Know What and Know How
On the value of Intellectual Capital
The parts for my Uplift Desk arrived a few days ago, ready to be unpacked and assembled. I’m not all thumbs, but I would starve trying to make a living as a handyman. So, when I set about the task of organizing the parts and putting them together, I was somewhat apprehensive. Any misstep might lead to a dysfunctional desk or irreversible damage.
I was relieved to find an instruction book consisting of drawings and text that guide the user through each step of the process. The resources included a cleverly designed set of labeled packets containing all the required screws, wrenches, and fasteners. Drawings in the instruction book correlated with the numbers on the packets, each of which could be kept closed until it was time to use its contents.
By giving its customers a guide and other tools to confidently put my desk together, Uplift has solved one of the biggest challenges in contemporary commerce-how to assist the average customer to put together a product that must be shipped in parts. And they have done a superb job of it.
Anyone who has ever installed a VCR, television, computer, new appliance, Wi-Fi, or other gizmo knows how challenging the setup process can be. The need for help has even spawned a new company, Buy It Installed, Inc., which partners with major companies to help customers with more money than time or patience.
At one level, creating and communicating an installation process for a standing desk may appear to be a rather mundane achievement. It’s not. The first instruction manuals for computers coming from Japan seemed to leave out more than they included. In part, what Stephen Pinker calls “the curse of knowledge” gets in the way. People with expertise find it difficult to imagine how a novice needs to be told every step (but no more) and to be reminded, for example, to check that every screw is tight before turning the desk upright (step 14 in Uplift’s process).
The knowledge and skills needed to create a smooth assembly process for the customer are part of Uplift’s intellectual capital. The product of the knowledge and skills-the packaging, numbering, and instructions-are also part of that internal know what and know how. Other companies may do something similar. They may do it better or worse. But Uplift’s packing, shipping, and customer assembly processes belong to Uplift. If the people who created or currently administer them leave, others can follow, be trained in the work, and carry on. As long as Uplift retains and uses the processes, those processes will be part of the assets that contribute to its financial value.
The information technology world is awash in algorithms. An algorithm is a defined decision-making and action process based on facts and preset priorities. Algorithms are valuable, among other reasons, because they free up brain power and can be written as code that enables a computer to work through the decision steps, selecting the prescribed choices based on facts gathered and preset criteria. Every algorithm a company develops, even simple algorithms such as Uplift’s instruction manual, are part of its intellectual capital.
In recent decades, business professors have written books and articles on intellectual capital, which they sometimes call intangible assets. (See, e.g., Lindsay Moore and Lesley Craig, Intellectual Capital in Enterprise Success (Wiley, 2008); Leif Edvinsson and Michael S. Malone, Intellectual Capital: Realizing Your Company’s True Value by Finding its Hidden Brainpower (Harper, 1997.) They started with obvious categories such as patents, trademarks, copyrights, and trade secrets, commonly called Intellectual Property or IP. This kind of intellectual capital can be easily transferred to other parties because it consists of exclusionary rights granted by sovereign governments. But the concept encompasses much more than the right to exclude others from using an invention.
We are still working on the identification and categorization of other types of intellectual capital. To me, processes and procedures such as Uplift’s packing, shipping, and assembly processes constitute a type of a company’s intellectual capital. They are part of the value a buyer of the company receives. (Some acquisitions fail because the buyer’s executives stupidly fail to recognize the value of the acquired company’s intellectual capital, including key parts of its culture, and throw it away.) In addition to processes, intellectual capital also includes procedures, practices, standards, values, and more.
That other companies also have processes, procedures, practices, standards, and values does not detract from their value to and as part of Uplift. Intellectual capital is not necessarily exclusionary (as is the case with patents). Interestingly, however, it is the rare company that even attempts to copy the things another company-even a competitor-does well. Everyone loves their own way of doing things, even if they are not particularly good processes and procedures. Provincial attitudes of this kind have a name: the not-invented-here syndrome.
Proper accounting would assign a value to a company’s actual processes, procedures, practices, standards, and values so that all parties interested in the success of the company (investors, employees, suppliers, acquirers) would be able to consider how much value the intellectual capital contributes. The accounting profession is working on ways to capture the different parts of intellectual capital on a balance sheet without lumping everything into a category labeled Good Will.
Faced with the challenge of defining a corporation, Michael Jensen and William Meckling wrote that it is a “nexus of contracts.” While a company’s collection of contracts is certainly a big part, any complete understanding of the corporate entity must also include its intellectual capital-all the things it knows and knows how to do. The company not only owns that intellectual capital; in a sense, it is that intellectual capital.
The Wright Brothers did not invent physical airplanes alone nor even just the design protected by their patent. As they emphasized repeatedly, they also developed the knowledge of how to fly an airplane, what to do when wind conditions changed, how to repair it after a crash, and even what to do about the occasional hoards of mosquitoes that descended on Kitty Hawk. (As it turns out, not much could be done about that.) This additional intellectual capital was one reason they had little concern about late comers in France who showed up with a machine capable of flight but who, themselves, were not yet ready to fly it more than a thousand feet or so.
Anyone with money can hire and direct employees and buy wood, steel, screws, electric motors, and other components of a standing desk. As the inferior competitors to Uplift demonstrate, however, not just anyone can design a standing desk system, which includes specifying the right quality of wood and dimensions, creating a manufacturing process that produces high-quality parts with few defects, finding the buyers, making the sales, and shipping the parts with the right instructions and other tools. What differentiates companies able to do that from also rans is high-quality intellectual capital-know what and know how. Corporate intellectual capital is stored and maintained in several ways, one of which is culture. I’ll discuss that in another post.
The Uplift desk system is so well designed and made that I guessed it must be a German, Swedish, Danish, or Swiss company. It’s not. It was born and raised in the entrepreneurial echo system of Austin, Texas. Congratulations to all involved.
Originally published at https://aboutrightandwrong.org.