REVIEWED BY JAMES CHEN Updated Apr 29, 2019
What is Intellectual Capital?
Intellectual property is the value of a company or organization’s employee knowledge, skills, business training or any proprietary information that may provide the company with a competitive advantage. Intellectual capital is considered an asset, and can broadly be defined as the collection of all informational resources a company has at its disposal that can be used to drive profits, gain new customers, create new products or otherwise improve the business. It is the sum of employee expertise, organizational processes, and other intangibles that contribute to a company’s bottom line.
Understanding Intellectual Capital
Intellectual capital is a business asset, although measuring it is a very subjective task. This asset to a firm is not booked on the balance sheet as “intellectual capital”; instead, to the extent possible, it is integrated into intellectual property(as part of intangibles and goodwill on the balance sheet), which in itself is difficult to measure. Companies spend much time and resources developing management expertise and training their employees in business-specific areas to add to the ‘mental capacity,’ so to speak, of their enterprise. This capital employed to enhance intellectual capital provides a return to the company, though difficult to quantify, but something that can contribute toward many years’ worth of business value.
Various methods exist to measure intellectual capital but there is no consistency or uniform standard accepted in the industry. For example, the Balanced Scorecard measures four perspectives of an employee as part of its efforts to quantify intellectual capital. The perspectives are financial, customer, internal processes, and organization capacity.
On the other hand, Danish company Skandia considers the transformation of human capital into structural capital as the mission of intellectual capital. The company has designed a house-like structure with financial focus as the roof, customer focus and process roof as the walls, and renewable and development focus for sustainability as the platform to measure intellectual capital.
Because of the nebulous nature and defining features of intellectual capital, it is also referred to as intangible assets and environment.
- Intellectual capital refers to the intangible assets that contribute to a company’s bottom line. These assets include the expertise of employees, organizational processes, and sum of knowledge contained within the organization.
- There is no standard method to measure intellectual capital, and standards for measurement vary across organizations.
Examples of Intellectual Capital
Simple examples of intellectual capital include knowledge that a factory line worker has developed over many years, a specific way of marketing a product, a method to cut down time on a critical research project or a mysterious, secret formulation (e.g., Coca-Cola soft drink). A company can also bolster its intellectual capital by hiring qualified individuals and process experts who contribute to its bottom line.
As technology and process improvements become more of a differentiating factor within modern companies, intellectual capital becomes a greater factor in achieving success in a competitive marketplace.
Knowledge Process Outsourcing (KPO)
REVIEWED BY WILL KENTON AND CHRIS B MURPHY Updated May 14, 2019
What Is Knowledge Process Outsourcing (KPO)
Knowledge process outsourcing (KPO) is the outsourcing of core, information-related business activities. KPO involves outsourcing work to individuals that typically have advanced degrees and expertise in a specialized area.
The information-related work can be carried out by workers in a different company or by a subsidiary of the same organization. The subsidiary may be in the same country or in an offshore location to save costs or other resources.
- Knowledge process outsourcing (KPO) is the outsourcing of core, information-related business activities to individuals that typically have advanced degrees and expertise in a specialized area.
- Companies utilize KPO when they are looking for specialized knowledge and expertise and when they have a shortage of skilled professionals.
- Ideally, companies look to KPO to simultaneously obtain a highly-skilled workforce at a lower cost.
Understanding Knowledge Process Outsourcing (KPO)
Knowledge process outsourcing (KPO) is the allocation of relatively high-level tasks, to an outside organization or a different group usually in a different geographic location.
KPO is different from business process outsourcing (BPO), which is the outsourcing of work to a third party to save money. Although KPO is a subset of BPO, KPO involves more specialized, analytical, and knowledge-based work.
Companies that engage in KPO look to obtain highly educated and skilled individuals without having the cost of training and developing those workers. Through KPO, a company can quickly add experts in specific fields to boost competitiveness and increase earnings.
Types of KPO Services
- Financial consultants
- Research and development
- Business operations
- Technical analysis
- Data analysis and interpretation
Companies look to knowledge process outsourcing to simultaneously obtain a highly-skilled workforce at a lower cost with the goal of boosting competitiveness and increasing profits.
Reasons for Knowledge Process Outsourcing
Companies utilize KPO when they are looking for specialized knowledge and expertise and when they have a shortage of skilled professionals. However, companies that engage in KPO offshore are typically doing so to reduce costs by hiring skilled workers earning lower wages in another location. Ideally, companies look to KPO to simultaneously obtain a highly-skilled workforce at a lower cost.
For example, a manufacturer might use raw materials, add value to those materials through various processes, and then sell the result as a final product. The company might look to KPO to determine how to improve efficiency in their production process so that they can deliver maximum value for the lowest possible total cost. The result of KPO might also help the company create a competitive advantage.
Advantages and Disadvantages of KPO
KPO can help companies reduce the costs of their operations or producing their products and services. KPO also fills the gap or need for skilled employees in a particular field. KPO also frees up existing staff, including management, to do other work boosting efficiency and productivity.
The flexibility that comes with KPO allows a company to increase or reduce staff easily. For example, if economic conditions worsen, a company can easily reduce its KPO staff to cut costs. Conversely, a company can quickly hire specialized staff to boost profits or revenue. KPO helps a company to be more nimble and adapt to the changes in its industry and competitive landscape.
However, disadvantages exist with KPO. Privacy and security can be compromised if classified or proprietary information is lost, copied, or brought to a competitor. Companies have less control over the hiring process of outsourced workers. As a result, a company might not be able to ensure the character of their outsourced employees or the quality of their work.
Implementing KPO can be time and resource-intensive to establish a successful operation. Also, communication can be a concern and a challenge, due to legal, language, and cultural barriers. Another disadvantage might be that existing employees might feel threatened by the hiring of outsourced workers and feel their jobs are at risk.
Reaping benefits from intellectual capital.
The wealth and value of organizations are increasingly based on intellectual capital. Although acquiring talented individuals and investing in employee learning adds value to the organization, reaping the benefits of intellectual capital involves translating the wisdom of employees into reusable and sustained actions. This requires a culture that creates employee commitment, encourages learning, fosters sharing, and involves employees in decision making. An infrastructure to recognize and embed promising and best practices through social networks, evidence-based practice, customization of innovations, and use of information technology results in increased productivity, stronger financial performance, better patient outcomes, and greater employee and customer satisfaction.
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