"My working life has been a journey of unlearning," says author and consultant Karl Erik Sveiby. While it's now fashionable to talk about how individuals and organizations can learn more effectively, he finds that his greatest insights have accompanied the loss of notions previously held. "My first job was as an auditor, unlearning what I had learned about accounting in the university. It took two years...and I also learned that I was not fit to be an auditor. So I spent six years as a manager at Unilever unlearning the accounting experience." When he left Unilever in the late 1970s and entered the world of publishing as an entrepreneur and journalist, he began to see the world of business anew. He went on to write two books about the emerging knowledge economy in the mid-80s that became best sellers: The Know-How Company and Managing Know-How (with Tom Lloyd). He also helped encourage the formation of what he calls "the Swedish Community of Practice" a group of some 40 Swedish companies that are actively measuring intangible assets and sharing what they learn among themselves. Although this group hasn't gotten much press outside Sweden, it has been exploring the management of intangibles for roughly a decade. In 1994, Sveiby and his partners sold the publishing company, he finished his pending PhD and became an independent consultant focusing on knowledge organizations. His new book, The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets (Berrett-Koehler), makes the case for a clear and resolute knowledge strategy and offers useful tools and methodologies for companies that intend to move in this direction. Among his most important contributions is his framework for managing knowledge organizations and for measuring intangible assets. It focuses on three dimensions: employee competence (the capacity of employees to act in a wide variety of situations); internal structure (patents, concepts, models, and computer and administrative systems); and external structure (customer and supplier relationships and the organization's image). Sveiby, who recently spoke with Knowledge Inc.'s Britton Manasco, now resides with his family in Brisbane, Australia.

KI: In your new book, you urge companies to adopt a knowledge focus. What does this mean?

SVEIBY: I urge them to develop a more knowledge-focused strategy or look at their firms from a knowledge perspective. That means they should manage the three categories of intangibles that I define in the book -- individual competence, internal structure and external structure -- rather than the tangible assets. If they focus on leveraging and managing their intangible assets, profits will come. It is not the other way. Tangible profits are driven by the intangibles. Therefore, companies will have to focus on people issues. By focusing more on people -- on developing skills and creating environments for more value creation -- they will create profits. Investments are for knowledge creation. So they will build IT-intense networks and infrastructures that enable people to share knowledge. They will not build offices with cubicles and corridors that hamper communication. But even if we have all these great knowledge systems and office spaces, people won't share knowledge if they don't trust each other.

KI: What are the key characteristics of an effective knowledge organization?

SVEIBY: There are several success factors associated with knowledge management. The first one is that you can't lead these kinds of organizations unless you know the core of the professional knowledge, so you can have trustful dialogue with the professionals. And you can't lead from a distance. The actual leadership is where the business takes place which is with the professionals and the customers. If you are a manager who hides behind secretaries and doors and spend your time in "important meetings" with like- minded managers you will never be able to figure out what is really going on. You will believe that you manage the organization, when it has in fact already been taken over by the leading professionals. A third issue is quality and quality control. The knowledge focus on quality is that people don't want to be linked to poor quality products or services. People actually like to work on things they can be proud of. It's very simple. The output has to be of very high quality because knowledge production is an expression of people's creativity. They are personally and passionately invested in the product of their work. The fourth one is a focus on know-how or knowledge. In the very successful firms, you have an almost elitist attitude toward knowledge. It's McKinsey's "up or out" policy : you rise to the level of partner or you leave the firm. The fifth factor is that the successful ones seem to be able to combine managerial and professional know- how. There is always a threat of a rift between these two. In fact, I think this is the next class struggle: the struggle between the professionals and the managers. It goes down to the core of every organization. It cannot be solved actually. It has to be re-addressed over and over again. Managers and professionals have different agendas. The managers are there to preserve and develop the organization as such. If the organization survives and prospers, they are rewarded and they feel proud. Not so for the professionals. They work with customers and they generally couldn't give a damn about the organization. The organization, from their point of view, is there to give them support. These are two very different agendas and they have to be reconciled. Otherwise, the organization will fall apart.

KI: Any examples of how this struggle is playing out?

SVEIBY: Look at recent disasters in the financial industry like Barings or Daiwa or Sumitomo. The professionals pursued their own agenda without the managers even knowing what was going on. Nick Leeson was doing his own thing over there in Singapore while his managers were sitting in "important meetings" in London. The derivatives market is a new field and the managers of Barings Bank didn't master it. Leeson was able to get away with it in a fairly simple way. The response from the financial industry has been more managerial control. It is the Industrial Era approach: supervise the bastards. That's what you see in a bank, for instance. However, that is detrimental to trust and creativity. You have to rely on more indirect measures instead. The sixth characteristic of an effective knowledge organization therefore is a strong, well defined culture. Knowledge organizations are very easily guided by ethics and strong cultures. The knowledge-focused way of doing it is to establish a framework of company ethics that helps you solve the problems of clients. It works both ways of course, so if the top managers (as in Barings) are greedy themselves they create greedy behavior. Hewlett-Packard is a prime example of a strong, positive culture, that is well communicated as the "H-P Way".

KI: Let's talk about the measurement of intangible assets. What has been accomplished so far?

SVEIBY: We haven't achieved very much at all. I started this "movement" or "community of practice" in Sweden in 1987 when I convened a working group that reported our ideas on measuring intangible assets in a couple of books. Today, there are about 40 Swedish companies measuring their intangible assets. One of them is Skandia , though they have changed the labeling of it to "intellectual capital." The intellectual capital movement -- the concepts Skandia and others are using -- are ones that I developed and that we reported back in 1988. Still, I don't think we've come very far. Skandia is one of those that have developed the concepts furthest in practice. But they have only about four years of experience. There are companies in Sweden that have up to 10 years of experience and that can point at remarkable financial success. I feature one of them -- WM-data -- in my book. The problem of any measuring system is that we are trying to design indicators or other measures for human processes and actions. Those kinds of measures cannot be invented out of thin air. They have to be tested carefully in reality. This is why a community of practice is so important and Skandia shows the way with their Annual Report supplements. If you don't test the measures and work with others and present your data in your annual report, you will never get any feedback and you will not learn. In Sweden, the companies that measure intellectual assets actually interact with each other and try to learn from each other. There's nothing like the Swedish community of practice on a global scale. There is a cluster around intellectual capital designs ¤ around Skandia. I'd say that is the most encouraging development because they are actually working together to design and test theories. There are probably thousands of different measures out there that are computed by managers who use them for their own operations, but they are not reported. Managers often keep a little book with a few key figures -- that's what they believe in. Managers are in fact computing many of these measures already, but they are not comparing them and they are a bit ashamed of them. The top management wouldn't approve.

KI: So there are a number of hurdles that stand in front of those who would measure intangibles...

SVEIBY: Yes, and there is one more that needs to be mentioned. The culture of reporting is one of seclusion rather than openness. Annual reports have developed into vehicles for concealing, rather than presenting and making transparent what is going on in the company. In Sweden, there are about 15 companies listed on the stock exchange that voluntarily publicly present their intangible assets with numbers in their annual reports and the Swedish Council of Service Industries has issued a recommendation on how to report. There's nothing like that in the global arena.

KI: What is an audit of intangible assets?

SVEIBY: The term "audit" suggests an outsider is evaluating the company. If you do your own reporting it's more of a management information system. It's an internal control and monitoring instrument. Those are two very different things. They are produced for very different purposes. Most of the companies in Sweden, for instance, are presenting their ideas for an external audience, but they aren't audited. They are presenting their own ideas about what is relevant, so naturally they present the "best" numbers. No outside expert is evaluating what is good and what is bad. There is a case in my book on the company Celemi, which has developed a business simulation called "Tango" that is based on my ideas. I have made an audit of its intangible assets for its annual report. I actually interpret these measures , judging whether something is good or bad, too low or too high. It makes a big difference. If you study the supplement to Skandia's annual report, you don't find any value or evaluative statements. The numbers exist in a void. This is the case with all Swedish firms , with only one exception, WM-data, that I have covered in the book. Most companies present their indicators in the same way as their financial statements : without an interpretation. It is only when you can interpret them that these numbers take on a meaning. The stage we are at right now is that very few people can allocate a meaning to these indicators because we don't have a community of practice around them. For me, an audit is when an outsider makes a value statement about a company's intangible assets. No one is doing that today. I think the one I did on Celemi is the world's first.

KI: What should go into the design of an audit for intangibles?

SVEIBY: There are two points. One is that you have to design a system that fits your own corporation. They are not like the financial indicators which are readily comparable between companies because they use the same currency. The currency of the company is unique in this case. If you are a brick manufacturer, you have to create indicators that fit your production and your reality. It's different if you are an advertising agency. They have to produce very different types of indicators. The other thing is that, despite this fact, I believe that we have to encourage companies to present generic indicators as well , not only company-specific ones. This is why I produced this book. These indicators are generic in the sense that any company can produce them. They can at least be computed. The financial community has developed highly sophisticated financial indicators over the last 100 years. Now, we are at Year One in the development of these kinds of indicators. We have very little to compare with. There are a few clusters of objective comparisons, like the Quality movement. They have quality indexes that are comparable. The Human Resources community has a number of useful indicators. These clusters of comparison are scattered. There is no cohesive body that actually puts all of these aspects of knowledge and intangible assets into a perspective and into a structure on a global scale, so the intangible assets of Intel, Ford and Marriott Hotels can be compared.

KI: You consider the evaluation of the customer relationship a key aspect of measuring intangible assets. Can you elaborate on this issue?

SVEIBY: I feel a lot of the discussion about intellectual capital is very introverted. It is confined to the internal knowledge of a firm, intangible assets that can be controlled by managers like patents or trademarks or computer systems or people. This is an Industrial Era approach to Knowledge Management, focusing on what can be made "tangible". So they often are not taking customers into consideration. There are two agents that can change any kind of knowledge you have: your own people and your customers. Customers are people too. One must realize that when we produce something for and with customers we create a relationship with them. This relationship is an asset and it has to be monitored. There are two or three of these customer relationship indicators that are generic. One is the customer satisfaction index. To what extent are the customers satisfied with your services? This can actually be compared between industries. The satisfaction of Coca Cola drinkers can be compared with the satisfaction of riders of Suzuki motor bikes. These kinds of indicators are very important and should be reported in the annual report. Another indicator looks at what kind of customers you have. The interesting question from a knowledge perspective is: To what extent do these people help or support you in your endeavor to increase your own intangible assets? To what extent do they provide what I call "intangible revenues" that enable you to improve your intangible assets? To what extent can you profit from the knowledge of your customers? Netscape linked up very closely with the developer community when it was developing its browser. These customers gladly, willingly spent hours working with new software and reporting "bugs" to the company. This is the value of customer relations, but we are given no clue about that relationship in the traditional annual report.

KI: What are we trying to accomplish by visualizing intangible assets and accounting for them? Why should a CEO or an investor care?

SVEIBY: Today, they probably don't, because they do not think outside their present mindsets. Managers ask, "What's the point of measuring these things?" They are right about one thing: Audits of intangible assets don't tell people anything about what they are presently rewarded for , sales or profits, for instance. If you start to measure with a knowledge perspective on your business, however, you are in for trouble unless you change the whole idea of what you are doing. Measuring goes hand and hand with reporting, rewarding and managing. We're talking about a revolution in the way companies have to be managed. If you have management with an Industrial Era mindset, they probably don't want it. It would upset their world. Just think about what a difference it would make if you measured customer relations and the way people feel about their company and you reward your managers based on how they enhanced these aspects of the company. Imagine what a different world we would have if we rewarded people based on these indicators.

Karl Erik Sveiby's site is: www.sveiby.com.au.