How do you measure intellectual capital? How do you measure something that is invisible, contained inside the human brain, databases, processes, culture, and products? Quite simply, you don't. The goal of IC measurement is not to determine how much knowledge or IC you have by counting the number of computers or key employees, but how effective the organization is in creating value from it. The key to IC measurement is to measure the effectiveness of various forms of IC in achieving the organization's goals, in enhancing its innovative and competitive ability, and in renewing and growing its IC. Performance measurement, which originated early in the twentieth century, provided a suitable framework for most of the IC measurement models.

Generally speaking, the role of measurement is to provide a framework to focus attention on the thing you intend to monitor. For example, consider a set of bathroom scales. A person who constantly weighs himself on the scales can, as a result of that behavior, alter his eating habits. As such, measurement offers management a powerful tool that can influence organizational behavior and action. The axiom "what gets measured gets managed" is slightly skewed. The truth is what gets measured gets noticed by top and senior management and, as a result, something gets done about it. Therefore, it is important that only the key success enablers get monitored and measured.

To measure performance in all areas, management would necessarily be spread too thinly across an organization, thereby sapping the human resources of management, which would result in confusion and a blurred sense of direction throughout the organization. Management has been dissatisfied with the use of financial measures per se to monitor business future performance. For some, they hardly monitor the characteristics that create an organization's competitive advantage. Financial measures (e.g., R.OI) are too general to indicate the areas that management should focus on to drive future competitive performance. Because financial measures are retrospective in nature, they also fail as predictors of current problems the organization is facing. Since the beginning of the industrial revolution, management recognized that financial reporting offers too little, too late and developed performance measures. The oldest are found in the manufacturing industry. Its "units per hour" indicator measured production performance. Hotels and hospitals used bed occupancy rate, while universities reported their graduate employment rate.

All these measures of performance look at the outcome of past performance to guide the improvement of future performance. Performance measures can be qualitative or quantitative, short or long term, in process or end-result based, or some combination of all. To date, all performance measures have been developed to assess one form or another of IC, but some are more closely aligned to the IC concept, or were developed with the IC concept in mind.

One of the earliest attempts to measure human capital preceded the emergence of the IC concept. In the 1970s, the Human Resources Costing and Accounting measures attempted to measure employee contribution and competencies in dollars. The attempts failed. Performance measures designed to measure process capital were also developed, prior to the IC concept, with the total quality management (TQM) movement in the 1980s. These systems attempted to measure the continuous performance of production and other business processes using quality and reduction of error as the yardstick. TQM met with considerable success.

Customer satisfaction is another measure of IC. Believing that customer satisfaction is the best indicator of customer loyally and repeat business, many businesses and organizations developed ways to measure customer satisfaction. In Sweden, the first Customer Satisfaction Barometer was issued in 1989. Other countries in Europe and the United States followed suit and issued customer satisfaction indexes to monitor customer satisfaction in different industries.

These measurement attempts fall short of creating a comprehensive system based on the IC model to monitor and track value creation from ICM. Though all forms of IC should be monitored for enhanced business performance, organizations need to focus their attention and resources on managing and measuring only those IC items that are critical for their success. To aid management with this role, a number of IC measurement systems emerged in the 1990s, some of which are based on the IC models discussed earlier. These include the Balanced Scorecard (BSC), the Intangible Asset Monitor (IAM) developed by Sveiby, and the Skandia Navigator (the Navigator).

Most of the IC measurement systems discussed in this chapter have been designed for the internal purposes of an organization, namely, strategic planning, management control, resource allocation, and raising awareness of the value of IC. Nonetheless, a number of these and other measurement systems also have external purposes, mainly reporting to external stakeholders on IC. Emphasis in this chapter will be placed on such models, or parts thereof, designed for internal purposes, while those used for external purposes are addressed in Chapter 3.