FW: Industry: (Fortune) Brain Power - Who Owns It... How They Profit From It

[Hai-Tri Le <haitril@microsoft.com>]

>
>
>Brain Power -- Who Owns It ... How They Profit From It
>
>Features -- Book Excerpt
>by Thomas A. Stewart
>
>CORPORATE AMERICA IS NOW BUILT ON INTELLECTUAL 
>CAPITAL RATHER THAN BRICKS AND MORTAR -- AND 
>THAT'S CHANGING EVERYTHING.
>
>The logic of capitalism was simple. Mr. Moneybags got an idea for a 
>business. He turned his money, plus some from a bank, into fixed 
>assets -- a factory, machines, offices. He hired a Man in a Gray Flannel 
>Suit to manage the assets. The manager, in turn, hired workers to 
>operate the machines. Moneybags paid them -- hourly wages to the 
>easily replaceable workers, annual salaries to the managers, a reflection 
>of their longer-term value. Moneybags kept all the profits; he was also 
>responsible for paying the bank, maintaining the machines, and buying 
>new ones. He might offer the public a chance to share ownership with 
>him; occasionally he gave managers the option to buy a piece too. He 
>almost never let the workers in on the action, though in good years he 
>gave them a goose for Christmas.
>
>In the middle of the last century, Karl Marx noted that the industrial 
>worker, unlike the craftsman and the small farmer, no longer owned the 
>tools of his trade or the product of his labor. Marx was wrong about 
>many things, but not about this, which he called the "alienation of 
>labor." Henry Ford owned everything needed to make cars and owned 
>the cars themselves, until he sold them. Then the customer took sole 
>possession.
>
>Intellectual capitalism is different. In knowledge-intensive companies, 
>it's not clear who owns the company, its tools, or its products. 
>Moneybags's modern-day descendant starts with seed money from a 
>Silicon Valley venture capitalist. He leases office space in some Edge 
>City corporate village and doesn't own a factory; a company in Taiwan 
>manufactures his products. The only plant and equipment the company 
>owns are computers, desks, and a 1950s Coke machine someone picked 
>up at auction. Whereas Moneybags bought the assets of his company, it 
>is unclear who makes the investments on which intellectual capitalism 
>depends, the investments in people. The manager -- the Man in the 
>Ralph Lauren Polo Shirt -- paid his own way through business school. 
>The worker is shelling out for an electronics course she takes at night, 
>though the company will reimburse her for half the cost when she 
>completes it. Every manager and worker receives stock options -- as a 
>group they may own as much stock as the capitalists.
>
>Many jobs still and always will require big, expensive machines bought 
>by someone else. But in the age of intellectual capital, the most valuable 
>parts of those jobs are the human tasks: sensing, judging, creating, 
>building relationships. Far from being alienated from the tools of his 
>trade and the fruit of his labor, the knowledge worker carries them 
>between his ears. If I write a story, fortune owns the copyright, but I 
>still own whatever knowledge is in it; if you buy the magazine, you 
>don't get sole possession of the knowledge. I have it; fortune has it; and 
>hundreds of thousands of others have it too. Employees, companies, 
>and customers share joint and several ownership of the assets and 
>output of knowledge work.
>
>This change upsets the nature and governance of corporations. Look at 
>Cordiant, the advertising agency that used to be known as Saatchi & 
>Saatchi. In December 1994 institutional investors, unhappy at what they 
>viewed as the arrogance and fecklessness of CEO Maurice Saatchi, 
>forced the board of directors to dismiss him. Protesting, several other 
>executives left too, and some large accounts -- first Mars, the 
>candymaker, and later British Airways -- defected. As far as the balance 
>sheet was concerned, Saatchi's dismissal was a non-event. Nevertheless 
>the stock, which had been trading on the New York Stock Exchange at 
>8 5/8, immediately fell to 4. The moral of the story: The shareholders 
>thought they owned Saatchi & Saatchi; in fact they owned less than half 
>of it. Most of the value of the company was human capital, embodied in 
>Saatchi.
>
>There's lots of evidence of the value of human capital. Why, then, do 
>companies manage it so haphazardly? One reason is that they have a 
>hard time distinguishing between the cost of paying people and the value 
>of investing in them. At the same time, compensation systems and 
>governance structures fail to recognize who owns intellectual assets.
>
>Human capital is, to quote Yeats out of context, the place where all the 
>ladders start: the wellspring of innovation, the home page of insight. 
>Money talks, but it does not think; machines perform, often better than 
>any human being can, but they do not invent. Thinking and invention, 
>however, are the assets upon which knowledge work and knowledge 
>companies depend.
>
>The point bears emphasizing: Routine, low-skill work, even if it's done 
>manually, does not generate or employ human capital for the 
>organization. Often the work involved in such jobs can be automated, 
>which is why these are the jobs most at risk nowadays; when it cannot 
>be automated, the worker, contributing and picking up little in the way 
>of skill, can easily be replaced if he leaves -- he is a hired hand, not a 
>hired mind.
>
>I'm not saying such workers lack skill or talent. They might have a 
>jeroboam of brains, but it is private stock; the employer doesn't get any. 
>Pull a first novel off the shelf at a bookstore and read the author's 
>biography: John Doe, it says, a graduate of the University of Chicago, 
>has sheared sheep in Montana, tended bar in Fort Worth, loaded cargo 
>on the docks of Baltimore, and worked as an orderly in a Rangoon 
>mental hospital. If the listening skills he learned as a bartender made him 
>a better worker in Rangoon, that was happenstance; he has been picking 
>up human capital to put in his novel, not to offer to his employers.
>
>Our point of view must be organizational, not individual: The question 
>for companies is how to acquire as much human capital as they can use 
>profitably. Human capital grows two ways: when the organization uses 
>more of what people know and when more people know more stuff that 
>is useful to the organization.
>
>The first, unleashing the human capital already in the organization, 
>requires minimizing mindless tasks, meaningless paperwork, 
>unproductive infighting. The Taylorized workplace squandered human 
>assets in such activities. Frank Ostroff, a fellow at Perot Systems, 
>realized the extent of the waste when as a college student he took a 
>summer job at a tiremaking factory in Ohio: "We'd spend eight hours a 
>day doing something completely mindless like applying glue to rubber 
>to tire after tire, all day long. And then these same people would go 
>home and spend their evenings and weekends rebuilding entire cars 
>from scratch or running volunteer organizations." The company got 
>eight hours' work from those people but no benefit from their minds.
>
>In the Information Age no one can use human capital so inefficiently. 
>With competition fierce, says GE's Chairman Jack Welch, "the only 
>ideas that count are the A ideas. There is no second place. That means 
>we have to get everybody in the organization involved. If you do that 
>right, the best ideas will rise to the top." To use more of what people 
>know, companies need to create opportunities for private knowledge to 
>be made public and tacit knowledge to be made explicit. GE's Work-Out 
>program -- a never-ending series of town meetings in which employees 
>propose changes in work processes and bosses are required to approve 
>or reject them on the spot -- is one proven way to begin the process of 
>getting at the ideas of more people. Some companies are setting up 
>electronic networks and other knowledge-sharing systems. But every 
>company already has informal networks and forums where tips are 
>exchanged and ideas are generated, and which at their best become 
>powerful learning forums.
>
>Second, to get more people to know more useful stuff, leaders need to 
>focus and amass talent where it is needed. The link to strategy is 
>essential. Kodak, for example, a great company built on the silver-
>halide chemistry that underlies the photography business, is struggling 
>to build the human capital it needs as digital photography threatens to 
>erode the chemistry-based business. As the 1990s began, task forces all 
>over Kodak were busy trying to find ways to use digital imaging in its 
>product line. The effort led nowhere, though the company in a decade 
>had invested $5 billion in digital-photography R&D.
>
>Kodak's problem was one of scale and focus: The small groups were 
>imprisoned in the divisional boxes that created them; the boundaries 
>made it difficult for them to collaborate or share their knowledge -- at 
>one point there were 23 different groups working to develop digital 
>scanners. Kodak had a few teams of snipers; it needed a corps.
>
>Recognizing the problem when he became CEO in 1993, Kodak's 
>George Fisher dismantled the departmental task forces, putting most of 
>them into a new digital and applied imaging division. Its sales (of such 
>products as "smart" film, which stores shutter speed and other data to 
>allow better photo-processing, and a CopyPrint station, now set up in 
>many photo stores, which uses digital technology to make on-the-spot 
>enlargements of ordinary prints) totaled $500 million in 1994 and an 
>estimated $1 billion in 1996. There's a lesson in Kodak's early 
>experience with digital imaging: Human capital is easily dissipated. It 
>needs to be massed and concentrated. Intelligence, like any asset, needs 
>to be cultivated in the context of action: Random hiring of Ph.D.s won't 
>cut it.
>
>There aren't many companies that, like Kodak, face the likelihood that 
>their entire business might become based on a completely different 
>science. For most, the challenge, no less important, is to find and 
>enhance talents that truly are assets -- for not all skills are created equal
>-
>- and turn them to advantage by making them, in some sense, company 
>property.
>
>Some knowledge can, of course, be owned outright and protected by 
>intellectual-property laws. Some can be codified in processes, 
>procedures, manuals, databases, files, knowledge-management 
>systems, decision-support software, and other intellectual assets that the 
>company indisputably owns -- what has come to be known as structural 
>intellectual capital.
>
>People themselves, however, can be rented, but not owned. Ceding 
>"ownership" of human capital to a corporation has to be voluntary. The 
>short but not simple way to do this: Create a sense of cross-ownership 
>between employee and company. Says management thinker Charles 
>Handy: "I believe that corporations should be membership communities 
>.... In order to hold people inside the corporation, we can't really talk 
>about their being employees anymore ... There has to be some kind of 
>continuity and some sense of belonging."
>
>A fundamental paradox lies at the heart of the Information Age 
>organization: At the same time that employers have weakened the ties of 
>job security and loyalty, they more than ever depend on human capital. 
>For their part, knowledge workers, because they bring to their work not 
>only their bodies but their minds -- even their souls -- are far more loyal 
>to their work (though not to their employer) than those tiremakers 
>whose first love was for the hobbies that waited for them at home. 
>Compounding the problem is the fact that the most valuable knowledge 
>workers are also best able to leave their employers, taking their talent 
>and their work with them.
>
>Community ... belonging ... If it sounds like Dr. Spock, don't worry. 
>Organizations can help create bonds of ownership in both implicit and 
>explicit ways that are thoroughly adult. An adversarial relationship with 
>employees, like one with suppliers and customers, may save or make a 
>few dollars in the short run but at the expense of destroying wealth.
>
>The implicit way is to foster intellectual communities in areas that are 
>central to competitive advantage -- that is, in hard-to-replace, high-value 
>activities like marketing if you're Nike or engine design if you're Ford. 
>To create human capital, a company needs to foster teamwork, 
>communities of practice, and other social forms of learning. Individual 
>talent is great, but it walks out the door. Interdisciplinary teams capture, 
>formalize, and capitalize talent; it becomes less dependent on any 
>individual. A vibrant learning community gives the company an 
>ownership stake; if Sally leaves, three other people know what she 
>knows -- and though Sally has left, she will probably remain 
>unofficially part of the group. Chances are, employees already, 
>consciously or not, define themselves by such communities. They are 
>chemists (currently working for Du Pont), managers (whose paycheck 
>says General Electric), human resources professionals (once at Procter 
>& Gamble, now with Intel, thinking of going out on their own). If the 
>community's heart is in your shop, they'll want to stay. But if their 
>professional satisfaction comes from learning about cheese, you won't 
>keep them if you offer only the chance to build a better mousetrap.
>
>There are also explicit ways to forge the company-employee bond -- 
>namely, to treat employees like the capitalists they are. Says shareholder 
>activist Robert A. B. Monks: "I would never invest one nickel of 
>passive capital in a service firm where the value added is done by people 
>who go out the door at 5 p.m." But what if you can capture the value of 
>that knowledge or make sure the people don't walk?
>
>It's no accident that employee stock ownership is widespread in 
>knowledge-intensive businesses. Nor is it surprising that incentive pay 
>has become more popular. Says MIT's Erik Brynjolfsson: "When 
>employees have information not available to their employers ... the 
>employer can get the employee to choose actions that will make them 
>both better off only by giving him a share of the profits and losses."
>
>The knowledge worker is as much an investor as the shareholder. Says 
>Michael Brown, CFO of Microsoft: "Fifteen or 20 years ago a person 
>was either an employee or he was unemployed. Now look around: 
>People are owners, managers, and employees -- sometimes all three in 
>the same hour." Only by recognizing this fact can companies protect 
>their intellectual assets. Says Brown: "Employee ownership is a 
>profound example of how the Information Age has changed the nature 
>of the corporation."
>
>Microsoft's capital structure exemplifies the change. Microsoft has 
>never needed other people's money. It's been pay as you go since Bill 
>Gates and Paul Allen founded the company in 1975: $85.5 billion in 
>market value, all generated by internal cash flow; the company has never 
>had a dime in long-term debt.
>
>Why, then, did Gates and Allen bother to incorporate, which they did in 
>1981? And why did they take the company public in 1986, if they didn't 
>need to raise capital? Part of the reason was to limit liability -- not even 
>Bill Gates can risk taking on America's tort lawyers. But that wasn't the 
>major factor. Says Brown: "For pure Information age companies, the 
>principal barrier to entry is the ability to concentrate intellectual
>property. 
>When these companies go public, they don't do it to raise proceeds to 
>build plants. They do it to monetize the value of their employee 
>ownership programs. Microsoft was incorporated to create a vehicle to 
>share ownership, not to ramp up production. And the principal reason 
>we went public was to monetize the value."
>
>Let's play that back. Gates and Allen incorporated because they needed 
>a vehicle to share ownership. With whom? With employees. Why? 
>Because they created the company's key property -- line upon line of 
>software code -- and owned its most important asset -- the knowledge of 
>how to write more code. Forming a corporation and taking it public 
>gave them an incentive to keep their assets working for Microsoft, rather 
>than take them elsewhere. Today, ownership of Microsoft is split 
>roughly fifty-fifty between people who invested financial capital in the 
>company -- outside shareholders -- and people who invested human 
>capital -- employees and founders.
>
>Even traditional companies, which depend on huge factories and need to 
>reward the shareholders who put up the money to acquire them, can take 
>a leaf from the books of Microsoft and companies like them. General 
>Electric now gives stock options to 22,000 employees, vs. just 200 in 
>the 1980s; but stock ownership isn't the only way to compensate 
>employees for the fact that they own part of the company even if they 
>own no shares. Other companies offer gain-sharing bonuses; they are, 
>in effect, dividends paid to employees for investing human capital. They 
>recognize the fact, as Peter Drucker says, that "in the knowledge society 
>the most probable assumption for organizations -- and certainly the 
>assumption on which they have to conduct their affairs -- is that they 
>need knowledge workers far more than knowledge workers need them."
>
>When individuals are able to capture for themselves almost all the value 
>of their human capital, they often become independent contractors. For 
>most of us, though, there is some economic value that is created by our 
>being part of an organization, a reason why the work we do together is 
>worth more than the sum of our individual efforts. The organization has 
>a legitimate claim on that human capital. But not an exclusive one.
>____________________
>
>Excerpted from Intellectual Capital, by Thomas A. Stewart, to be 
>published in March 1997 by Doubleday/Currency. Copyright © 1997 
>by Thomas A. Stewart
>
>FORTUNE
>
>Copyright (c) 1997 Time, Inc.
>Received by NewsEDGE/LAN: 2/26/97 12:06 PM
>