted to set up a forum where we could exchange ideas from around the world that would lead to new products, new ideas, new services. We also have the proverbial chat room kind of forums where we may have 500 to 700 participants exchanging ideas, all intended to come out the other end with some new product, some new service, some way of meeting the needs of the market.

All these are techniques to try to harness technology to get at one thing that has never changed. If you can understand what represents value to your customer, and you can deliver against that value, you're going to have a successful business. And value, for a buyer, changes. There are sociological changes going on that are contributing to driving the Internet and these other things: Everybody in the household is working; they don't have time to go to the store. The convenience of being able to shop when they want to is one of the contributing factors that represents value to that individual. So, again, it's back to technology is only the enabler; how do you focus on what that value is and keep reacting to that?

Fairbank: There are so many opportunities where there isn't the maturity of the market that there is in Coke and Pepsi. Health care happens to be one. And what we have found, in terms of being leading-edge in the healthcare business, is in part just showing up. A decade in health care has very few players standing, and if you're there 10 years later, you have a tremendous building-block advantage.

The capability of the organization to execute is something that only comes with time. You can't build the organization overnight. Overnight you can come up with the idea. Overnight the technology will change. But it's only the organization that's in place that has been building consistently towards something that has the opportunity to regularly increase, own, and maintain market share.

Sirois: The problem is, you want to implement the new model, but you have the old legacy systems. The action is how to move the people who have been born and raised into the old model, into the type of model I was talking about, the more organic one, where the people need to be a lot more autonomous.

Dickenson: It's long seemed to me that one of the most difficult parts of trying to communicate within an organization is the financial controls that we've all put in place. They're so strong, and they've tended to be so pervasive, that the standardization of financial. measures mitigates the business of getting people to be creative in how they do their thing, and being willing to accept responsibilities that go counter to that.

FACING THE FUTURE

Fairbank: Truly one of the greatest challenges we all face is the management of Wall Street. Because the pressures on short-term earnings, the what-have-you-done-for-me-in-the-last-two-minutes mind-set of Wall Street flies entirely in the face of the long-term sustained investment-oriented long gestation periods inherent in a company of innovation.

And you can't wait until you start to slide downhill to say, "Oh, gee what are we going to innovate now?" While we are on our most successful ventures, we have to manage the demise of those ventures into the heavy investment in the next innovation. And I find that the challenge of maintaining a focus on the long term is very tough in a public company. And we managers take our daily vows to stay focused on that.

Schwartz: One of the primary responsibilities of a CEO today is to continue to examine the processes in place and not just accept them because they're there. Most advancements I've seen come from someone saying, there is a better way to do it, and don't just accept the status quo.

Fairbank: The reward for growth is to become very large, and to face those demons of bureaucracy and politics and turfs and all those kind of things. One of our struggles now, as we deal with the success that has come from an information-based strategy is to figure out how to remain a very small entrepreneurial company, and our philosophy is to break the company down into sub-pieces, placing the burden of proof on why things should be large and integrated within the company.

We also have found that we've had to redefine what our role is as leaders. Increasingly, I'm defining my own role as one that creates an environment in which others can create rather than try to be the creator of everything.

Sarkis Soultanian (National Utility Service): Most of the people here have the same problems that I have had. We were the innovators in our own particular business, and we've had the advantage of being a dominant factor, and we've had many competitors come along, but we kept our eye on the long term and the competitors fell by the way side. There is temptation then to become more satisfied with ourselves. Our biggest challenge is to see that even though it's not broken, I've got to go back and break it.

Martin: I'm going to reorganize what's known as the MIS department. And it will have a lot of cross-pollenization with what we now call human resources, training, credit, marketing.

And we want somebody that knows how to make money running the information knowledge side of our business - and it touches how we recruit, train, sell, wait on customers, advertise - not somebody that knows how to negotiate a piece of hardware or tell us about the latest applications.

James M. McNamee (Hooper Holmes, Inc.): I think in our individual market we're really the technology leader, but we're going to have to continue the culture, to make sure that it's still that way.

Kaul: I'm not afraid that technology will competitively disadvantage Hanover Direct, but I watch what's happened in the last 10 years, and technology has made not only my company, but most companies consumer disadvantaged.

That consumer, unlike 15 years ago, probably knows a lot more than the front-line knowledge worker, and the balance of power has shifted in favor of the consumer. My front-line operator may know my price, but the consumer knows 10 prices. I am very worried about that disadvantage that technology is creating, because the consumer is so much better informed.

Unruh: The most critical role that any CEO has these days is to create the right organizational environment and culture. My favorite definition of culture is, what do people do when you're not around. It's how they act based on their experience; it's how they act based on their understanding of what you're trying to do. And you can't be there to reinforce it.

The history of American business is that very few companies stay in business. And it's because they miss the discontinuous change. So, building the adaptive bias for change organization is the most critical thing that we have to do.

And technology is the enabler. CEOs have traditionally abdicated the world of information technology. That's amazing to me. Nontechnical CEOs will never let product development be abdicated, but they have abdicated information technology. And, if we keep doing that, it's at our own peril. Not the technology as much as what you're trying to do with it. In the world of information technology, when we forecast the impact of change, we always overestimate the near-term impact and underestimate the long-term impact.

A WHO'S WHO OF ROUNDTABLE PARTICIPANTS

John W. Allen is chairman and chief executive of New York-based Spring Investment Corp., an international seed-capital firm with operating company revenues exceeding $100 million.

Charles A. Dickenson is former chairman of Milpitas, CA-based Solectron Corp., a $3.2 billion electronic manufacturer.

J.D. Campbell is president and chief executive of Memphis-based Arcadian Corp., a $1.3 billion manufacturer of chemicals and fertilizers.

Andrew M. Carter is president of Andrew M. Carter & Co., a $482 million fixed-income investment advisory company based in Boston.

Richard D. Fairbank is chairman and chief executive of Capital One Financial Corp., a Falls Church, VA-based financial services firm with $12.1 billion in managed loans outstanding.

John H. Foster is chairman and chief executive of NovaCare, Inc., a $940 million medical rehabilitation company in King of Prussia, PA.

Samuel M. Harrell is chairman and chief executive of Cincinatti, OH-based EDI International, an investment banking and consulting services company for agribusiness.

JoAnn Heffernan Heisen is chief information officer of Johnson & Johnson, a New Brunswick, NJ-based healthcare products company with more than $18 billion in sales.

Heidi Hutter is chairman, president, and chief executive of New York-based Swiss Reinsurance America Corp., a $3 billion-asset property and casualty reinsurance underwriter.

Rakesh K. Kaul is president and chief executive of Hanover Direct, a $700 million catalog mail order company based in Weehawken, NJ.

Edward M. Kopko is chairman and chief executive of Butler International, a Montvale, NJ-based $450 million provider of outsourcing and technical staff augmentation.

Robert W. Lear is chairman of CE's Advisory Board and an executive-in-residence at Columbia Business School.

Michael K. Lorelli is president and CEO of Ridgefield Park, NJ-based MobileComm, a $560 million telecommunications, paging, and wireless communications company.

R. Brad Martin is chairman and chief executive of $2.2 billion Proffits Inc. department store group based in Memphis, TN.

James M. McNamee is chairman and chief executive of Basking Ridge, NJ-based Hooper Holmes, a $111 million health information services company.

Peter Michael is president and chief executive of Brinks Home Security, Inc., a $129 million Carrollton, TX-based security systems services company.

Donald W. Mitchell is chairman of Mitchell and Co., a financial management consulting company based in Waltham, MA.

Anthony J. Nania is chief executive of New Milford Savings Bank, a $300-million asset bank based in New Milford, CT.

Lawrence Russell is president of the Information Services Group for $6 billion Unisys Corp., a Blue Bell, PA-based information management company.

Howard J. Schwartz is chairman and chief executive of Lynch, Jones & Ryan, Inc., an $80 million institutional trading and research firm in New York.

Charles Sirois is chairman and chief executive of Teleglobe Inc., a $1.2 billion global carrier of international telecommunications based in Quebec, Canada.

Sarkis Soultanian is chairman and chief executive of Park Ridge, NJ-based National Utility Service, a $55 million utility and telecommunications rate analysis company.

James A. Unruh is chairman and chief executive of Unisys Corp.

James L. Wareham is chairman and chief executive of Wheeling-Pittsburgh Steel Corp., a $1 billion Wheeling, WV-based steel manufacturing company.

RELATED ARTICLE: THE QUIET REVOLUTION

At the Canadian Imperial Bank of Commerce, knowledge capital became a topic of interest in the early 1990s, as the Information Age transformed financial institutions from collectors of deposits to repositories of information. "We move information around, we create value out of information," says Claude Balthazard, a senior consultant at the CIBC Leadership Centre near Toronto. "So more and more, the brick and mortar of a bank does not predict value."

That's true of CIBC's corporate-lending customers, as well. Too often, tangible assets present an incomplete view. "Far more critical are intangibles, such as a reliable capacity to innovate, strategic exploitation of patents, thorough knowledge of client needs, and the skills to track their evolution," Michelle Darling, CIBC's executive vp of human resources, wrote recently.

To better manage its operations - and make more accurate assessments of other companies' value - CIBC has been working to understand and manage intellectual capital, part of an overall effort to build a learning organization. "The benefits of applying knowledge are so substantial - and penalties for not applying it so harsh - that companies are compelled to use the intellectual and creative abilities of all employees," A.L. Flood, CIBC's chairman and CEO once pointed out. As a result, "CIBC has made learning its business."

Rather than launch a rigorous program, however, the bank has taken a subtler approach that tries to instill the concepts of intellectual capital into the corporate culture. "It's more of a diffusion strategy than an implementation plan," says Balthazard. At CIBC, he says, intellectual capital "is not a system, it's not a software, it's not 'push this button and you will get an intellectual capital audit.' It's more a way of looking at things."

The bank's Leadership Centre acts as a home for that body of ideas; from there, staff consultants and managers spread the word through education programs and presentations, to gradually embed the idea into every-??. One CIBC executive called the efforts ??" - that is, trying to move the message across the corporation through middle management, and letting it work its way up and down the 41,000-employee organization from there.

CIBC looks at its intangible assets in three dimensions: human, structural, and customer capital. To track them, says Balthazard, "the CIBC approach has been less to create new measurements and more to provide a new context for old measures." For example, corporations often keep tabs on things like customer retention, customer satisfaction, length of customer relationships, and so forth - but they generally don't group them under the heading of customer capital. The key, he says, is "pulling it together and trying to get a more integrated assessment of each area."

After several years of work, CIBC still has a ways to go, Balthazard adds. "It's not as if we've got this figured out, or that it's a well-honed process. It's a work in progress." Nevertheless, the concepts are working their way into the organization, and more of the bank's departments and units voluntarily include non-financial, intellectual-capital measures in their reviews of operations.

Eventually, says Balthazard, intellectual capital may become another tool for gauging executive performance. Reviewers will ask, "What are you doing to sustain and renew your human resources, or your human capital? What's being done to enhance the structural capital?" he explains. Such questions will pay off by shifting attention from short-term results to long-term value. "By focusing on intellectual capital, you tend to focus on future-oriented building. It's not just the results you achieve, but how are you achieving them - and whether [that] is leaving the organization in good shape for the future."

- Peter Haapaniemi

RELATED ARTICLE: INTELLECTUAL CAPITAL

When Leif Edvinsson joined the Skandia financial services corporation in 1991, he was given a title that was something of a first in the corporate world: Director of Intellectual Capital. He was brought on board "to uncover hidden value" in the Stockholm-based company and, over the next few years, his efforts helped make Skandia a leader in the movement to understand and grow its intangible, but vital, intellectual capital.

"Within Skandia, processes that create value for customers, shareholders, and the staff are carried out on a daily basis. Many of these are...invisible," writes CEO Bjorn Wolrath. "Nevertheless, they are innovative and they create value."

Skandia's basic premise is that financial measures paint a picture of where a company has been, rather than where it's going. "Our metaphor is the tree," says Edvinsson, who's now corporate director of intellectual capital at the $7 billion company. "The traditional perspective looks at the fruit. But for sustainability and future earnings capability, you have to look at the roots of the tree."

Those roots, of course, are Skandia's intellectual assets. To get a handle on them, Skandia has developed metrics that examine a wide variety of factors, including customer defections, staff computer literacy, training hours, employee turnover, an employee-motivation index, laptop computers per employee, number of leaders per employee, and so on. The company divides its intellectual assets into two broad categories: human capital - its people and structural capital, which includes "all the things that remain when the employees go home," says Edvinsson. Structural capital is subdivided into areas such as organizational capital (databases, systems, etc.) and innovation capital, which is gauged by factors such as number of new-product launches, the age groups that make up the work force, and growth in value added per employee.

Edvinsson says that all these figures help investors, employees, and executives "visualize" Skandia's intangible assets, and thereby gain a better understanding of the company's potential. Every six months, the company publishes a report, similar to an annual report, discussing the state of its intellectual capital.

Those measurements also provide the basis for Navigator, a management and reporting system that is now used across all of Skandia's business units. Through Navigator, executives get a balanced overview of operations and are better able "to identify ways to nurture intellectual capital," says Edvinsson. "It lets us go from managing the harvest of yesterday to navigating into the future."

The importance of intellectual capital is "very much common sense," says Edvinsson. "The challenge is to turn it into common practice." To that end, the company is focusing on technology and creating links between people and business units. "You have to use various types of systems to speed up knowledge-sharing-e-mail, Lotus Notes, intranets and the Internet." To a great extent, he says, "the collective intelligence of the organization is dependent upon the technology network."

The company has also established a Skandia Futures Center, a kind of think tank that's creating a vision of how Skandia can leverage its intellectual assets and "shorten the lead time between 'learn' and 'teach,'" says Edvinsson. While such strategic exercises are typically the domain of senior corporate managers, the center draws on employees from across functions and, especially, age groups: A team will usually have a mix of people in their 20s, 40s, and late 50s. "We're connecting people across generations and across borders and across cultures," says Edvinsson. "That gives us a broader perspective on the future." And that perspective is critical, he adds, because "the center is really proto-typing the organization of tomorrow."

- Peter Haapaniemi