Hubert Saint-Onge Vice president of people, knowledge, and strategies, Clarica

Sidebar: "There is one route to revenue and that is customer capital." Hear more about what Saint-Onge says on investing in customer capital in Real Audio 28.8 or 14.4 file format. (Audio plays for approximately one minute).

Sidebar: The old rules of management no longer apply in the knowledge- based era, Saint-Onge says. Listen to his comments in Real Audio 28.8 or 14.4 file format. Audio plays for approximately three minutes)

Avoiding the Sudden-Death Syndrome

As vice president of people, knowledge, and strategies at Clarica insurance company, Hubert Saint-Onge is one of a new breed of chief knowledge officers charged with assessing and managing corporate knowledge capital. He spoke with Exec about the role of intellectual capital at the Waterloo, Ontario-based company, and the need for understanding and exploiting intangible assets.

Why is it important for companies to understand intellectual capital?

Intellectual capital is about looking at the firm from a new perspective. In the past we have viewed firms mostly from the tangible- and financial-assets perspective. But you can define the value of a company in three components: tangible assets, financial capital, and intangible assets. So we're trying to see the firm from the perspective of those intangible assets, and see how those assets contribute to value. Obviously, you still need to manage the tangible assets to stay in business and operate. But we think that they are not what's going to create competitive advantage for us.

We divide intangible assets -- the intellectual capital -- into three areas: human capital, which includes the capabilities of individuals to provide solutions to customers; structural capital, which is the capability of the organization to meet market requirements; and customer capital, which is the penetration, width, loyalty, and profitability of our franchise. What senior executives tend to say is that somewhere around 80 percent of the worth of the firm is in their intangible assets. But we have all been managing firms as if they are driven by tangible assets. Our accounting systems bias this allocation of attention in a big way, because the tangibles are the only thing that we are in fact measuring or monitoring or trending.

However, we've come to believe that strategic survival depends on how we manage the intangible assets of the firm. And if those intangible assets are actually being undermined, you are losing your competitive advantage in the marketplace. The problem is that, by and large, business leaders have not been actively managing their intangible assets. They are very actively managing the tangible assets, and very actively managing the financial assets. But one can say with confidence that they give only very partial attention to the intangible assets.

Do most executives appreciate this problem?

I think that most executives are becoming more attuned to this issue. I think most senior folks in private moments and times of candor will tell you that they understand that the rules of the game are changing -- and that they are not all that clear on what the new rules are. But they do know that firms seem to be disappearing at an alarming rate -- firms that they consider to be well-tooled, well-equipped, capable. We call this the sudden-death syndrome, and it comes in part from not knowing how to nurture, harness, and grow your intellectual capital.

When I sit down in front of CEOs and senior folks or speak in groups I will say, "OK, can you tell me whether right now you are building up or depleting your customer capital?" And if they are being candid they will tell you, a glimmer of fear in their eyes, that they don't know. We haven't put the mechanisms in place either to monitor or to understand what is happening to our intangible assets.

That means you can be losing customer capital by the ton and not even realize it. Think of a chart showing organizational capability, which is really based on structural capital, and market demands. Market demands are going up exponentially, so if your organizational capability is going up linearly, you're falling behind in your ability to meet customers' expectations. Even though your capability is increasing somewhat, you're losing ground. But you can't see that growing gap, because you can't track how well you are building your intangible-based capability.

When that market-demand curve takes off and leaves you behind, it takes a while for the financial reality to catch up with the reality that's first reflected in the intangible assets -- the declining customer capital. So you might still have a great financial picture, but essentially you are undermining your future. That gives you the sudden-death syndrome -- the kind of situation where the company celebrates its best year ever, and 18 months later it's gone beyond hope of repair.

What is being done at The Mutual Group in the area of learning and intellectual capital?

At Mutual we are working to get a clear sense of our intangible assets, of the capabilities of our individuals and the organization as a whole. We are moving into Asia and expanding our presence in the United States, so we want to make sure we are leveraging our intangible assets to improve our competitive position in all our markets.

The CEO here at Mutual pointed out that one of the things that we are all doing is trying to measure intangible assets in the same way that we measure the tangible ones, and that is never going to work. So at this point we are putting in place an initial attempt to measure our intangible assets. We are in the very early stages of that. We are also putting in place a learning/knowledge system based on groupware. And we are doing a lot of work around customer knowledge -- really tapping into what the firm knows in terms of customer knowledge.

We are finding that the firm knows more than it knows, if you will. We have some 2,000 agents out there in Canada alone that know a whole lot about our customers. But I don't think we are as good as we need to be at capturing the insights that these people carry. So we are really working hard at building a customer-knowledge capability.

You recently wrote about the importance of "tacit knowledge" in the organization. What is that?

Knowledge is made up of explicit knowledge and tacit knowledge. Take a phone conversation, for example: The information going over the wires is the formal, explicit knowledge. But it's the tacit knowledge of the speakers on both ends -- what they know about the other person, the context of the information, and so forth -- that allows them to decode that explicit knowledge and give it a richer meaning. Most managers think only of the explicit knowledge. So what is happening with a lot of IT systems is that companies are building an information mountain that people are buried in, rather than on top of, because they don't have the tacit knowledge to interpret it.

How, in a practical sense, do you apply tacit knowledge to those mountains of information?

I think it calls for more of a cultural solution than a technical solution. One way is by building communities of knowledge where people work together in a relatively small group to derive and marshal insights from information. Each community should have some common purpose, an affinity of task or an affinity of occupation.

For instance, we might build a sales-management community by bringing together 20 or so of our good sales agents and letting them interact with those mountains of information through a shared database. They could exchange their respective learning and understanding, interact as a community around the information, build up tacit knowledge, and use it to apply that store of explicit knowledge and come up with new ideas or approaches.

You mentioned that The Mutual Group is in the early stages of creating measurements for its intangible assets. But the measurement of such assets is still a fairly inexact science, isn't it?

It is very inexact and actually quite difficult. It is difficult to isolate variables. Also, the generation of intellectual capital manifests itself differently in each organization -- meaning you can't simply apply one company's approach to another. So it's not an easy proposition.

Let me give you an analogy of how we view this. In subatomic physics, scientists are finding that you can't measure both the size and direction of a subatomic particle at the same time. I think that when we are dealing with intangible assets, we have to make the same kind of choice: Will we measure absolute volume or will we measure the flow and the direction of the flow? I believe that we need to focus on that second area -- measuring intangible assets in terms of trends, up or down, rather than absolute value.

We want to be able to determine ratios so that when we invest in our intangible assets, we can determine the impact that money will have. I'd like to be able to say, OK, if we spend $5 on our human and structural capital, it should bring $10 in financial capital. Right now, that's what we do with financial capital: I know that if I increase my lending capital, I can add 12%, 14%, 16% to the bottom line. But if I invest that money in the development of our human capital, it's just an expense in our current accounting format. So it creates a bias against the investment in intangible assets.

Are we at the point where we can come up with those ratios?

No, we're certainly not there. We're really in the first couple years of a 10-year ramp. But that's where we want to be, and that's where we need to be.

Exec, April 1997
Republished from the April 1997 issue of Exec.
Copyright 1997 Unisys Corporation. Used by permission.