702 Int. J. Technology Management, Vol. 20, Nos.

5/6/7/8, 2000

VAIC™ – an accounting tool for IC management

Ante Pulic
Austrian Intellectual Capital Research Center, University of Graz,
Univesitatstr. 15, A-8010 Graz, Austria
Fax: +43.316.380.9590 E–mail: ante.pulic@kfunigraz.ac.at

Abstract: The existing accounting system cannot meet the requirements of

modern companies any more because not costs but value creation is the core of
modern business. If a company aims to achieve a maximum result with its
given resources management must know how successfully they create value in
the company. Information provided by a basic economic function – measuring
the efficiency of value creation – is therefore decisive for successful
management of intellectual assets. The VAIC TM method measures and monitors
the value creation efficiency in the company using accounting based figures.
The better a company’s resources (capital employed and intellectual capital)
have been utilized, the higher the company’s value creation efficiency will be
(whereby human capital, as the decisive value creation factor of modern
business). This results in an increase of value added on the one hand and
determines the market value on the other hand as our research has shown.

Keywords: Intellectual capital; value creation; value creation efficiency;

measuring.

Reference to this paper should be made as follows: Pulic, A. (2000)

‘VAICTM – an accounting tool for IC management’, Int. J. Technology
Management, Vol. 20, Nos. 5/6/7/8, pp.702–714.

Biographical notes: Ante Pulic, University Professor, is economics educator at

two faculties, Zagreb, Croatio, and Graz, Austria.. He is also leading research
projects on intellectual capital in both countries. He gained a Degree in
Economics in 1972, an MS in Economics in 1976, and a Doctorate in
Economics in 1989. He is the author of Socialism and Markets, 1982,
Organization and Management, 1987, Information Society and Economy, 1990,
Elements of Information Economy, 1993. Currently Ante Pulic is leading the
Austrian IC Research Center in Graz – the objective of the centre is to become
a leading research place for the topic of measuring intangibles on a micro and
macro level.

Cofounder of the Austrian Intellectual Capital Research Centre and pioneer in

the field of IC management in Austria and Croatia, Prof. Pulic has primarily
focused his research on measurement of value creation efficiency in companies.
Cooperating with leading experts in this field he has developed a tool which
measures the contribution of tangible and especially intangible resources to the
value creation in companies. The term value creation efficiency should become
a standard economic measure in the new, knowledge-based economy.

His current projects are:

1 VAICTM— MVA analysis of 30 companies randomly selected from the FTSE

250, in order to prove a correlation between value creation efficiency of
resources and market value added of companies (extension to MVA-
VAICTM analysis of 70 companies noted at the Vienna stock exchange.

Copyright © 2000 Inderscience Enterprises Ltd.

 VAICTM – an accounting tool for IC management 703

2 Connection to the SAP/R3 system (controlling) in order to enable constant

monitoring and measuring of the value creation efficiency inside the
company (process and activity level).

1 Introduction

More and more companies are sensing a gap between the modern approach of value
creation and the old way of monitoring operations. This discrepancy is typical of the
situation companies face today: on the one hand there is business reality and on the other
inappropriate traditional evaluating methods.
What could be the causes for such a situation? Many analysts consider that new
business criteria require new indicators for accurate business decisions [1]. In my
opinion, there are three essential elements, which form the difference in business activity.
Firstly, the principal characteristic of the alteration is the introduction of knowledge
into products and services. After periods dominated by quantity, quality has become
increasingly important. We can therefore define a new regularity in the activities of
modern companies: In the same way the price fell with increased quantities of the
product on the market, now it falls with increased information content.
Due to the first change labour has got an entirely different position. In contrast to the
majority of labour before, which was simple and routine, now the majority of labour is
tied to knowledge and the ability of the employees to transform it into profitable action.
Depending on their capabilities the same quantity of labour may now achieve completely
different business results in contrast to prior times when a given amount of routine work
produced more or less the same quantities of a product.
And thirdly, we have a totally altered structure of expenditures. In a traditional
company the ratio between production and all other costs was 80:20 on average. Today
this ratio is almost vice versa. Production costs, which created the principal part of
industrial economy, have become almost insignificant for contemporary business, as is
production itself in the total activity of a company.
In conditions of scarcity, companies were primarily orientated towards an increase of
quantity and accordingly the entire system of measuring business performance was based
on this. The best example is revenue, which is still considered to be an adequate criterion
for a company’s size. In the traditional company monitoring of labour force and material
costs was developed almost to perfection. Contrary to that, today the significance of these
costs is marginal.
Considering these differences it is obvious that the accounting system analysing the
business activities of a company has to be changed and adapted. The once significant
resources have become less important from the standpoint of modern business since
knowledge is acknowledged as the basic resource. However, there are still no appropriate
information models providing necessary information on IC performance, which is the
Achilles' heel of modern companies. Since that course of information is hardly even
monitored I would like to focus on it in my paper and share with you my efforts to
provide a theoretical and practical solution.
704 A. Pulic

2 From expenditures to the value creation

Traditional companies based their business on physical capital and modern ones base it
on knowledge. That knowledge resides inside the employees who convert it into more or
less value depending on their capabilities. In order to manage that value creation we need
modern measuring tools.
Conventional cost accounting shows the costs of individual production operations
without connection to other activities, e.g. marketing, service, etc. Such cost accounting,
aimed at cost-control was developed to perfection seventy years ago at GM. The task was
a total control of production costs, which was achieved by adding up the individual
operations. As production was the dominant activity, the results of all other activities in a
company were not registered separately, rather were they considered general (indirect)
costs. A small shift was made when activity-based costs (ABC) were introduced. It
represented certain advancement, as costs per individual activity could be controlled in a
better way and provided some sort of connection to the whole. Nevertheless the
measuring system based on cost accounting has proved quite inadequate for
contemporary circumstances.
This problem became particularly obvious in service companies such as banks,
insurance companies, schools, hospitals, etc. with no comprehensive information on costs
because traditional cost accounting has not been created for such operations. For the
sake of objectivity it should be said that it is not the technique to be blamed, rather the
fact that traditional cost accounting is an inappropriate concept for this type of activity.
The challenge is therefore to establish a different evaluation system for business success.
With focus on the value addition in an organization and not on cost control.
According to Drucker, the traditional approach is [2] still buying low and selling
high, which is why costs were subtracted from income so that earnings could be
calculated, and why so much attention was focused on costs.
The new approach defines business as the organization that adds value and creates
wealth.
The introduction of the EVA® concept in the nineties represented a shift in the right
direction. Drucker believes that measuring the value added overall costs, including the
costs of capital, EVA, represents a measure which actually expresses the productivity of
all factors of production. Thus, by applying EVA it becomes evident which product or
service works better, and which activity adds an unusually high value. Furthermore EVA
is, according to Drucker, a measure of productivity, applicable to all activities. Therefore
EVA can be considered the first step from costs to value added monitoring.
There is no doubt that with Activity Based Cost and EVA progress was achieved in
controlling information of business activities. As I see it this is the beginning of a shift
from costs to value creation. The introduction of the concept of value added met the
essence of modern and future business activities of a company: the domination of input
(costs) gave way to output (created value).
However the present accounting system, although improved by ABC and EVA,
remains closely tied to capital employed and financial capital flows, still lacking relevant
information on the performance of intellectual capital.
Therefore I agree with a few analysts such as Charles Champy, who rightly asserts
that the measurement of business success is in for a real revolution [3]. Traditionally a
company would measure its input in the following way: how much material, how many
 VAICTM – an accounting tool for IC management 705

employees with a certain level of education and how much time is needed to complete
some task.
As opposed to this, a new measuring system for corporate success should be focused
on value creation, value creators and value creation activities and processes.

3 Control of the value creation processes

Introducing the notion of intellectual capital into business was a considerable step
forward as it represented the beginning of a new age with focus on the employees,
knowledge and intellectual assets, an essential presupposition for a knowledge based
economy.
In order to become an integral part of business the concept of IC required adequate
measurement techniques. The Skandia Navigator was one of the first methods to
calculate and visualize the value of intangible capital. Its approach is based on the notion,
that IC represents the difference between market and book value of a company.

Figure 1 Skandia Navigator

Building on this today widely accepted solution I have been concerned with three other
important aspects of IC evaluation and value creation yet unsolved by the present
methods.
1 Which way can a company’s financial and intellectual potential be leveraged?
2 If there is no adequate system monitoring the efficiency of current business activities
performed by the employees, how will management know whether they are creating
or destroying value?
706 A. Pulic

3 Market based IC value can not be calculated for companies which are not on the
stock market, which alternative do they have to determine their IC value?
Trying to find a solution I approached the problem from a different angle. The VAIC™
method (Value Added Intellectual Coefficient), designed to help managers leverage their
company’s potential, is based on current business performance.
In my opinion all the value creation processes in current business have to be
measured and documented in order to manage the value creation in the company,
optimize its potential and maximize its value in the marketplace.
The VAIC™ approach is therefore based on five basic steps.
First of all, we have to find out how competent a company creates Value Added (VA),
which is calculated as the difference between output and input:
OUT – IN = VA
Output (OUT), revenue, represents the overall income from all the products and services
sold on the market. Input (IN) contains all the expenses of everything that came into the
company. Because of the active role in the value creation process, I think that labour
expenses can not be regarded as costs any more (a key point of my method). Value added
is the result of current business and expresses the newly created wealth of a certain
period.
Then we have to obtain information on how efficiently this value added has been
created. As VA grows out of physical, financial and intellectual capital it is not irrelevant
whether a given value added has been achieved by ten or 100 employees, as much as it
matters, if ten or 100 millions of capital employed (CE) have been invested. The
objective of any business is clear: create as much value added as possible out of a given
amount of physical, financial and intellectual capital.
If value creation in the company is to be optimized it is important to analyse how well
this process has been managed. Therefore the business result, VA, is related to the
resources, capital employed, human and structural capital, in order to receive their value
creation efficiency.
The second step is therefore a relation of value added and capital employed
(including physical and financial capital).
VA/CE = VACA
The received Value Added Capital Coefficient, VACA, indicates how much new value
has been created by one invested unit of capital employed. The following example
demonstrates the relevance of this information (all examples are from case studies):

Table 1

Bank CE VA VACA
Bank 1 3,552 1,619 0.46
Bank 2 3,299 843 0.26

In this example bank 1 creates 0.46 $ VA out of any $ capital employed, while its
competitor, bank 2, makes only 0.26 VA. In other words: bank 1 doubled its value added
compared to bank 2. VACA shows how successfully tangible assets have been employed.
 VAICTM – an accounting tool for IC management 707

Now we have to calculate the efficiency of IC and its two components, human and
structural capital. From the beginning of my research in this field I have represented and
defended the thesis that human capital could be expressed by expenditures for the
employees (including all other benefits like social security, kindergarten …) as they
represent a compensation for employees competence, creativity and motivation. Since the
VAIC™ method is based on positions from the balance sheet, payroll costs are taken as
an equivalent for HC. This issue is elaborated in my paper ‘Measuring the performance
of IP in knowledge economy’ [4]. Let me just point out that Leif Edvinsson has also
taken the payroll as a possible indicator for HC and Karl Erick Sveiby considers yearly
employee remuneration as a reasonable proxy for HC.
The third step is the relation between Value Added and employed human capital.
VA/HC = VAHU
The Value Added Human Capital Coefficient – VAHU shows how much value added has
been created by one money unit invested in the employees.

Table 2

CE HC VA VACA VAHU
COMP 1 113 43 40 0.36 0.95
COMP 2 114 48 81 0.71 1.68

This example demonstrates the significance of HC in value creation: although both

companies have almost identical CE, the second company creates almost double the
value of company 1 with slightly more HC.
The next information we have to obtain is the share of structural capital (SC) in the
created value of a period. According to Leif Edvinsson structural capital is intellectual
capital minus human capital. In my approach SC is received if HC is deducted from value
added. Therefore HC and SC are in reverse proportion.

Figure 2 Relationship HC – SC
708 A. Pulic

The less HC participates in value creation, the more SC is involved. This has also been
verified by empirical research which showed that in traditional industrial sectors like
heavy industry or mining industry VA is only slightly bigger than HC, with an
insignificant part of SC. In the pharmaceutical industry and software sector we have
obtained an entirely different situation. In this area HC creates 25–40% of the entire VA
but the major share belongs to SC as can be seen on the graph.
The fourth step is the relation between VA and employed structural capital (SC)
which is calculated differently due to the fact that HC and SC are in reverse proportion.
SC/VA = STVA
The received coefficient STVA indicates the share of SC in the created value.
The VACA, VAHU and STVA indicators can be considered precise and objective as
they are derived from the balance sheet. They enable management to visualize the value
creation efficiency of capital employed and intellectual capital.
The fifth step is to find out how successfully each of the resources participates in the
achieved VA, which is indicated by the obtained indicators, VACA, VAHU and STVA.

Table 3 Case Schweppes

CE HC SC VA VACA VAHU STVA VAIC™

156 27 88 115 0.74 4.19 0.76 5.69

1996
128 25 79 104 0.81 4.15 0.75 5.71
1997

In 1997, VACA increased VAHU and STVA were reduced. How can we see if business
got better or worse in relation to the previous year?
VACA + VAHU + STVA = VAIC™
The Value Added Intellectual Coefficient, VAIC™ indicates corporate value creation
efficiency. The higher the VAIC™ coefficient, the better management has utilized the
company’s potential.
As demonstrated, the VAIC™ method monitors and measures the value creation
efficiency in the company according to accounting based figures. Both components of
value creation can be traced, monetary and intellectual, being objective due to figures
taken from the market. This way negative tendencies can be noticed in time to enable
quick management intervention.

4 The VAIC™ software - an operational tool for IC management

The VAIC™ software has been designed as a modern accounting tool that companies can
apply inside the company in order to measure the value creation activities and processes
in current business. It is focused on value creation, value creators and a value matrix. As
HC has the decisive part in value creation it is mainly HC performance that is monitored
but periodically data concerning CE and SC is also entered.
Increased IC efficiency directly influences IC development and is reflected in the MV
of the company. As mentioned already, VAIC™ is an accounting device, hence
accounting data from the balance sheet form a base for calculation.
 VAICTM – an accounting tool for IC management 709

Before the software can be implemented a division of the company into processes and
activities has to be done. Depending on its business each company defines value-added
chains, which we call, processes. The process is a horizontal addition of activities, always
with some input and some output, but never without created value for the customer who
is at the end of the chain.
Figure 3

Every chain, which creates value, can be considered a VA process. The definition of
processes and activities in each company results in a VA matrix, which has cross points,
where the value creation and the efficiency of value creation are monitored. The goal is to
locate and constantly monitor the weakest value creation points in the company. This way
fast management intervention is enabled and the efficiency of value creation can be
improved.
This display demonstrates the main part of the software, which provides basic
information on current business efficiency and is intended for data entry.
It is divided into three areas of which the first upper area provides information on
current business:
• The graph located in the upper right corner highlights the activity of VAHU, the
coefficient indicating the efficiency of value creation.
• Furthermore we have data on OUTPUT, INPUT and HC – achieved up to a certain
period of time.
• The next line indicates the VA realized up to that moment, as well as the VAHU
coefficient indicating the efficiency it was achieved with.
All data refer to the company as a whole.
The middle part of the display shows several menu options, including data entry, data
edit, possibilities for correction, a chart with business results and the VA-matrix, the
VAHU-matrix, data print.
The third part is used for data entry needed for the VAIC™ analysis.
710 A. Pulic

Figure 4

Figure 5

After the division into processes and activities each financial document has to be attached
to each process and activity.
Let us take an invoice, which our company issued to a client for example. Data from
the document is entered into the following fields: date, activity, process, number of
document, and name of partner, purpose of payment.
All monetary amounts are entered into one of the last three fields, depending on the
purpose of payment. Since we are dealing with revenue in this case, the field to be chosen
is OUTPUT. If we had cost positions for the company we would choose INPUT and if
 VAICTM – an accounting tool for IC management 711

the data referred to a payroll position, the right field would be HC. Herewith the process
of data entry is finished.
After all data has been attached to a process and activity a base for the VAIC™
analysis has been established. The option RESULTS indicates business performance
with regard to processes.

Figure 6

The demonstrated example shows that product P1 created 1,615 VA while P2 achieved
1,420. The right side displays the efficiency this VA has been created with. Therefore it is
evident that product P1 having a coefficient of 2.74 is less efficient in value creation than
product P2 with 3.09. This way a precise picture of the performance of each process has
been achieved, by employing two criteria: value creation and efficiency of value creation.
It is also possible to visualize the efficiency of value creation by graphs like the
following one. The upper area demonstrates business efficiency on company level; the
lower area shows the same but according to each of the processes.
In our example P1 has a stable but P2 unstable value creation efficiency. But, in order
to manage HC in a company we need more information regarding the contribution of the
activities to the accomplished VA, which we can get from the value-added matrix, being
the second option.
712 A. Pulic

Figure 7

The VA-matrix provides information on how much VA (expressed in absolute figures)

has been created by each activity in each process. With P1 logistics creates 155,
marketing 460, and production 1000. In the same way we have also obtained data for
product P2. In comparison with traditional accounting, VAIC™ provides precise
information on value creation but we still lack information on the efficiency of value
creation.
Since that information is provided by the VAHU MATRIX it is also the central part
of the VAIC™ analysis.
Figure 8
 VAICTM – an accounting tool for IC management 713

As can be seen from the chart we get information on how efficiently and in which area
HC is employed. The weakest point of the company, in this case logistics with P1, is
located and highlighted for management intervention. After efficiency has been improved
in that area, the second weak point, this time production with P1 requires management
intervention.
This is one of the main advantages of VAIC™; it highlights weak areas requiring
intervention and provides constant information on the efficiency of value creation in each
process.
The objective is that management can control the creation of value at any moment at
any place, regardless of the number of products or services, short term or long term.
Until now we have been concerned with HC value creation efficiency only, but in
order to receive a picture of corporate value creation efficiency, data on SC and CE have
to be entered into the software periodically.

Figure 9

5 Conclusion

We have established an entirely new accounting system, which is focused on value

creation and not solely on costs. Similar to EVA®, based on the same accounting
documentation, VAIC™ offers a changed perspective on business analysis. Via current
business performance of HC and SC a link with IC value and the market value of a
company has been established.
714 A. Pulic

Figure 10

Please note that there is no sign of equation between the two sides. This means that MV
is not equal to output. The left side represents the accumulated result of previous business
including built in expectations. The right side is the result of current business
performance.
A comparison of both sides provides information as to whether the current business
results meet strategic goals and have a value creation or value destruction tendency.
The implementation of the VAIC™ software provides control of value creation
efficiency, which enables managers to leverage their company’s potential and maximize
its value in the marketplace.
If we hope to bring economic reality into business, we have to know how successfully
we create value. Information provided by a basic economic function-measuring the
efficiency of value creation- is decisive for managing knowledge assets successfully.
At the present time, when knowledge-intensive companies are beginning to dominate,
it is necessary to introduce new indicators of business success. Our approach, the
VAIC™ method, is merely a step towards the creation of an accounting system for a new
economic era.

References
1 Harvard Business Review 1998) Harvard Business Review on Measuring Corporate
Performance.
2 Drucker, P. (1995) ‘The information executives truly need’, Harvard Business Review, Vols.
1/2, pp.54–62.
3 Handy, C. (1994) The Age of Paradox, Boston.
4 Pulic, A. (1998) Measuring the Performance of IP in Knowledge Economy, Hamilton.