These days, the value of a firm doesn't have much to do with physical assets but with intangible assets like brand, customer relationships and capabilities. We can lock up our offices, but how do we protect our intangibles?

When you look up "protecting intellectual capital" on the Internet, you find a raft of articles about legal protections: patents, non-disclosure agreements and non-compete contracts. It's sensible to use these tools, but is it sensible to rely on them? If your competitive advantage lies in superior manufacturing skills, can you really prevent your employees from ending up at competitors and bringing a lot of know-how with them?

A larger part of the solution seems to lie in how you manage human capital - the ability to attract, develop and retain talent and the corporate capability to move faster, execute better and learn more quickly than anyone else.

Retaining Intellectual Capital
When I speak to HR managers about protecting intellectual capital, they quickly breeze past the discussions about legal constraints and speak about developing and retaining talent. Retaining talent is a tough subject to pin down because it involves everything from compensation, to corporate image, to managerial style, to the opportunities for women. HR managers talk about creating "a great place to work," and that's really the first line of defence in protecting intellectual capital.

However, as USC professor John Boudreau points out, HR tends to make two mistakes when tackling a problem like keeping talent. First, they think of it as an HR problem when creating a great place to work has more to do with the actions of line managers than the programs HR implements. Secondly, HR tends to aim for corporate-wide programs while the intellectual talent to be protected is not evenly distributed. It is important to direct the investment in people to where it will have the biggest impact.

So the role of HR is not so much to create programs to make the company "a great place to work" as it is to help managers understand and think through the importance of retaining intellectual capital. As managers come to terms with the issue and identify the individuals who hold critical intellectual capital, then it is often fairly self-evident what they need to do. For example, if some R&D scientists have crucial knowledge, then their managers need to focus on what will make the company a great place to work for these scientists - which may be little more than freedom and good support services. Furthermore, managers can do a lot to retain talent without any help from HR. Simply paying attention to what key people want and need can have a huge impact. (You can learn more about Dr. Boudreau's ideas at www.hcbridge.com)

Developing Intellectual Capital
Keeping intellectual capital in-house (and hence depriving competitors of your most knowledgeable people) is the first step. But, in the long run, a firm's ability to develop intellectual capital is every bit as important. Peter Senge, author of The Fifth Discipline, and others have written extensively about the learning organization and those ideas remain valuable. More recently, Harvard's Dorothy Leonard has made a big contribution with her investigation of "deep smarts" (Deep Smarts: How to Cultivate and Transfer Enduring Business Wisdom by Dorothy Leonard and Walter Swap, HBSP 2004.)

Dr. Leonard points out that competitive advantage does not lie with the technical smarts you can readily buy on the market but with the "deep smarts" you find in unusually bright and experienced managers and professionals. The people with deep smarts are the "go to" people for tough and critical problems. They are the ones who see through the clutter and get the firm moving in the right direction. Developing all members of your staff is important; nurturing the growth of deep smarts is what differentiates great firms from good ones.

People do not develop deep smarts in the classroom. Instead, deep smarts are grown over years, cultivated by the right kinds of experiences. These experiences include being given stretch assignments, diverse jobs and a chance to work closely with your in-house gurus. In every project, there is the short term goal of getting the job done, but there should also be the longer term goal of using the project as an opportunity to develop deep smarts.

This brings us back to Dr. Boudreau's ideas. Developing deep smarts is not something HR does directly. It's up to line managers to understand the importance of developing intellectual capital and to seize the opportunities to do so. For example, a joint venture with an overseas partner is not just a chance to open new markets, it's a chance to give a high potential employee some experience working aboard. HR's role is as coach and champion, helping managers recognize and seize those opportunities.

Look for an upcoming interview with Dr. Leonard at www.humancapitalinstitute.com, a non-profit think tank that WITI is generously partnering with.

Preventing Leakage
However, legal protections, staff retention and the development of deep expertise cannot completely prevents leakage of important ideas to competitors. If you have great manufacturing processes, the loss of a single staff member can be enough to bring much of that knowledge to other firms. Even if no one leaves the firm, knowledge has a way of getting out. Everyone knows about Toyota's production systems, Southwest's strategy and how Microsoft selects programmers. Interestingly, these firms don't do much to prevent leakage; in fact they are very open, telling the press about what they do. This leads us to what is perhaps the ultimate weapon in protecting intellectual capital - creating value that is hard to copy.

A lot of capability lies not with individuals but with teams and more broadly with an organization culture. An effective team will still be effective even if one person leaves, and that one person may find he or she can't recreate success on the competitor's team. An organization that innovates quickly is not at risk of leakage; competitors will end up trying to copy last year's ideas. An organization that excels at execution has a kind of intellectual capital that is hard for competitors to copy, no matter how many employees they hire away from that firm.

Conclusion
While legal protections and efforts to retain staff are both very important, they leave large parts of intellectual capital untouched. The larger answer to protecting intellectual capital will be in developing and protecting deep smarts and in creating value that is hard to copy.

When you ask managers what they are doing to protect intellectual capital, you rarely get more than a vague answer. This is an area ripe for exploration, and those managers who figure it out will contribute greatly to their organization's on-going success.

HELP! David Creelman, author of this article, is looking for people interested in the topic of protecting intellectual capital, particularly in manufacturing. If you can spare a few minutes to answer some questions please write creelmanresearch@canada.com. WITI is collaborating with Kobe University and the Human Capital Institute on this project. Interested WITI members will receive a report and an opportunity to participate in panel discussions on the topic.

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