Products, raw materials and skills have become ever more intangible in the last 20 years changing the inherent value of companies. In 1978, 20 per cent of corporate value was attributable to intangible assets. By 1998 this had increased to 80 per cent. Practitioners, accountants and academics have identified a perceived need to manage, measure and report on the intellectual value of companies. Although there is now a proliferation of measurement tools it is still questionable whether companies are seeing any benefit from measuring intangibles.

There is confusion over whether the measurement of intellectual resources should be used for control and compliance, as a tool to help management grow the business, or whether the reporting of such data will lead to the capital markets viewing the company more favourably.

Research into performance measurement has shown that many companies have good financial and operational measures and even external measures such as market share. However, it is still rare for companies to have good measures for their intellectual assets or for how those assets are deployed. Good measurement systems should satisfy two key areas of performance - effectiveness and efficiency. Intellectual resource effectiveness measures fall into two categories.

Effectiveness can be measured as the change in intellectual stocks, so companies should measure activities that increase those stocks, for example recruitment and training. The second measure of effectiveness is to understand how intellectual resource management affects business performance, for example, what returns are being achieved on intellectual assets. In terms of efficiency, intellectual resource measures can include operating performance measures such as lead times, customer satisfaction, employee productivity, or learning measures such as the number of participants in communities of practice and the number of people trained.

A rather uncoordinated effort has been made to create measurement frameworks for intellectual assets. The frameworks that have been created are broadly similar. In most cases the frameworks are basically a hierarchy of measures with each category of intellectual assets being measured by its own set of indices. Indices are a collection of measures specific to the business; they can range from direct counts (number of staff), ratios (hits per web page) or concrete financial measures (amount of revenue generated per person). Ratio measurements are useful to help determine the efficiency and productivity of a company's intellectual resource. To date no standardised index method has been agreed, although Kaplan and Norton's balanced scorecard is the most widely accepted and used.

Unfortunately the measure of intellectual stocks is not entirely accurate and when a company tries to assign a value to its intellectual assets it relies heavily on a number of assumptions and approximations. It is difficult to create a standardised framework across companies, let alone industries, because although two organisations can be similar in terms of size, industry, markets, and the amount they invest in research and development, they will combine, use and exploit their organisational knowledge differently. Therefore if the same stock of knowledge represents different combinations of expertise it is difficult, from a measurement perspective, to create a general framework of measures.

Successful frameworks
Where measurement frameworks have been successful there have not only been clear links between the strategy and the measures but between the stocks and flows of intellectual components.

The number of measurement frameworks is growing as researchers attempt to standardise metrics across industries, improve measures for disclosure and look for better ways of predicting future performance. But why are companies measuring their intellectual stocks and flows and what real benefits does this give them? Recent research carried out at Cranfield University in the United Kingdom has shown that most companies use intellectual asset measures for strategic reasons or for influencing the behaviour of their managers and employees.

A good quality business performance measurement system should be guided by strategy and used to assess and challenge the assumptions underpinning the current strategic direction. In addition the verification or rejection of strategic assumptions may potentially have an impact on the intellectual resource allocation within organisations. The intellectual resources that a company needs, and that it therefore measures, depend on the strategic direction and competitive landscape that the company faces. It was found that, because intellectual asset measures are guided by strategy, a different set of measures was used by each of the companies.

In terms of managerial control it has been suggested for some time now that financial performance measures should be supplemented or replaced by non-financial measures which tell you more about employees' actions and can improve contracting. In terms of behaviour most organisations realise that relying purely on financial measurement can encourage short-term thinking, especially if those financial measures are linked to compensation systems.

A justification for the use of non-financial performance measures in compensation plans is the higher level of information these measures provide about managerial effort and actions desired by the firm. It is generally recognised that measures should affect managerial behaviour and actions in order for the strategy to be realised and that a performance measurement system should evaluate the impact of practices on the journey towards achieving those strategic goals. Recent research by Cranfield University has shown that non-financial measures are mainly being used by companies for managerial control and for the basis of compensation.

Pressure to disclose
The quantity of voluntary disclosure is increasing and that the pressure on companies to account for and disclose non-financial data is growing. Studies in both the US and the UK have shown that analysts value information about intellectual assets. In addition a number of empirical studies have also demonstrated that companies that are able to make meaningful disclosures about their long-term prospects achieve more satisfactory market valuations. Although some research suggests that more companies are beginning to report their intangible indicators in the annual report, this was not reflected in the Cranfield research.

Nearly 50 per cent of companies did not report any aspects of their intellectual assets, and more than 45 per cent briefly discussed their assets. Only five per cent of companies made any concerted effort to account for or report their assets separately to the financial report. One reason for these findings is that intangible indicators are often difficult to define and even more difficult to measure. It could be that firms are being careful about disclosure as internal measures aren't yet tried and tested and they do not want to run the risk of exposing the company to external criticism.

In considering the measurement of intellectual assets, firms need to be clear about the motivations for undertaking such an exercise. In a knowledge-based organisation intellectual resources should be an overriding factor in helping to determine and to execute strategy and if so, this should be the starting point for measuring such assets.

Where the aim of a company is to increase the number of intellectual assets and to leverage value from those assets then the performance measurement system should be geared towards influencing behaviour that focuses on intellectual asset value creation. It is suggested at this stage that no company should see disclosure as the primary motivation for measuring intellectual assets. As and when internal measurement is satisfactory then firms can consider the external reporting of their intellectual assets.