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JHRCA 13,2

Classication, measurement and the ontology of intellectual capital entities

Jan Mouritsen
Copenhagen Business School, Frederiksberg, Denmark
Purpose The paper discusses the role of measurement and classication in intellectual capital research. Its purpose is to develop an alternative role for measure. The aim is to explore how measurement may be important even if it does not pretend to accurately represent and underlying reality. Design/methodology/approach The paper is an essay on the difculties of measuring intellectual capital. It is a conceptual, analytical paper which proposes a new approach to analyzing the roles and effects of measurement in the area of intellectual capital. Findings The analysis suggests that measurement of intellectual capital is difcult because it is not possible to copy its properties in a number; yet it is necessary because it allows intervention to happen since it develops a wholly new set of dimensions to manage. This dual conclusion both problematic because the search for a denitive measure of the size, value and effects of intellectual capital is impossible, yet it is also comforting because measurement helps develop the actions that can be made in the name of intellectual capital. Research limitations/implications The central implication is that research should be explicit about the status of measurement in intellectual capital research since measurement does not primarily represent an underlying reality to be reported by intellectual capital. This directs attention to different purposes of measurement. Originality/value This paper explores alternative roles for measurement and suggests that it is necessary to study how measurement is input to management decision making more than a representation of an underlying reality. Keywords Measurement, Classication, Intellectual capital Paper type Research paper


Journal of Human Resource Costing & Accounting Vol. 13 No. 2, 2009 pp. 154-162 q Emerald Group Publishing Limited 1401-338X DOI 10.1108/14013380910968665

In the intellectual capital literature, human, structural and relational capitals are central concepts. They propose intellectual capital to be some function of these three concepts and thus they are the entities out of which intellectual capital is composed. Yet, what is this composition? It is a proposition about the intellectual capital accruing to a rm; i.e. does it say that the three capitals together describe what intellectual capital is so that human capital is creative, structural capital is reliable and relational capital leverages the other two? Or is it, as a possible alternative, a system which classies indicators about intellectual capital such that indicators about employees can be categorised as human capital, so that indicators about organisation can be categorised as structural capital and so that indicators about customers and suppliers can be classied as relational capital? The difference between these propositions becomes a problem when researchers and others wish to measure intellectual capital. What do they measure? The rst proposition suggests measurement to be the same as intellectual capital and the problem is to assure that each of the indicators used actually produce a function alike

to that of each of the three capitals e.g. only that part of employees that is creative will have to be measured. This may leave out a lot of ordinarily accepted measurements because most human capital indicators are about the structure of a workforce and not in any discernible way expressions of creativity. The second proposition suggests that indicators can easily be classied and then the problem is to separate the entities being measured from the type of capital that it belongs to is training a person to be skilled in a customer relationship management system a human (training), structural (information technology) or relational entity (customer)? They could be all of them. This ambiguity is heartening so why measure in the rst place? The purpose of measuring intellectual capital may not be to make an accurate representation of it but to make it ready for management intervention either in a rm or in the capital market. Measurement is important because it develops knowledge about the state of intellectual capital that may be useful in decisions about increasing or decreasing the size of the elements of intellectual capital. Knowledge about the size, investments in and effects of intellectual capital elements makes their management possible. Measurement produces knowledge and is constitutive because it justies transformation of intellectual capital (Mouritsen and Larsen, 2005; Mouritsen, 2006). In this light of affairs, measurement is this not primarily a summary of a past; it is more interesting as mechanism that makes problems out of the present and thus induces change and transformation. Measurement is hardly a mere afterthought to ambitions of transforming societies and rms who rely on intellectual capital. How do jer (2001, p. 699) describes the purpose of we then know what to measure? Jan-Erik Gro classication with which measurement is intimately connected as follows:
[. . .] to classify/divide something means to describe, which implies to explain the nature or essential qualities of something. To classify or divide we need to construct properties/attributes that describe an object, event or state.

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When classifying , i.e. stating what belongs to one category rather than to a different category one assumes the task to construct properties and attributes of an object. In jer indicates that the nature of essential qualities to which this denition Jan-Erik Gro he also refers may not be so simple. At least he raises the question whether it is possible to nd the nature of qualities given that classication is a construction done by a we. The problem is whether it is possible and advisable to devise an exhaustive classication? The answer to this two-dimensional question is negative. It is neither advisable to develop an exhaustive classication nor is it possible. The reason is, rst, that measurement may be an attempt to get to the bottom of matters and nd the essential qualities of an entity, but on inspection, measurement is primarily an administrative procedure that separates out streams of interconnected processes. Measurement places these streams in separate/individual categories such as human, structural and relational capitals. Such measurement could reach very deep into some structure of essential attributes, but it is impossible to test because the only way we know about intellectual capital is the measurement hereof; it is impossible to test the distance between the measurement and the world. The second reason is that it is hardly possible to develop measures that ll up intellectual capital since the boundaries between the elements of intellectual capital are loose and do only little to explain their various possible underlying logics. In spite of

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difculties of nding the referent of intellectual capital, measurement is constructive and constitutive because it helps making something loosely identied as intellectual capital adequately visible to be of use in relation to some form of intervention. Measurement is strangely impossible and useful at the same time. The paper has two arguments. First, I explain why and how classication does not isolate the elements of intellectual capital but put them on hold in an information system where they are given a place where they can wait to be mobilised. Second, then I show that elements of intellectual capital do not each have one inherent logic that explains the entities that are captured by them. Classication as separation; and complementarity as integration It is easy to illustrate that the received model having intellectual capital consist of human, structural and relational capital can be re-worked which indicates that classications are fragile. Eustace (2003) divides capital into three categories: conventional assets (tangible assets) recognised in the contemporary balance sheet; new intellectual assets (intellectual goods) such as, e.g. brand value and patent value of which many can be traded in a market; and last innovation, structural, market and human resources (intangible competencies). This model adds new forms of assets to tangible assets, namely intellectual capital which can have two forms depending on its recognition as a tradable singular asset or not. Eustace (2003) extend Edvinssons and Sveibys (and many others) well-known models; they create new distinctions. In effect, it attempts to re-create the boundaries between what is a separable, recognisable asset and what are merely organisational competencies. It pushes the boundaries to what can be put on the rms balance sheet and it includes more possible items. This process of putting more items to the balance sheet is a process of disentanglement, where a separation between entities is constructed, and where the framing of the phenomenon in question is established (Callon, 1998). This is how all kinds of balance sheet assets are created tangible assets and new recognised intellectual assets such as patents and brand value. These are made visible by a procedure through which they are made recognisable and measured , i.e. represented by numbers on paper. To recognise assets is to devise a procedure to dene and separate it from other assets. Therefore, the process of disentanglement is one where the asset is taken out from the sphere of the rms production process where it in use is complementary to other assets. To take items out is a transformation of the item because it is described not in action but on hold. This is simply a form of spread-sheet where numbers are given a place. A more systematic mechanism of putting numbers on hold is an accounting system or an intellectual capital statement where numbers are relevant when then occupy a logical position. When an asset is on hold it lies on a table as a set of naked numbers and can be studied. Its activities are stripped away from it and it is there only in form but without substance because it does not act. On hold in information systems, assets are arrested and taken out of context and while it may be measured in size, its identity and consequences for others are impossible to see. All balance sheets report assets on hold including tangible assets such as buildings and equipment.

In contrast when in action, an asset is in interaction with other assets and it gains strength and functionality by way of these relationships. When, say, technology allows intensive customer relationship management, customer relationship managers gain power and are able to reach more customers in a detailed and focused way than if the technology was a system to monitor sales peoples activities. In action customer relationship managers would be different depending on the resources proposed by technology. While on hold assets are readably visible, in action assets move between different constellations of other entities and as action draws on and redenes the role of entities recognised as, e.g. human, structural and relational capital. There is thus an important distinction to be made between assets on hold, which are described through an administrative procedure, and assets in action where entities mingle with each other and give each other new roles and thus new identities. This is where complementarity is at work. There are joint effects whose tracing to individual assets bases such as tangible or intellectual capital is fraught with estimations and guesswork. In action, there is a problem involved in making them individually calculable, because they exist only as collective performance. For this, there is no administrative rule and assets or capital is movement in relation to some form of value creation (Mouritsen and Larsen, 2005). Assets produce effects in action, but this is quite often unsatisfactory to managers because if everything is connected to everything, there are very few levers of intervention. Therefore, to gain oversight, measurement is needed which can help identify elements or objects around which intervention can happen. This procedure puts assets on hold; the measurement is therefore always un-realistic. The irony is that in order to understand interconnected, complementary activities, part of this complementarity has to be removed and substituted by separation. To gain oversight, the process to be made visible will die a little bit. The more oversight the more the process will stop. The more separated resources are the more different they are from the process that makes them strong. In effect, via measurement and classication resources are put on hold and required to stop interacting and thus required to stop working. In contrast when resources work in a process they cannot be distinguished from each other and when resources are in action oversight is hampered[1]. When quantied and put on hold on paper intellectual capital thus has to be different from the processes where intellectual capital is involved. This means two things. First, no measurement can take over the properties of the process it attempts to make visible. No measurement can copy the process and no measurement can be an isomorphic representation of the process. Therefore, measurement does not necessarily create more certainty. Rather, measurement gains by developing generality and comparability, but it loses process, contingency and situation. It gains generality but loses representational qualities. Second, measurement can happen against any number of dimensions none of which can claim better representation than others. Eustace et al.s model is different from Edvinssons model but no specic test can determine which is better. They just have different dimensions. It may be that Eustaces model has more dimensions but this is only an advantage if the problem it faces is to account for tangible in comparison with intangible assets. Edvinssons model may have strength if at stake is the number of layers or depth in the elements of intellectual capital. Thus, two classications cannot be evaluated against each other. Even the possible attempt to put all elements of different classications together may not be a good idea because

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the complexity of such a model could create even more confusion than here was in the rst place. Thus, classication is a choice it in its own right; it is not a position from which to decide which representation is better. Measurement procedures of committing numbers to paper Measurement of intellectual capital organises the production of numbers to be inserted into, e.g. an intellectual capital statement. But what is the outcome of such a procedure. One possibility is expressed by Roos et al. (2005, p. 235) suggesting that:
The empirical measurement system is a system showing what should be measured [. . .] [and] a real working image of the empirical structure is built. This [. . .] results in an isomorphic numerical measurement system.


Roos et al. claim measurement to produce isomorphic representation which means that the real world corresponds to the world that is represented in the measurement system. Measurement stands in for the world, and by manipulating measurements one also manipulates the world. In this perspective each type of entity being measured has to have certain discernible properties and along these lines human capital is typically about creativity; it is claimed that people are the source of innovation, but they may be a bit unpredictable because they may not return to work the next day. Organisational capital is about best or good practices that can be reused across time and space; organisational capital is dependable but not particularly creative. Relational capital is about external knowledge; it stabilises the environment and makes it accessible to the rm. These denitions create classication, but on inspection not very strong boundaries; at least not boundaries that satisfy a strong measurement ambition. Are measurements in intellectual capital statements strong ones that copy the dimensions of the world? It is a problem that in many cases it is not so clear how the three categories, human, organisational and relational capital, capture events. Assume an event such as Training. One would expect this to be a clear case of human capital. Assume then that we learn that this training is to develop computing competencies to make people use the rms newly acquired sophisticated technology. Is it still human capital, or is it now suddenly organisational capital? This is plausible because training is used to develop the productivity of information technology. So, this event can be both human and organisational capital. Further assume that we learn that this information technology is a customer relationship module in an ERP package, and then training is suddenly an investment in stabilising the rms relations to its customers. Is it not then relational capital? Thus, a Training event can be human, organisational or relational capital depending on how it is explained. This makes the three kinds of capital fragile and, if an event can be all three categories, one starts to speculate what structural models estimating relations between the three capitals have actually measured and made into causal propositions. Suddenly it is clear that the three capitals, which may make intuitive sense, have problematical organising capabilities because they do not make sense of the events they capture. They are good metaphors; but are they good denitions for a set of classications? Do the names of the categories signify the practices they represent? The sad answer is: probably not.

In the literature this dilemma expresses itself in a series of different ways. First, human capital is seen to be about creativity and heightened attention to the individuals pursuits. Novelty and new ideas are functions of this entity/variable. However, many indicators about human capital are not about individuals at all. They are about collectivities, such as break-down of the work force according to age, gender, education, satisfaction, sickness, tenure, etc. These are statistics about a collectivity and much more a description of institutionalised competencies than of risk taking, creativity and novelty. Human capital is rarely about oddballs making new ideas and inventions; it is rarely about the value of the unexpected. It is much more about attempts to master the work force and make it amenable to intervention, not in terms of person per person but by structuring patterns of competencies needed to stabilise the rm (ODonnell et al., 2006; Roslender and Fincham, 2001; Thorbjrnsen and Mouritsen, 2003). Does this not make human capital an organisational resource? Second, as illustrated by Hermans and Kauranen (2005), there are similar uncertainties about the function of relational capital. Typically, relational capital is said to be concerned with customer satisfaction, loyalty and number and size of networks, but in Hermans and Kauranens study, most of the relational indicators are nancial ones; they are concerned with suppliers of capital. This is a completely non-intuitive possibility because suddenly even the most frequently noted (perhaps even essential?) distinction and separation between nancial and intellectual capital is made debatable. Third, when we look at organisational capital, for example, through the lens of information technology, it can turn out to have many different possible properties. It can be used to document or codify information (Hansen et al., 1999) where items of knowledge and documents are made available via an intranet. This is where knowledge is made common between all people, and all people get access to the same information and knowledge. Another possibility is where information technology is used to create a corporate yellow pages or directories in which people can access each other. In this situation, people are acknowledged as experts and technology creates connections. This is a very different notion of knowledge sharing than the rst example. In the rst example attention is to corporate resources such as documents and common knowledge, while in the second case knowledge is still an individual possession and therefore the ambiguity is whether this intranet is really organisational capital and not human capital. Such examples illustrate that the three factors in intellectual capital are weak and fragile. They do not have immutable referents and they can therefore not stand for robust phenomena in the world. If measurement does not produce rigorous quantication what does it produce? After all, there are numerous items of measurements in IC statements (Guthrie et al., 2006; Mouritsen et al., 2001, 2003). The key controversy is the claim for isomorphic representation; the ambition to create correspondence between measurement and the external world. Measurement is the result of an administrative procedure of recognition. Therefore, it is internal to the system of representation and therefore it is closed around the transactions themselves and not in a referential relation to a real world. The transactions are merely organised according to rules and procedures that inscribe certain practices according to some conventions. By this movement measurement does not take over the properties of the world, but it may add something to the world. It adds perspective that makes it possible to create visibility. This visibility creates distance from intellectual capital in processes and

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presents it in a perspective. Yet, the perspective is a lure; it also thwarts and changes intellectual capital by such movements. It makes intellectual capital something different from what it was. For example, adding measurement of the constellation of employee qualications makes it possible to develop new forms of intervention that were not possible before it could be made known who has and who has not certain experiences. This may be a good thing, but obviously formal qualications are not part of an integrated process of activity as such a separate variable. Classication, measurement and intervention Intervention happens when actors mobilise resources on hold and entangle them in ongoing processes of activity in action. Intervention is made possible when actors know something about the ongoing process somehow made available to them via direct inspection of and involvement in production activities. Personal knowledge will allow actors to make sense of measurements and add perspective to them. Measurements are used to create visibility but they are only visibility to actors who both know the limits of measurement and also know that measurements are important in order to know whether targets are being followed or acted on if they are not met. This implies that not too much emphasis is placed on measurement, which is too abstract, and not too much emphasis on personal knowledge, which is difcult to account for as it may contain too much prejudice. Measurement here sets direction and helps formulate targets, and personal knowledge makes choices partly based on intuition and sets activities in motion whose effects will be monitored by measurements. Another possibility is that measurement and classication help to construct what is known about intellectual capital and the on-following sets of decision making. Classication provides categories around which measurement develops knowledge used by managers, analysts, politicians, etc. Many classes of measurement have no clear referents, however. Measures of satisfaction are difcult because it is not possible to go and nd satisfaction other places than in the measurement system. It is not personal experience. When different peoples satisfaction is presented as averages or even deviations from expected averages, there is only little personal experience about it. There is therefore a cost to measures. Yet, if the manager dispenses with the requirement of personal experience then a new set of possibilities emerge. When, for example, a measurement of employee-competencies sets out to describe the employee in terms of skills such as formal skills, on-the-job skills, and customer-oriented skills, it is possible to develop skill proles for aggregates of employees, for departments, for regions, and the for the company. Such proles can be visualised, e.g. as web-diagrams which say something about the status of skills of aggregates. This visualisation can be related to strategy in wholly new ways. If there is a decit, say, of skills in operating certain technologies, the rm may chose between several strategies such as either train people, or to hire people, or even to buy a company with these skills. Suddenly, even if the measurement is based on simple indicators, new calculations can be carried out on top of these measurements and make the possible strategies to develop intellectual capital unexpected. Completely new phenomena emerge at the end of measurement and calculation which are far removed from the entities that are measured. In this situation, personal knowledge does not count much because, e.g. a strategy to buy a rm is not part of the personal experience that a manger seizes from interacting with production processes. Importantly, in this case measurements, classications and

indeed calculation are more than the experience of people and new entities emerge as part of the process of committing intellectual capital to numbers and paper. In such a capacity the classication is constitutive of the interest in intellectual capital. It is jer, 2006). s and Gro constitutive of managerial intervention (Catasu Conclusion Measurement of intellectual capital is doomed because it is not possible to copy its properties in a number; yet it is necessary because it allows intervention to happen because it develops a wholly new set of dimensions to manage. This dual conclusion both problematic because the search for a denitive measure of the size, value and effects of intellectual capital is impossible, yet it is also comforting because measurement helps develop the actions that can be made in the name of intellectual capital. The paper argues that measurement cannot gain certainty about intellectual capital, but it may create extended sets of managerial implications of the obligation to manage intellectual capital. The argument is that measurement requires assets to be on hold and in this capacity they do not perform their functions and thus do not show how it exists in action when it interacts with other assets. This discomforting conclusion does not mean that measurement lack relevance and importance though, because localised personal knowledge is never able to be more than sentiments and does not create a strong account in a collective setting. Measurements, however, do. Likewise, measurements rarely stand alone. On top of them calculations integrate and differentiate various measurements and suddenly completely new objects emerge which are constitutive of the efforts that managers can put in motion. Measurement thus helps to manufacture new managerial objects that crave the attention of managers and who have to deal with these objects in order to be accountable as managers. Managers are victims of measurements because managers only have to the choice to account for them. If managers do not do this, they are weak because if they cannot produce a counter measurement or calculation that can help to develop a different version of the state and importance of intellectual capital. jer (2001, p. 699) When measurements divide they construct properties of objects, as Gro says; this means that the construction is strong until another construction can be established. When classifying and creating the properties of objects, events or states we jerm, 2001, p. 699). also dene the objects, events and states (Gro
Note 1. To disentangle is to bring away from the life of the resource. In a biological setting, as Latour (1999) has shown, to identify a plant means to separate it to make it discernible, and this is to separate it from other plants and from the soil. The plant has to die to become disentangled. References Callon, M (Ed.) (1998), The Laws of the Markets, Oxford University Press, Oxford. jer, J.-E. (2006), Indicators: on visualizing, classifying and dramatizing, s, B. and Gro Catasu Journal of Intellectual Capital, Vol. 7 No. 2, pp. 187-203. Eustace, C. (Ed.) (2003), The PRISM Report 2003, Research Findings and Policy Recommendations, European Commission Information Society Technologies Programme (Brussels), October.

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jer, J.E. (2001), Intangibles and accounting classications: in search of a classication Gro strategy, Accounting, Organizations and Society, Vol. 26 No. 78, pp. 695-713. Guthrie, J., Petty, R. and Ricceri, F. (2006), The voluntary reporting of intellectual capital: comparing evidence from Hong Kong and Australia, Journal of Intellectual Capital, Vol. 7 No. 2, pp. 254-71. Hansen, M.T., Norhia, N. and Tierney, T. (1999), Whats your strategy for managing knowledge?, Harvard Business Review, March/April, pp. 106-16. Hermans, R. and Kauranen, I. (2005), Value creation potential of intellectual capital in biotechnology empirical evidence from Finland, R&D Management, Vol. 35 No. 2, pp. 171-85. Latour, B. (1999), Pandoras Hope, Harvard University Press, Cambridge, MA. Mouritsen, J. (2006), Problematising intellectual capital research. Ostensive versus performative IC, Accounting, Auditing & Accountability Journal, Vol. 19 No. 6, pp. 820-41. Mouritsen, J. and Larsen, H.T. (2005), The 2nd wave of knowledge management: re-centring knowledge management through intellectual capital information, Management Accounting Research, Vol. 16 No. 3, pp. 371-94. Mouritsen, J., Larsen, H.T. and Bukh, P.N. (2001), Valuing the future: intellectual capital supplements at Skandia, Accounting, Auditing and Accountability Journal, Vol. 14 No. 4, pp. 399-422. Mouritsen, J., Bukh, P.N., Johansen, M.N., Larsen, H.T., Nielsen, C. and Haisler, J. (2003), Analysing an Intellectual Capital Statement, Ministry of Science, Innovation and Technology, Copenhagen, available at: ODonnell, D., Tracey, M., Henriksen, L.B., Bontis, N., Cleary, P., Kennedy, T. and ORegan, P. (2006), On the essential condition of intellectual capital: labour!, Journal of Intellectual Capital, Vol. 7 No. 1, pp. 111-28. m, L. (2005), Managing Intellectual Capital in Practice, Elsevier, Roos, G., Pike, S. and Fernstro London. Roslender, R. and Fincham, R. (2001), Thinking critically about intellectual capital accounting, Accounting, Auditing and Accountability Journal, Vol. 14 No. 4, pp. 383-98. Thorbjrnsen, S. and Mouritsen, J. (2003), Accounting for the employee in the intellectual capital statement, Journal of Intellectual Capital, Vol. 4 No. 4, pp. 559-75. Further reading Petty, R. and Guthrie, J. (2000), Intellectual capital literature review: measurement, reporting and management, Journal of Intellectual Capital, Vol. 1 No. 2, pp. 155-76. Corresponding author Jan Mouritsen can be contacted at:

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