Intellectual Capital Reports for Universities – A Trial Intellectual Capital Report at the University of Vienna

Submission for the 3rd Conference on the Public Sector, Faculty of Economics, University of Ljubljana, June 30th – July 1st, 2005

Otto A. Altenburger (presenting author) Zoltan Novotny-Farkas Michaela M. Schaffhauser-Linzatti University of Vienna Department of Business Administration Bruenner Strasse 72 1210 Vienna, Austria Tel.: +43/1/4277-38130 Fax: +43/1/4277-38124 email: [email protected]

JEL Classification: I29 key words:

Intellectual capital reports Universities Austria Reporting instruments Public institutions

(Version: June 2005)

1. Introduction Undoubtedly the intellectual capital of single persons as well as of private and public institutions is steadily gaining importance. As far as institutions are concerned, Intellectual Capital Reports (ICRs) should provide information about the “inventory” and the development of their intellectual capital. The external reports which have to be prepared by large companies comprise traditional reporting instruments like the annual financial statements which hardly recognise intellectual capital. Hence, concepts of Intellectual Capital Reporting were first developed for such companies. It was only a small step then to apply the idea of ICRs to research institutes, as intellectual capital is representing their most important – but up to now not visible – asset. As for universities, ICRs have mainly been generated for single departments so far. (For a survey of ICRs of companies, research institutions, and universities see Erlach et al., 2005.) The Austrian public universities are the first institutions worldwide that will be obliged by law to publish ICRs. This upcoming obligation was the reason for preparing trial ICRs for two chairs of the University of Vienna. One of them was the Chair of Financial Accounting where the authors are working and to which this article refers to. This practical experience complements the existing literature substantially. As the chances and problems of ICRs for universities have not been examined systematically and comprehensively so far this paper aims at a basic contribution to this topic of current interest. The remainder of the paper is structured as follows. In section 2 we present the regulations for the ICRs of the Austrian public universities as well as the trial ICR of our chair which forms the basis for our practical experience. In the sections 3 and 4 we discuss the chances and the problems of ICRs for universities and also refer to Austrian peculiarities. Section 5 summarises our results and gives some recommendations regarding ICRs for universities.

2. Intellectual Capital Reports for Austrian Universities 2.1. The Relevant Provisions in the Universities Act 2002 The Universities Act 2002 (official abbreviation: UG 2002), which is still in the stage of implementation, is bringing forth a reorganisation of the Austrian public universities (further: universities), basically by enlarging the autonomy of the universities. For example, the newly structured top-level university organs and the deans have been assigned substantially wider decision competences than in the past; the direct influence of the government, i.e. the Federal Ministry for Education, Science, and Culture (official abbreviation: bm:bwk), has been reduced. The governmental influence mainly appears in the so-called performance agreements which are public law contracts between each university and the bm:bwk for periods of three years (cf. UG 2002, section 13 subsection 1). These contracts regulate the duties of the universities, define performance targets, and determine the universities’ public funding which is divided into a basic and a formula-based budget (cf. section 12). Due to the UG 2002, subsections 5 and 6 of section 13, universities are obliged to annually submit performance reports and ICRs to the bm:bwk. Section 13 subsection

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6 defines the latter obligation as follows (official translation; instead of “in itemised form” a better translation would be “separately”): “Each university shall submit an intellectual capital report for the past calendar year to the Minister, by way of the university council, by 30 April of each year. This shall, as a minimum, present in itemised form: 1. the university’s activities, social goals and self-imposed objectives and strategies; 2. its intellectual capital, broken down into human, structural and relationship capital; 3. the processes set out in the performance agreement, including their outputs and impacts. The Minister shall, by order, issue regulations for the structure and design of intellectual capital reports.” The concept of the ICR described by this subsection of the UG 2002 is based on the model which has been developed and applied by the Austrian Research Centers Seibersdorf (ARC), a public-private research institution (cf. Leitner, 2005). The UG 2002 only defines the framework and the main tasks of the ICR; the bm:bwk has to clarify its detailed structure and design by an order. According to the UG 2002 the universities should have to implement their first ICR already for the year 2005. However, up to now only drafts of the order consisting of a large number of indicators have been published, and it is not clear when it will actually come into force.

2.2. The Trial Intellectual Capital Report for the Chair of Financial Accounting at the University of Vienna 2.2.1. Aims, Development, and Model of the Trial Intellectual Capital Report The Chair of Financial Accounting as well as the Department of Pastoral Theology of the University of Vienna which developed an individual trial ICR at the same time tried to implement the legal requirements as exactly as possible, with the restriction, of course, that the future ICRs refer to the whole universities, while the trial ones only considered small subunits. As the experience out of this project and the possible conclusions were more interesting than the numerical results themselves, we further concentrate on the steps of implementation and the problems to be faced. Unless stated otherwise, we refer to the trial ICR of the Chair of Financial Accounting. Firstly, the team members defined and verbally formulated the objectives of the chair in a couple of strategy sessions. Secondly, they derived indicators for measuring these objectives and structured them according to the underlying model, which was mainly based on the concept of ARC. The model identifies potentials, performance processes, and output/outcome of the chair. The potentials include human capital, structural capital, and relationship capital. The performance processes comprise the core processes, teaching and research, and other processes, which cannot be allocated to the first two processes, e.g., consulting. According to the model the intellectual capital influences output and outcome of the stakeholders of the chair by the core performance processes (for more details about the model and its components see Novotny-Farkas et al., 2005).

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2.2.2. Potentials Human capital as a main resource of universities has been defined as the competences, attitudes, and activities of the employees (cf. Roos et al., 1997, p. 35). The competences represent the knowledge, abilities, and talents of the employees. Knowledge expressed by the academic qualification is the theoretical element of the competences, while know-how represents the practical part. Typical indicators for measuring human capital are the number of academic staff, qualifications per academic staff, or practical experience in years per academic staff. Structural capital refers to the internal organisation and emphasises infrastructure as a basis for scientific work. It is the intellectual capital that stays in the department when the employees leave their work (cf. Stewart, 1998, p. 113). Representative indicators for structural capital are the investments in information technology and literature (in currency units). Relationship capital refers to the external organisation of the chair. It helps to intensify the relations to external partners, e.g., to the scientific community, to the economy, or to ministries, and to exchange knowledge. Typical indicators are the number of memberships in scientific associations, partnerships with other universities, and contacts to alumni.

2.2.3. Performance processes One of the most difficult tasks was to identify the performance processes, because these processes cannot be clearly distinguished from input or output measures (cf. Biedermann, 2004, p. 255). They represent some kind of a black box, where the ongoing processes cannot be visualised and thus cannot be associated with well-defined output or outcome (cf. Novotny-Farkas et al., 2005, p. 176). Even if processes could be defined, their valuation would demand steady control with great effort and would be subject to high subjective influence (cf. Kautz, 1999, p. 21, see also section 4.2. below). Among others, indicators which attempt to measure the core processes of the chair were • the number of publications with external co-authors (referring to relationship capital at the same time) in the field of research; • the number of courses per term per total number of offered courses in the field of teaching; • the number of workshops and projects and the number of participations in conferences per academic staff in the field of other processes.

2.2.4. Output/Outcome Generally, the output indicators should measure the achievement of the objectives previously defined and the impact of the processes generated by the intellectual capital on the stakeholders which are the addressees of the ICR. Many process indicators can also be interpreted as output indicators which illustrates the difficult differentiation between processes and output/outcome. However, also the differentiation between input and output is not quite clear as knowledge can be regarded as an input factor and as an output factor (cf. Deking, 2003, p. 37). Output indicators chosen for the chair were, among others, an individually created publication index (including the number of publications and the international rating of each publication), the employees’ satisfaction with their workplace, and the students’ satisfaction with the courses.

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3. Chances of Intellectual Capital Reports for Universities 3.1. Survey – Classification of Chances The introduction of ICRs undoubtedly represents an important step towards a future-oriented university reporting system which is able to evaluate and to visualise core processes and objectives of universities. Generally, the chances of ICRs can refer to external advantages for stakeholders and to internal advantages for the universities and their employees (cf. Schaffhauser-Linzatti, 2003, p. 81).

3.2. External Chances Firstly, the new – partial – autonomy introduced by the UG 2002 forces universities to intensify and to enlarge the information flow to the bm:bwk as the bm:bwk allocates the university budgets in the course of negotiations preceding the performance agreements. Therefore, ICRs support these budget negotiations between the universities and the bm:bwk by providing a more objective decision basis and by helping the universities to better present their performance in research and teaching (cf. Leitner et al., 2001). Secondly, ICRs communicate university achievements (cf. Biedermann et al., 2002, p. 71), or stated otherwise, the use of public funds to the public and so help to understand the use of tax money. Thirdly, ICRs can serve marketing purposes by presenting interpretable and marketable information. Under broader autonomy, but evident dependence on public funds the universities will compete against each other. Thus, the function of ICRs as marketing instruments will gain importance. They will aim at attracting excellent students to increase the universities’ reputation. Furthermore, ICRs help to attain and to intensify relations to private and public enterprises which are interested in academically qualified manpower and the universities’ scientific results.

3.3. Internal Chances Since ICRs are generated by the employees they increase the awareness of internal and also personal objectives. They also help to identify structural and personal strengths and weaknesses. ICRs reveal the current state of research, teaching, and other activities and support the development of strategies and the improvement of internal processes. They further strengthen the employees’ identification with the university and intensify the internal communication within the whole university, also among and within the subunits. As ICRs have to be prepared annually, past and current data can be compared in order to measure the achievement of the defined objectives. Therefore, ICRs can be used as a controlling instrument, but also as a monitoring instrument. Due to the autonomy of the universities, the university management has to develop monitoring instruments which include incentives and sanctions for the subunits and the employees, respectively, in the long run. The ICR can partially fulfil such a task, however, its positive effects can turn negative, if it is perceived as a pure monitoring instrument by the employees (cf. Hamachers-Zuba et al., 2005, p. 20, and section 4.2. below).

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4. Problems of Intellectual Capital Reports for Universities 4.1. External Problems Firstly, the current draft of the Austrian order for the universities’ ICRs, contrary to the wording of the UG 2002, mainly concentrates on statistical, quantitative data, similar to traditional reporting instruments, i.e. on “hard facts”. This orientation contradicts the basic idea of ICRs: to consider “soft” elements which cannot be expressed by numbers (cf. Berka et al., 2003, pp. 39 f.). Therefore, the planned ICR design is problematic for universities in particular as science as a whole and especially developments and innovations in science are creative processes which cannot be simply put into figures (cf. Hamachers-Zuba et al., 2005, pp. 18 and 19 f.). This ICR design would lead to a distortion of the performance appraisal. Secondly, the ICRs of all universities have to follow the instructions of the order and consequently are based on the identical model with identical indicators which seems to be an advantage in respect of comparability at first glance. However, the comparison of the two trial ICRs has shown that the same indicators very often had two different backgrounds and interpretations. Thirdly, the underlying ICR model has been developed for relatively small research institutions. The difficulties in comparing indicators of different subunits have shown that the implementation of the model for a whole university with very heterogeneous departments will lead to results of restricted usefulness and relevance. In this context the relevance and the reliability of indicators have to be considered. Measuring hard facts can provide reliable values of indicators in the sense of verifiability. But this does not mean that they have relevance. It is to question whether indicators like the average age of the employees are relevant to measure intellectual capital. The quality of indicators should be preferred to quantity. The indicators chosen for a presentation in the ICRs should give relevant information enabling conclusions about the development of intellectual capital. Pure listings of large numbers of indicators only increase the necessary efforts to generate the ICRs and do not necessarily contribute to a “true and fair view” of the state and the development of intellectual capital. A special reason for possible misinterpretations of Austrian ICRs in German speaking countries could be the fact that they are not called ICRs by the UG 2002, but literally “Knowledge Balance Sheets” (“Wissensbilanzen”, for the interpretation of this term cf. Altenburger, 2003, pp. 58 – 60).

4.2. Internal Problems Firstly, the universities will probably adjust their strategies only to the indicators specified in the order and will try to intensify those activities which improve the decisive indicators. Therefore, important aspects and processes not incorporated in the order will be disregarded. The dependence of additional funds on particular indicators will direct the universities’ output at these and as a result certain issues will be neglected. Thus, the requirement to reach defined values of indicators could indirectly reduce the freedom of research and teaching. Secondly, because of this reduction of individual freedom ICRs will be perceived by the employees as a monitoring instrument, what could lead to a reduction

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in motivation and loyalty. Performance might be increased without this side effect, if the ICR results were connected with adequate incentives and sanctions (Weinert, 2001, p. 4). Thirdly, the underlying ICR structure gives a lot of leeway in preparing and interpreting the provided information which causes substantial subjective influence on the ICR results. On the one hand, universities are tempted to present themselves very favourably to the bm:bwk by expanding the leeway and by extensively pushing special indicators to gain a better negotiation basis for the budget allocation. This laborious strategy results in an apparent betterment of the own university, however, there indeed is a zero-sum situation because all universities will apply such a procedure. On the other hand, the presented indicators are composed of single data collected from all employees of the university. For various reasons the employees are interested in overstating their performance, among others, because their performance represented in the ICR might result in rewards and sanctions. Such “sugar-coated” data are not an appropriate basis for management decisions like internal budget allocation. Consequently, comprehensive monitoring will have to be introduced which will discourage the employees. Therefore, the technical design of data entry and control as well as of sanctions and budget allocation plans will play an important role in implementing the internal ICR procedure. Fourthly, the reporting period for the ICRs as well as for the other university reporting instruments is the calendar year. This period corresponds to the general practice of most public institutions. However, it does not take into account that universities do not only represent research institutions; teaching activities are organised within academic years from October to June. Our trial ICR showed the drawbacks of this regulation as all teaching data have to be adjusted from terms to calendar years. This is not only a troublesome and time-consuming task, these accruals and deferrals also distort the true and fair view on data changes between consecutive academic years. At last, each amount of time dedicated to generate ICR data reduces the time available for research and other activities, i.e. it deteriorates the generated indicators.

5. Results and recommendations The legal implementation of ICRs for universities represents a courageous step forward to a future-oriented reporting system. It will definitely improve the information on intellectual values of universities to the broad public and will help university management to better manage its previously invisible intellectual capital, but faces some drawbacks. Mainly, the ICR model should treat qualitative and quantitative information with equal priority. However, the verbal interpretation has been nearly totally neglected in favour of a large number of simple indicators. These indicators are said to be comparable over all universities and all fields of science. This so-called comparability does not stand our empirical proof as indicators with the same label hide different information on not comparable performances and procedures. As the comparison between the two trial ICRs has shown, the objectives and strategies of the subunits are very specific and different. The comparison of standardised indicators of the two departments would fail. Therefore, the inclusion of narrative elements is recommendable. The narrative description of indicators and results does not only support their interpretation, but also emphasises their relevance.

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Our trial ICR showed that especially large universities like the University of Vienna cannot be covered properly by the governmental model due to their internal diversity. This is one of several reasons why further feasibility tests should be carried out before a specific ICR design becomes obligatory (cf. Berka et al., 2003, p. 40). However, the results presented here do not claim to be universally valid. Our paper should mainly serve as a basis for further discussions.

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