1. The Efficiency of Intellectual Capital Ante Pulic [email_address] & Karmen Jelcic [email_address]

2. Annual percentage change Labor Productivity in Europe

3. INTEL 200 bil. $ (FORTUNE 5 Hundred, 2006) 35 bil. $ 165 bil $ V I S I B L E M A R K E T V A L U E I N V I S I B L E Human Capital Stru c tural Capital Intel l e ctual Capital CASH RECEIVABLES ASSETS SHORT-TERM LIABILITIES LONG -TERM LIABILITIES C apital Problem is that we do not manage and measure this part but use “ rules of thumb” Where is the problem?

4. „ T oday ’s companies don’t need better managers. They need better value creators.” How can we know if and how much value we have created?

5. Knowledge - Intellectual Capital Money By connecting …

6. Without nu m bers it is neither possible to lead k nowledge e conomy nor to increase the productivity of knowledge workers. "When you can measure what you are speaking about, and express it in numbers , you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory k ind . Lord Kelvin: Lecture to the Institution of Civil Engineers, 3. May 1883. Our Approach

7. Our Numbers: Value Added (VA) and IC Efficiency (ICE) Taxis Interests Amorti sation Wages and salaries Profit All products and services bought at market Empolyees Development Banks State Owner’s R E V E N U E ICE = VA VA

9. New indicators Our explanation for labor productivity fall Traditional indicators Not only revenue & profit but also VA & ICE

10. 2006 TOP o f EU BANKS a ccording to Value Added

11. 2006 TOP o f EU BANKS a ccording to Intellectual Capital Efficiency ICE average = 3,38

12. AVERAGE AVERAGE Source: Calculation by Dr. Mariusz Chmielewski and Karol Sledzik Intellectual Capital Efficiency in Polish Banks

13. After more than 15 years of intensive IC related action, there is a profound insight into the existing approaches. It is not likely that a radical new solution will come up in the near future. This is why I have decided, that in the existing context, it is possible to present the f ollowing principles. I am very happy that t he p rinciples h ave t heir World Promotion at this event. The Principles of Intellectual Capital Efficiency – A Brief Description –

15. Today, the main busienss acitvity is incorporation of knowledge into products and services. Therefore companies do not need b etter managers. They need managers who are better value creators – individuals who do not only understand organizational processes but also the way of functioning, which enables continuous increase of value added . T he existing productivity problems are more due to a lack of business imagination (knowledge) in utilizing new possibilities and less due to the optimizing solutions in given circumstances. 2 . Value C reators as essence

16. The value added is the bridge between knowledge and money. A precondition of efficiency is value added. In order to increase the productivity of knowledge work the first step is to monitor what is happening with value added. Following situations are signals that warn of possible problems in current business: - fall of value added in relation to the former period - increase of value added which is lower than inflation - stagnation of value added 3 . Value Added as output

18. An ongoing and comprehensive control of value creation is necessary. In order to successfully increase the created value added it is vital to find out for every process inside the company , and, if possible, even for each working place, how much it contributes to value creation. In the same way , each action , first of all by management but also all other decision makers, influences value added . The question is: “H ow will their actions be reflected in value creation ?” . This question must therefore be come a substantial part of decision making. 5 . Value Added C ontrol

19. Creating value added is not enough, it has to be done efficiently as well. In the old times productivity meant producing more and more physical units in a certain period of time. Ef ficiency means creating more and more value out of one invested monetary unit in u tilized resources – financial and intellectual capital. 6 . Value Added Efficiency

20. 2,50 or more Very good 2,00 Good 1,00 Much worrying 1,25 Worrying 1,75 The edge 7 . Efficiency Levels for Intellectual Capital

21. In order to keep business productivity increasing , control of efficiency is necessary, starting at business processes . Herewith I refer to the process as a group of tasks, where it is possible to trace precisely how much value it creates. All processes inside a company should be monitored since that is the base of successful business. It is in processes that value is either created or destroyed . Therefore identification is needed of those processes, where value is destroyed, reasons have to be found and causes eliminated. 8 . Efficiency C ontrol CHIEF EFFICIENCY OFFICER C E O – for New Economy

22. Creation of any product or service requires manifold activities . Some of them add to value creation , some do not . It is very important to know what each activity is doing with regard to value creation , short and long term. Only because a company creates value as a whole it does not mean that there are no units/parts where value is not destroyed. Improvement of business processes where value is destroyed leads to increase of efficiency in these parts of the company and the efficiency of the company as a whole. The value creation efficiency or inefficiency of each unit, transfers to total efficiency of the company. That is valid for all levels of business (from the business processes to the national and global economy). 9. Elimination of V alue D estruction

23. Intellectual capability is based on the potential of employees . Their knowledge and capability Transformed into value at the market are the f undaments o f contemporary business and will be so in t he future. It is therefore of utmost importance to define exactly the remuneration which the employees ought to receive for their intellectual efforts . In the past that was dependent on two factors: the time spent at work and the quantity of physical output. Today, that is not valid any more since individual and group value creators (the knowledge workers) have entered the scene. T herefore, remuneration has to be based o n the capability of the individual to firstly createvalue , and secondly, to do it efficiently . The principle “ as much my work contributes to value added and increases effici ency” would be a fair criteria for remuneration of employees. 10. Efficiency R emuneration

24. “ The most important contribution of management in the 20th century was to increase manual-worker productivity fifty-fold. The most important contribution of management in the 21st century will be to increase knowledge-worker p roductivity hopefully by the same percentage. ” Knowledge-Worker Productivity: The Biggest Challenge, California Management Review, 1999, Vol. 41, No. 2,

26. Thank you for your attention and good luck with value creation and IC efficiency in your banks. More information on: www.vaic-on.net © 2007 Center for IC & Ante Pulic