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Valuing knowledge as a corporate asset

The idea that knowledge is a resource, an asset that should be leveraged for maximum productivity and competitive advantage, is widely accepted. However, it seems that this is easier said than done.
Read time 17min 50sec

Knowledge management strategies within organisations take many different forms and are based on differing views of not only the extent to which knowledge is manageable, but also on different views of what knowledge actually is.

Almost across the board, there is a realisation that tangible assets account for as little as 20% of a company`s value and growth. Yet managers are loathe letting machinery that could be productive sit idle, without imposing similar optimal use requirements on the "other 80%". The problem, of course, being that the other 80% is intangible, hard to account for, and difficult to manage effectively.

The most basic strategies for "knowledge management" simply provide technology enablers that allow knowledge workers to more effectively collaborate, share their experience, expertise and corporate information. These technologies include databases or data warehouses, reporting tools, intranet infrastructure and collaboration software.

More sophisticated strategies identify explicit as well as tacit knowledge within an organisation, and document processes that most effectively exploit this knowledge.

At the leading edge, organisations are trying to actively account for their knowledge capital and its use, just as they rigorously account for their finances and tangible assets. These organisations go beyond the assumption that the difference between their market capitalisation and their net asset value must be equal to the value of their intangible assets, and try to find concrete ways in which intangibles - and particularly knowledge - can be measured, accounted for, and managed.

What is knowledge management?

This question, simple at first sight, proved to be most loaded when posed to different people and different organisations.

Whatis.com, an excellent reference on technical terms and concepts, enlightens us thus: "Knowledge is, to an enterprise or an individual, the possession of information or the ability to quickly locate it."

It goes on to define knowledge management as follows: "Knowledge management is the name of a concept in which an enterprise consciously and comprehensively gathers, organises, shares and analyses its knowledge in terms of resources, documents and people skills."

1 a. (usu. foll. by of) awareness or familiarity gained by experience. b. a person`s range of information. 2 a. (usu. foll by of) a theoretical or practical understanding of a subject, language, etc. b. the sum of what is known.

The Concise Oxford Dictionary of Current English, 9th edition, -

Michal van As, MD of Intervate, a small Microsoft solution provider that provides intranet tools and related technology solutions, considers two distinct views of what knowledge is. In doing so, he points out a common problem facing companies considering knowledge management (KM) strategies:

"You have the extremes of the academic interpretation of what knowledge management should be, to the productised or bastardised versions of trying to take features and relating that to an academic principle," he says.

As a practical interpretation, he views knowledge as "information that facilitates business decisions". Then, he says, there is `tacit knowledge`, which is "true experience and real knowledge in the more academic sense".

...the capacity for informed action.

Mario Marais, KM consultant, CSIR`s ICT division - icomtek

PricewaterhouseCoopers consultant Charl Lombard considers knowledge to be information that leads to action. Mario Marais, KM consultant at the CSIR`s ICT division, icomtek, presents a somewhat broader view, and defines knowledge as the capacity for informed action - or knowledge that can lead to action, to use PwC`s terminology.

Karl-Erik Sveiby, a well-known practitioner in the field of KM, broadly agrees with Van As that there are two divergent streams of thought. His own work falls in the knowledge-focused stream, which says something like: "the value of knowledge comes out when its many forms are leveraged."

A competing stream, on which assumption Sveiby believes 80% of KM investment is made, is information-focused, and says: "the value in knowledge comes out when it is made explicit in the form of information." This line of thought, according to Sveiby, is US-led and heavily promoted by IT firms.

He is critical of this second view. "The trouble for KM is that its agenda has been hijacked by the US IT companies and consultants, who make their living from selling IT advice," he writes. "For instance, since Business Process Re-engineering [BPR] has turned into an ugly word, the earlier BPR advocates seem to have hit the find/replace button on their word processors and are now telling the world how to `manage knowledge`."

Yet another definition - although also in the "information-focused" camp Sveiby mentioned - comes from Martin Rennhackkamp, MD of Prescient Business Technologies, a company that focuses on business intelligence and e-business system development and their integration.

"Real knowledge management takes place when we get applied knowledge as a result," he says. "In real terms, that means getting useful information, to the right decision-makers, at the correct level of detail, at the right time."

...the sum of (stored or known) information in a specific context.

Russel Swanborough, founder, Absolute Information Inc

Russel Swanborough, co-founder of Dimension Data-owned company Absolute Information, takes issue with many popular definitions - including dictionary definitions - of terms such as knowledge. "If I ask for the definition of `chair`, most people say it`s something you sit on. This is true, but it doesn`t define the word. In fact, it`s a level platform, averaging about 50cm to a side, elevated by the same amount, that usually has a backrest and optionally has armrests attached to it. The difference between the two definitions is that the first never considers that I might want to use the chair for a different purpose than to sit on."

He says it`s the same with knowledge. Most definitions point out one or more uses of knowledge - or worse, are self-referential.

One component of a remarkable 25-year project developed by Swanborough and his colleagues is a Common Informational Vocabulary (CIV), designed to raise the consistency and formality of information-related (informational) terms to the same level as that found in economics or mathematics.

CIV defines knowledge as the sum of (stored or known) information in a specific context. In turn, it defines information as signals of coherent content that pass within or between orgs (where `org` is an existing word which includes the concepts `organism` and `organisation`).

KM is defined, according to the CIV, as the management of knowledge... It elaborates, luckily: "KM is the management of marketplace, competitive or internal knowledge (and optionally intelligence) that has been processed and/or stored within an org."

Does all this bring us any closer to understanding what knowledge management actually is, and what it means for actual real-world companies?

The short answer is yes. It shows the various flavours of what essentially are Sveiby`s "two streams". The first is focused on recording information about customers, competitors, past business activities, market conditions and so on, and making it effectively available to employees when and where they need it to make decisions. This is a fairly technology-driven view, although it also involves a change of culture among employees.

The second is focused more on tacit knowledge - knowledge or know-how that resides in the heads of employees - and how to measure, document, share, retain and use such knowledge. At the forefront of academic and business thinking one finds proposals and ideas for measuring this knowledge, accounting for it, and managing it the same way one would manage one`s tangible assets.

If knowledge is power, why share it?

A frequently cited problem that faces companies in their KM efforts is encouraging knowledge sharing.

Knowledge isn`t valuable when it`s in someone`s head.

Lesego Tlhabanelo, marketing communications manager, Lotus Development SA

Lesego Tlhabanelo, marketing communications manager at Lotus Development SA, now a division of IBM, says that although KM uses technology for business intelligence, collaboration, knowledge transfer, knowledge discovery and expertise location, it is not just about technology.

"Knowledge isn`t valuable in someone`s head," he says - placing himself firmly in the camp that advocates making knowledge explicit. "You have to enable a culture of sharing knowledge, and convince people of the value of doing so."

Lombard explains that consulting houses like PwC make knowledge sharing a requirement among its consultants and managers. The company implements incentives, and people`s record at sharing knowledge is an important consideration for promotion.

"We`ve implemented a global discussion list, named Kraken, where people share ideas, discuss issues and raise questions," he says. "This kind of informal knowledge sharing technique has worked well for us."

Strong leadership can instil a culture of knowledge sharing within an organisation.

Keith Goossen, engagement manager, EMC

EMC`s engagement manager Keith Goossen says that secure leaders will empower others in their organisation with knowledge. "Consultants, for example, are reluctant to share, but the idea is not to reinvent the wheel, but to improve it. Strong leadership can instil a culture of knowledge sharing in organisations."

"Companies have to convince their employees of the value - not only to the company, but to themselves - of knowledge sharing," says Tlhabanelo. He reasons that if one has knowledge and sits on it, its value dramatically decreases over time. If, instead, that knowledge is shared, one would expect to receive new knowledge in return, creating benefit for both parties.

He points to the usual suspects - employees, business systems, customers and suppliers - as the sources of knowledge within an organisation. However, he goes on to suggest that knowledge management should extend out of one organisation, and across its partners. This requires an even more liberal view of the value of sharing knowledge.

Marais points out that customers can often be one`s best source of information about one`s competitors. "People are amazingly willing to share that knowledge," he says.

Managing knowledge: flows versus transactions

Ironically, Sveiby, the name behind the consulting firm Sveiby Knowledge Management, which helped companies, including MTN, account for and manage their intangible assets, does not believe knowledge can be managed.

Knowledge management is a poor term, but I suppose we`re stuck with it.

Karl-Erik Sveiby, director, Sveiby Knowledge Management

"KM is a poor term, but we are stuck with it, I suppose," he laments. "`Knowledge focus` or `knowledge creation` are better terms, because they describe a mindset which sees knowledge as an activity, not an object - a human vision, not a technological one."

Piet Dempsey, MD of Knowledge Focus, a company specialising in managing digital information assets, also doesn`t like the term. "We prefer to call it knowledge preservation and knowledge retrieval."

Knowledge Focus (the company, not Sveiby`s term) helps companies build what Dempsey calls an organisational memory, by integrating all data types - text, paper, office documents, video, databases and the corporate intranet.

Van As also believes that "real" KM is something that won`t be achieved anytime soon. "It`s going to take many years to get to the level where one can take collective tacit knowledge, centralise it, and make it available to other people," he says.

"As an almost transitionary platform, KM should be a case of taking information, and using that information to facilitate business decisions. In that way you turn information into knowledge."

This view heavily influences the activities of Intervate, Lotus and many other software companies that provide technology tools to manage the information inherent in the communications of knowledge workers.

Most more elaborate - non-technology-focused - knowledge management theories revolve around the idea of codifying "know-how", or making it explicit. Many manufacturing companies, for example, are able to codify the results of their research and development once a product has been created. This `knowledge` is usually patented, because once it becomes explicit, it can easily be transferred, and used by competitors.

According to Cathy Stadler, marketing director of CommerceOne, a key source of knowledge is that resulting from participation in business-to-business (B2B) trading exchanges. "Companies start with putting their product catalogues online, and performing simple online buying and selling. This information can then feed into supply chain management systems, customer relationship management systems, and becomes the source of knowledge within organisations," she says.

Stewart Barker, CEO of Commerce Centre SA, agrees that in implementing KM, collecting knowledge is the most difficult process, and B2B trading helps with this.

Deliberately transferring knowledge within an organisation is, at best, an imperfect process, as Nonaka and Taeuchi describe in their book, "The knowledge creating company".

They describe a cycle that starts with turning people`s tacit knowledge into externalised, conceptual knowledge, combining it with the existing knowledge base of individuals to become internalised as operational knowledge of how to do something, and making this part of their tacit knowledge again. Each stage in this cycle involves some loss of information, and the process becomes increasingly inaccurate as the codifiability of the knowledge in a company decreases.

Most companies talk of sharing knowledge, of making it available to the right decision-makers at the right time - in short, they talk of knowledge flows.

This is strongly influenced by the models on which the big five consulting houses base their KM offerings, and broadly agrees with best practices to date in pioneering organisations.

One view contrasts significantly with all these views. Swanborough`s Absolute Informational Management Principles (AIMP) define information `transactions` in the same way that one would define financial transactions.

"Companies - even one-man-bands - wouldn`t dream of accounting for their finances without employing the transactional concepts of debit and credit, and applying the Generally Accepted Accounting Principles (GAAP) to document not the flows, but the transactions they were involved in," he says.

In his view, information can be accounted for in much the same way, as long as suitable analogues for debit and credit are devised.

Unambiguous communication requires unambiguous language.

Russel Swanborough, founder, Absolute Information

"I have a long list of instances where terms are used by consulting houses and in books, but they have almost exactly opposite meanings," says Swanborough.

The AIMP consists of the CIV, to eliminate this kind of ambiguity, and combines it with tools that implement a transactional system of informational management. Swanborough claims it has - in anticipation of patenting - been tested in a wide range of market sectors, and has had a 0% failure rate to date. It is also much simpler and more intuitive to use than knowledge management systems that require lengthy descriptions of information flows, and often overlook crucial aspects of a company`s knowledge processes, he says.

Measuring the results of KM

With one exception, everyone interviewed for this article said that measuring or quantifying knowledge is very difficult. Swanborough`s answer was "easy!"

The details of the AIMP are still subject to non-disclosure, pending the granting of patents on key elements and tools.

The value of information is exponentially proportional to its adequacy.

Russel Swanborough, founder, Absolute Information

AIMP proposes a "triple-entry knowledge-keeping" system that is analogous in many ways to the double-entry bookkeeping everyone is familiar with. Information is expressed in terms of suitable units and unambiguous language, which makes it possible to manage information or knowledge as exactly as is the case with finances.

The most common method for determining the return on investment for KM is in terms of what it achieves.

"You can measure innovation in terms of how old your products are, for example," explains the CSIR`s Marais. "How many new partnerships have you entered into? These are the kinds of indirect metrics that can be used to prove how knowledge was used."

PwC`s Lombard agrees that the results of KM - rather than knowledge itself - can be quantified. "A popular technique is the balanced scorecard."

Skandia AFS, a Swedish financial services company, developed this technique. It structures intellectual capital and reports it on its balance sheet. Its famous hierarchical breakdown of the types of capital employed in an organisation combines innovation capital and process capital into organisational capital, which combined with customer capital forms structural capital, which combined with human capital equals intellectual capital, which added to financial capital gives the final market value of the organisation.

This system, although post-dating Sveiby`s work, was arrived at independently. Sveiby`s own theory about knowledge capital divides it into three categories: customer capital, structural capital and human capital. Many people in the KM field focus on how to convert or transfer human capital into structural capital. Sveiby takes a somewhat broader view, by accounting for the flows between all three forms of capital.

I don`t believe we will ever be able to measure knowledge, and I am not sure it is needed either.

Karl-Erik Sveiby, head, Sveiby Knowledge Management</P>

However, he writes: "I don`t believe we will ever be able to measure knowledge, and I am not sure it is needed either. Many managers are very good using just `gut feel`, which generally suffices very well."

Swanborough dismisses this "gut feel" as "taking pot luck", by contrast.

According to an article in the July 2000 issue of Knowledge Management magazine, Cisco has been able to measure the return on its investment in Web-based information sharing tools. Among the measurable results were:

  • An order cycle shortened by 70% - from six to eight weeks to one to three weeks, resulting in savings of about $440 million in fiscal 1999;

  • 25% increase in customer satisfaction since 1995;

  • On-time and error-free order delivery 98% of the time;

  • Contribution to annual growth of as much as 50% per annum;

  • 40% to 60% saving in traditional classroom training and travel costs by conducting about four-fifths of sales and technical training online;

  • $58 million per year saved thanks to automation of work processes and employee services; and

  • Income per employee of $690 000 in 1999, compared to $435 000 of its closest rival, 3Com.

According to Computer Weekly of 6 May 1999, Cisco`s investment in its intranet between 1995 and 1999 was between $20 million and $25 million.

Theoretical debates about the quantifiability or otherwise of knowledge immediately take on less significance in the face of such figures.

Face to face with the government`s chief knowledge officer

Richard Gerber is the chief knowledge officer in the Department of Communications (DOC). A conversation with him instils renewed confidence in the ability of the government to face the challenges of today and the future.

"Knowledge management is often perceived as being an IT issue," he says. "However, our view is that if a project entails more than 25% IT, it`s an IT project, not a KM project. It actually consists not only of IT, but of around 60 different disciplines. These include psychology, ethnography, participant observation, and so on."

Gerber is leading a communications strategy based on three elements: raising awareness, initiating a national debate and building capacity. "It`s a new area, and my role is leading a process of increasing awareness of knowledge management at national, provincial and eventually local government level," he says.

This process has already seen two seminars on KM. The first was hosted on 21 August 2000, and the second more recently, on 2 March this year.

Gerber illustrates his view of the development of KM along the famous s-curve. "It`s at the innovation stage, and we`re targeting the innovators and opinion leaders in government," he explains. "One can consider the digital divide as a knowledge gap. One can`t close that gap except through making knowledge available as a resource."

However, he`s very aware that of the so-called innovativeness-needs paradox. "Those people who`re most likely to adopt KM strategies, probably least need it. We`d like to address the segment of most resistance. I found incredible willingness within the public service to adopt KM, from a certain proportion of people. Within the DOC itself, 10% of people are doing a KM course. 10% to 20% are willing to adopt it, which is a critical mass. Even if I do nothing further, KM will be adopted now. The s-curve will be completed through opinion leaders and the early majority. It`s been a pleasant surprise for me."

In Gerber`s view, the wide scope of KM - across the 60 disciplines he mentioned - means that KM can be aligned with the national objectives of job creation and economic growth.

"There is an association that addresses the needs of underemployed graduates. KM has a wide scope for employing graduates. If you do the math, 100 000 graduates earning R100 000 a year each would realise R1 billion in GDP. And it`s cream on top," he says. "This could increase our country`s growth rate massively, from 3% to 3.3% - this is the potentially measurable effect of KM. It has the potential to make degrees that previously were considered pretty much useless, valuable."

At an upcoming conference on KM in Washington in April, Gerber has been invited as the only non-US speaker, presenting the various KM initiatives underway in the South African government.

More information on the DOC`s efforts on KM will soon be available on a new Web site at http://www.km-debate.co.za/.

See also