According to SearchCRM.Com this is the definition of Intellectual Capital:

Intellectual capital is knowledge that can be exploited for some moneymaking or other useful purpose. The term combines the idea of the intellect or brainpower with the economic concept of capital, the saving of entitled benefits so that they can be invested in producing more goods and services. Intellectual capital can include the skills and knowledge that a company has developed about how to make its goods or services; individual employees or groups of employees whose knowledge is deemed critical to a company’s continued success; and its aggregation of documents about processes, customers, research results, and other information that might have value for a competitor that is not common knowledge.

What with the blizzard of buzz words flying around the business world these days, it’s easy to lose sight of the basics. It’s a good definition and it’s quite simple isn’t it? Sorry, I shouldn’t have said that. There are ten thousand consultants out there insisting everything is complex. There’s no money in simple. It’s a lot easier to sell complex.

Here’s an absolute fact. As long as this capital is only in the employee’s head, not written down, video taped, put on whatever medium you chose, made available for distribution, the company that thinks it possesses that capital, is at risk.

Joe the engineer’s head is not a Swiss bank vault. Swiss banks will probably be around when people on earth are having lunch with those aliens hiding out at Area 51. Joe may decide to run off to Bora Bora with Suzy the shirt salesperson at Sears. If he does, he’s going to take his intellectual capital with him. He won’t care if his capital is in your bank or not.

By the way, if you are the manager of a small company—perhaps you only have ten or twelve employees—and you have just said to yourself, this isn’t for me; please reconsider. In a way it is even more important. You may only have one engineer, or one employee with a particular skill. You lose him or her and you are well and truly up the proverbial creek. More on this: If you are only thinking of Intellectual Capital in terms of some esoteric, patentable process you have developed, think again. Remember what happened when the gal who filled and setup the stamp machine was out with the flu and she was the only one who knew how to do it? Three other people got involved trying to figure it out. It took three hours, ruined a roll of blanks and made you hostile. Fill in your own idiotic time waster in the space above. What she knew how to do in five minutes is most definitely Intellectual Capital.

Here’s a true story to illustrate the risk of ignoring the value of Intellectual Capital. For five years I taught, Total Quality Management (TQM), Statistical Process Control (SPC), Deming, Team Building and many of the other skills that come under the TQM umbrella. I had a contract at a medium sized technical manufacturing company (350 employees). My charter was to teach the skills noted above to every employee, from janitor to CEO. The consultancy was a combination of classroom, mentoring and practical exercises in the manufacturing environment.

If I were asked now what I thought was the most important ability of an instructor/mentor, I would say getting people to talk about what they do and then listen excellently. People told me things. They complained, whined, and bitched. They literally poured their hearts out. There’s a lot of loss and disappointment in the average work place. They knew what was wrong but no one asked them about it. This story is one of the things I was told.

Six months before I arrived a new COO came on board. He was a dyed-in-the-wool hunter-killer type from Wharton with an MBA and dreams of becoming CEO of FORD. He decided that a general belt tightening had to happen. He must have convinced the CEO, as there was no objection from above. Managers in every department were ordered to look around and report on how this could be achieved. The stated goal was a 15% reduction in overhead of all kinds.

One of the first things he did was order a salary review of all employees making over $50K a year. A list was made up of who had to go. Against the advice, pleading and screams of agony from the line managers he brought out the axe and chopped heads. I think it is axiomatic at the ‘better’ business schools that the best way to improve the quarterly reports is get rid of employees. Apparently they don’t teach Deming at Wharton. We Deming adherents would paraphrase another famous quote and say, “cutting people is the last refuge of the incompetent.”

This company manufactured various products for the aviation industry. One of these products was pressurized vessels that were part of aircraft on-board fire suppression systems. Testing of these vessels was key as the FAA has more rules than the IRS before they could be accepted. Joe, a very clever senior engineer, built the pressure testing system. [He definitely made more than $50K per year] It was an elaborate system that required frequent adjustment. No one thought to get all of the procedures written down. This engineer was a popular guy who had no interest in moving on to greener pastures. He had been working there since the company was formed.

A Monday morning arrived and he found a pink slip in his in basket. Easy to imagine how he felt. He was given his two-week notice. He said, to hell with it and went home. Friends tried to call but he wouldn’t answer the phone. Why should he? He certainly must have felt betrayed.

Three days after this the pressure vessel test system failed. At that time they were running two hundred of these vessels, from a dozen contracts with major airlines through the test system every week. No one except the engineer who was now sitting at home watching day time soaps and sulking knew how the system worked. There were some poorly written procedures but nothing that provided and in-depth explanation of how to align and maintain it.

Joe’s manager passed the word of the system failure up the line. He was very angry. He tried his damndest to save his engineer to no avail. He warned them this was a seriously stupid thing to do. Meetings were held. The shouting and bad language was heard all the way out on the production floor.

The COO said, “well, call him up, get him in here.” The manager replies, “I can’t do that, you fired him.” “So, go to his house, tell him we need him.” The manager who was now totally enraged and didn’t care if he was the next to go said, “you go to his house, &*^%^*% for brains, you fired him.”

More engineers were brought in to work the problem. They actually got the system running but now the system had to be recalibrated and at this they fail utterly. It went on for a long time. Many engineers and technicians became involved. Some, as might be expected, made the problem worse when they tried to correct something they did not understand.

Finally they got Joe on the phone. They explained the problem to him. Great silence. He’s human; he has been crapped upon from a great height and has no intention of making it easy. He said, “have the &%^^ head who fired me call.” He hung up. The CEO, who was on a fishing trip in Baja California, Mexico, was brought into it. Need-less-to-say his instructions to the new COO were painful, loud and to the point. “You go get Joe in even if you have to kiss his patoot every step of the way. You made the problem, go fix it.”

He called Joe and pleaded. “What do you want?” Joe said, “A consultants contract for two weeks at $300 an hour, eight hours a day guaranteed regardless of how long it takes to complete the work, to be paid before I start.” The COO had no choice. He had to agree. Manufacturing was piling up untested pressure vessels and customers were asking questions. There was a couple million in deliverables sitting in the warehouse gathering dust, the company’s reputation was at stake and the contracts were absolutely important to the company’s survival.

As you might guess, it took Joe all of a day to fix everything and get the system recalibrated. Now, because you the reader are much smarter and more experienced than the Wharton shark, you naturally would have had someone watching every step Joe took to get things running again. You would have your videographer and tech writer in Joe’s lap memorializing every step he takes. He wouldn’t be able to breathe in without someone asking him, “Joe, why did you breathe in at this particular point of the process?” I am sorry to tell you no one was there to get this crucial data recorded.

He was called in several more times before I arrived. It was like having a lawyer on retainer, and nearly as expensive. I gave the problem to a Cross Functional Problem Solving Team. Their charter was to get the data, all of it. The smart thing would have been to give Joe a nice raise and hire him back. And in the world of prose, the new idiot COO would have been sent back to Wharton and taught that greed and ambition do not necessarily improve the bottom line. This did not happen. The COO was replaced quietly about three months after I was given my contract. I wish I had had something to do with it. I didn’t.

Joe was a large deposit of intellectual capital. This particular company had many people like him. Every company that I have ever worked with has people like Joe, at every level and department of the organization. And still, every company I worked with reinvented some wheel that had already been nicely designed because no one bothered to get that Intellectual Capital firmly deposited in the company’s bank.

If you want to know what it costs to have Joe close his account, read Crosby’s “Cost of Quality” carefully and apply it rigorously. There are many well thought out methods to accomplish this most important task. It’s very expensive not to have your own bank filled with the Intellectual Capital you have spent thousands, even millions to develop. My advice is lose the madcap idea that the only way to improve the bottom line is let people go. There really are better ways to improve the numbers in your balance sheet. And just for the record, intellectual capital lasts far longer than seasonal blips in the quarterly report.

Finally, people leave companies. They do so to advance their careers, for personal reasons, and sometimes they just get bored. If you haven’t captured their knowledge it costs far more than double to duplicate it.

Norman Taylor & Associates