What Is Organizational Capital

Topics: Economics, Investment, Capital Pages: 7 (2786 words) Published: November 11, 2010
Kindley, M. (2001) What is Organizational Capital? – Interview to Erik Brynjolfsson – CIO Insight

The recent bursting of the internet bubble, together with its unsustainable and sometimes bizarre business models, has resurrected the debate on the degree to which IT investments contribute to productivity growth. While economist Erik Brynjolfsson is a firm believer in the long-term contribution of technology to productivity growth, he also believes the answer isn't as easy as buying a few computers, a server and some software . H H

Brynjolfsson, a professor of management at the Massachusetts Institute of Technology's Sloan School of Management and the codirector of the Center for eBusiness@MIT, is one of a new breed of economists who invoke the concept of "organizational capital" to describe a whole range of intangible assets and investments necessary to leverage IT investments into fully productive parts of a successful, even innovative, business. His in-depth studies of more than 800 of the Fortune 1,000 companies—extending back to the pre-Internet economy—have provided some of the most tangible evidence of the value of the intangible assets that make up "organizational capital." At the end of a two-hour interview with journalist Mark Kindley in his office at MIT, Brynjolfsson mused on how he would characterize organizational capital. It's not so much an economic theory or an accepted fact. Rather, he said, "It's a perspective. It lets you see things you might not otherwise see." CIO INSIGHT: What is organizational capital? BRYNJOLFSSON: I think of organizational capital as analogous to physical capital. Just as you make an investment in the bricks and mortar of a factory, you could also make an investment in a new supplychain system, inventory-management system or a new accounts-payable process. They may take hundreds or thousands of person-hours to redesign and implement; they may require consultants and special software and be very costly to put into place. But once they've been put into place, the expectation is that they will yield a stream of benefits over a period of years—not only in terms of lower costs and greater efficiencies, but also in terms of better customer responsiveness, more innovation and more transparency for management to understand how their organization is working. An economic definition of capital is something you make an investment in and then get a stream of benefits back from over time. Clearly, a factory fits that profile. I have been arguing that many business processes are also investments in economic terms and, therefore, just as we talk about "physical capital," we should also be thinking in terms of "organizational capital." Firms that have made such investments have an asset others don't have. It's just like having a factory your competitor doesn't have. Is organizational capital directly linked to technology? No. There is organizational capital that is not associated with technology. What our studies found, however, is that there is a disproportionately large amount of organizational capital associated with technology investments. In fact, we found that among the companies we studied, there were on average $10 of organizational capital associated with every $1 of technology capital. What's included in that? All of the direct costs, such as hiring consultants, the time spent by internal and external software developers to rewrite the code and adapt the code to work for the organization, the training of the personnel at all levels, whether it be the secretaries or the line workers or the sales people or the middle managers, all the way up. Then there's the management time in thinking about which processes need to change and how. I call them costs, but you could also think of them as investments. You are spending this money with the expectation of getting some return. Is this a new measure of corporate worth? Yes. Organizational assets are a subset of intangible assets. Intangible...
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