There are ways we can measure IC. But valuation on IC is most difficult, even certain expert in the field gave up on that task. First, IC has several components each with itheir attributes and contributions to the firm. Second, there are direct and indirect contributions, active and passive drivers etc. Thus assigning one value is like asking if you can assign a 'love' or 'happy' index on one's family. There are many valuation methods already in the literature. But I doubt their usefulness...

I suppose if you want to assign a value to the components, you can by using Expected Value. But then again it is likely by firm's insider because of information access issue.

Another possible way is using multivariant regression bewteen firm financial performance as dependent varaible vis-a-vis IC components as independent variables. That again requires insider information.

These methods are guestimates as there are a lot of 'best guesses' or future projections in the inputs. Is it worth the effort, probably not.

As for insider information. Unless the firm tracks its IC performance, it would be incomplete at best. The best tool/concept for the job is 'Balanced Scorecard' modified to include all the IC components. And, I doubt anyone has come this far.

So, what you are asking is a multi-million dollar question...! Good question! But I seriously doubt that the industry in general is ready for it.

I believe Daan Andriessen (Hogeschool InHolland, Amsterdam) wrote a doctoral dissertation on how to value IC, covering not only the "how" but also the "why" question regarding IC valuation.

Here are several articles, largely based on his doctoral work:

www.surfsharekit.nl:8080/get/smpid:10681/DS1

http://www.emeraldinsight.com/journals.htm?articleid=884019&show=abstract

http://www.lectoren.nl/index.php?option=com_kennisproduct&view=kennisproduct&id=inholland%3Aoai%3Arepository.samenmaken.nl%3Asmpid%3A10712&Itemid=4

To measure IC it has to be made observable. Outputs of the use of IC are observable. When these outputs are described in common units, such as units of change, complexity, then it is possible to compare the relative productivity of IC embedded in various processes.

Dear Georges, Thanks for valuable contribution.

Andriessen's article is quite good...

There are two valuation methods one might consider i.e. Gordon Growth Model and/or Option Pricing. Gorden Growth Model tends to company as a whole, thus individual IC component may be difficult to assess. Option pricing can assess invidual IC components, but it is complex in calculations...

Like Andriessen article mentioned, there are two issues of performance measure: measure and valuation. Even measure can be split in two i.e. performance measure and indicator. Increase in customer is an indicator, it may indicate an increase of profit (but not always true due to another factor called acquistion costs) Profit is a performance measure. Valuation in relation to performance can be judged by change in net worth. These are very different constructs.

Since the performance measure (i.e. BSC) has sequential or depedent probablities, one has to map out the causal relationships of the performance measures i.e. from development to process to customer and finally to financials, and IC components have to be placed at the correct places within the BSC or causal relationships. Once that is done, you would have a good basis for valuation.

Dear friends,

In my opinion there is an important issue about intellectual capital and valuation but from "money" perspective. For this reason last ideas are related to the creation of an index in order to provide a result with translation into money. In this sense organizations have their book value if the index is 5/10 (as an exam). More than 5 has an impact in the book value, the intangible multiplier. I have my proposal for entrepreneurial projects.

Regards

Venture capitalists in the industry need a way of measuring this IP capital value.

Few things that determine the value are:

1. Value of patents (Assuming knowledge is represented as patents)

2. Demand for the solution (Impact on society - how many people will benefit from this)

3. Repeatability: how easily the knowledge can be transferred, imitated and implemented

4. Innovativeness: How many similar solutions exists already

These above points are turned into mathematical indicators and come up with a good equation.

GK

http://gopalakrishna.palem.in/

The Four Approaches for Measuring Intangibles:

The suggested measuring approaches for intangibles fall into at least four categories of measurement approaches. The categories are an extension of the classifications suggested by Luthy (1998) and Williams (2000).

• Direct Intellectual Capital methods (DIC). Estimate the $-value of intangible assets by identifying its various components. Once these components are identified, they can be directly evaluated, either individually or as an aggregated coefficient.

• Market Capitalization Methods (MCM). Calculate the difference between a company's market capitalization and its stockholders' equity as the value of its intellectual capital or intangible assets.

• Return on Assets methods (ROA). Average pre-tax earnings of a company for a period of time are divided by the average tangible assets of the company. The result is a company ROA that is then compared with its industry average. The difference is multiplied by the company's average tangible assets to calculate an average annual earnings from the Intangibles. Dividing the above-average earnings by the company's average cost of capital or an interest rate, one can derive an estimate of the value of its intangible assets or intellectual capital.

• Scorecard Methods (SC). The various components of intangible assets or intellectual capital are identified and indicators and indices are generated and reported in scorecards or as graphs. SC methods are similar to DIS methods, expect that no estimate is made of the $-value of the Intangible assets. A composite index may or may not be produced.

Thanks to Carlos,

Thanks to Carlos, Gopalakrishna and Hasan for their valuable contributions.

A simple way to assess intellectual capital would be to construct an IC index from the average prevalence of degree-level qualifications of the members of an organisation weighted by the prestige of the place their degrees were obtained. I doubt the complex methods suggested above would add much to this general intellectual measure. This is a similar argument to saying that the main reason for differences between schools is the calibre of their pupils, not the structure of the school.

A possible way could be to measure the contribution of intellectual capital to company performance. In a not very recent publication (in the attachment) we tried to assign an index that measures the value of intellectual capital by taking into consideration: the most crucial elements to company business strategy and value creation process.

Thank you Michele

There are at least four categories of methodologies to measure intellectual capital. These categories are an extension of the classification suggested by Luthy (1998) and Williams (2000):

• Direct Intellectual Capital Methods (DIC)

• Market Capitalization Methods (MCM)

• Return on Assets Methods (ROA)

• Scorecard Methods (SC)

Luthy, David. (2001).“Intellectual Capital and its Measurement”.APIRA 98 Paper #25, 22-02-01, pp. 7-8.

Sveiby, Karl-Erik. (2001).“Methods for Measuring Intangible Assets” http://www.sveiby.com.au/IntangibleMethods.htm.

Brewer, P. “Putting Strategy into the Balanced Scorecard”. Strategic Finance, January 2002, pp. 44-52.

Dear Aykut

I'm sending you a link of a paper which may be helpful.

http://www.sciencedirect.com/science/article/pii/S095741741201322X

Using Fuzzy AHP to manage Intellectual Capital assets: An application

to the ICT service industry

Armando Calabrese, Roberta Costa ⇑, Tamara Menichini