Insight

Five eyes on the fence: structural capital

September 2018


In my book Five Eyes on the Fence, I debunk the myth that the health of a business can be judged by its bottom line alone – by its financial capital. Instead, I assert that financial capital is a by-product of four other capitals:

1. Human capital includes the personalities, intelligences, behavioural traits, values, attributes, and motivators of a person, a family, or a company.

2. Intellectual capital is a company’s and its employees’ knowledge and experience.

3. Social capital is a company’s network of people and associates.

4. Structural capital includes a company’s processes, systems, and ways of delivering its products or services.

A company that pays attention only to its financial capital has a high probability of failing: The company is keeping only one eye on the fence. The recipe for a company’s success is much broader and includes the interrelationship between all five capitals.

In this series of articles, I examine how the five capitals form an intricate web, and how you can make decisions based on how the five capitals interact. In the March 2017, September 2017, and March 2018 issues of Business World, I discussed human capital, intellectual capital, and social capital. In this article, I look at structural capital.

Structural capital

At its core, any structural capital is the way we do things in a business that  creates reliable and repeatable outcomes. It is the mechanism by which a company delivers a thought, a product, or a service. It includes systems, processes, and modes of communication, such as employee handbooks, lead-generating systems, invoicing processes, customer retention structures, and all other structures for sharing knowledge and communicating with social capital.

Structural capital: the glue that holds the others together

A company with rich structural capital will have a process or processes that make sure:

• Human capital is honored through its actions
• Social capital is protected and leveraged
• Intellectual capital is delivered efficiently
• Financial capital is maximised.

Structural capital, in this way, is the glue that holds all the capitals together, weaving them into a cohesive unit.

To this extent, then, structural capital is the most important. Because all the capitals rely upon one another, structural capital is required to integrate, web, and link everything together. If processes are not solid, the company is likely compromising its human capital, neglecting its intellectual capital, ignoring its social capital, and therefore leaking financial capital in the form of lost profits and opportunities.

And yet, structural capital is often the most ignored of all the capitals.

Building and rebuilding structural capital

Whether they have been consciously created or not, your organisation likely has processes in place. If the structures are not in place intentionally, though, they are probably poor structures. Likewise, if the structures are not reviewed regularly, they very likely will lose their power. Still others will be well thought-out, but in the end, they create bottlenecks.

For this reason, companies should adopt an attitude of continuous improvement with respect to their structures. Indeed, many companies start believing in the sanctity of a process, confusing the process with the purpose of the process. We must have structure for a reason, not for the structure in and of itself. Ultimately, structures must create a value for which a customer will pay. In other words, they need to work by improving your business.

Because your business, as well as the internal and external environment, will always change, structural capital should also change. Consider, for instance, the uptick in online reviews, like Yelp. If an organisation does not have a process for managing and responding to its Yelp reviews, it can and will be negatively impacted.

Three considerations for building solid structural capital

The best structural capital, then, meets three objectives:

1. First, it is consistent. Systematic processes ensure that nothing within an organisation is being done haphazardly.

2. Second, it is efficient. Structures should alleviate an organisation from having to reinvent the wheel each time it secures a new client or delivers a product or service to a new customer.

3. It should force an organisation to focus on all four of the other capitals. A company can begin seeing how it might increase leads, for instance, by enriching its social capital. It can create a system for systematically evaluating each line item on its profit and loss statements to find less expensive but more efficient methods for creating its product. It can create systematic review and feedback processes to identify external factors that could encroach on its intellectual capital.

When making sure structural capital is intentionally serving an organisation’s other capitals, ask these questions:

• Do these processes contribute to making a profit?
• Do we have processes in place to measure the satisfaction of our social capital constituents?
• Do our processes facilitate or impede delivering value to the constituent?

Finally, and most importantly, never be afraid to modify a system. All change can be uncomfortable, but strengthening a structure is like strengthening a muscle – it hurts at first, but it will give you and your company more longevity and the ability to carry more workload in the long run.

Author: Tony A. Rose