What distinguishes the Swedish firm [Business, March 27] is its approach to measuring its intellectual capital. Its techniques have been featured in its annual reports since 1994, with details unmatched by any other firm. Skandia's image as a proponent of innovative ideas has been reinforced by extensive publishing, public speaking and promotions. This constitutes the centerpiece of its efforts to create the image that it's one of the most sophisticated firms in advancing new concepts of how to increase employee productivity.

To understand what Skandia is doing requires an immersion in philosophies, metrics and classifications. One must become acquainted with the fine distinctions of how to partition intellectual capital into human capital, structural capital, organizational capital, customer capital, innovation capital and process capital. To steer through such subtleties, you must become proficient in using the Skandia Navigator, the Skandia value scheme, flow-based models (a PC software package called Dolphin) and, most important, the Skandia Intellectual Capital Index, which aggregates more than 100 variables into groupings such as the relationship capital index, the human capital index, the infrastructure capital index and the innovation capital index. A sampling of this collection would lead you to discover just about every conceivable metric, such as employee turnover, average years of service, change in the company's IT literacy, PCs per employee and IT expense per employee.

All the inputs are then passed through a series of equations that establish such relationships as: Human Capital Base Value = Net Present Value of Five Years' Payroll Costs.

Unfortunately, how all this relates to company success isn't explicit.

After having satisfied myself with Skandia's intellectual concepts, I became curious about their effectiveness. Does all of this inspirational thinking produce superior results?

One way of judging a firm's performance is to compare its financial record with those of its competitors. That's easy; analyzing Skandia's size, revenue and industrial classification produced a list of 19 look-alike firms in five other countries. I settled on return on shareholder equity (ROE) as the measure for assessing the productivity of people and how well their talents were deployed for shareholders' benefit.

The top-ranking firm was German insurer Aachener und Muenchener, with a 1998 ROE of 48.4%. At the bottom was Victoria Holdings, also in Germany, with 7.6%. Skandia ranked second from the bottom, with a meager 8.2% - barely above the cost of capital. This isn't an impressive performance for a firm that boasts about its leadership.

I then took a closer look at Skandia's history to see if 1998 stood out as a bad year. It didn't:

Compared with half its peer group, Skandia has consistently underperformed in delivering superior results.

Many firms let their public relations enthusiasm exceed their accomplishments. The stock market often rewards this enthusiasm with share valuations that are higher than what their plodding-but-profitable competitors get. But in due course, the shortfalls are recognized and the firms are penalized when their market worth nosedives.

There's no substitute for delivering above-average financial results as proof of competitive excellence.