Organizational Capital: Making the Relationships Work

by Vince Kellen, Senior Consultant, Cutter Consortium

On the face of it, we all can agree that how a company does its work matters a great deal. The continual interest in reorganization, the business process reengineering explosion of the 1980s, and the now nearly universal acceptance of the business process and organizational structure as fundamental to good performance give proof to this truth.

However, how a firm does things includes "squishier" concepts that are harder to get our minds around, especially from an IT perspective. This includes things like corporate culture, human relationships, and leadership. Researchers have several names for this concept of how a company does things, including the term "organizational capital." One could conceptualize organizational capital as comprised of various elements -- business processes, structure, reporting relationships, decision-making processes, training, empowerment, use of teams -- but united in at least one way. Organizational capital is embodied in the relationships between individuals. How companies do their work and share their knowledge to do better work is directly tied to relationships between people.

In 2002, three researchers, Erik Brynjolfsson of MIT, Lorin Hitt of University of Pennsylvania, and Shinkyu Yang of New York University, showed how powerful organizational capital is in their paper, "Intangible Assets: Computers and Organizational Capital" (PDF). In their research of 272 companies, they showed that companies that invested heavily in IT assets and heavily in organizational capital are much more highly valued by investors, and this excess value is intangible, meaning it is not due entirely to the increase in IT assets. The adoption of certain work practices, when coupled with IT investments, is adding more to the value of the firm. Their research shows that strong investments in both IT and organizational capital must be made. Companies that invested heavily in one but not the other did not match the superior market performance of those companies that invested heavily in both. The researchers also noted a significant time lag in which the benefits of the investments may take three to five years to show up.

By their own admission, Brynjolfsson and his research partners captured a small portion of organizational capital, namely education levels of workers, training costs, and decentralization of decision rights and work management. The researchers admit that organizational capital is much broader than what their research measured. Competitors may not easily copy those aspects of organizational capital (management practices) that work well for successful companies. Imitation may be difficult.

I contend that heavy investments in IT tend to produce (or at least co-occur with) management practices such as decentralized decision making, greater use of teams, broader job requirements, a more educated workforce, quality management frameworks, simplified and improved business processes, and better cross-department coordination. The technology makes some of these things easier (e.g., decentralized decision making, cross-department coordination), and it tends to require some of these practices (e.g., broader job requirements, more education).

This line of reasoning begs several questions: Does lack of attention to organizational capital and its myriad of components cripple investments in IT? How much should a company examine its management practices when making large IT investments? Or should the firm simply invest in the IT and get around to the accompanying management practices later? At what point does corporate culture need changing in order to get the payoff from the IT investment? Is your company's culture well matched for the major IT investments made so far and to be made in the future? Are your competitors ahead or behind you in adoption of good management practices? What investments are they making that seemed timed with IT investments? Can or should you copy these practices? What collection of management practices are the magic elixir in your company, that when mixed properly, ignite the IT investment?

Too often discussed separately, the planning of investments in IT assets should be joined with the planning of investments in management practices. I welcome your comments on this issue of the Cutter Edge and encourage you to send your insights on the market in general to me at vkellen@cutter.com.

-- Vince Kellen, Senior Consultant, Business-IT Strategies Practice