Conversations
with Tom Stewart -- Part I
Bursting Bubbles
Tom Stewart
Board
of Editors, Fortune magazine
Editorial Director, Business 2.0
Editor, Harvard Business Review
Editor's
note:
This is a synthesis of the "Conversations with Tom Stewart"
held in March, 2002 as part of the AOK STAR Series. It was Tom
Stewart's second visit as volunteer moderator in as many years.
Each month AOK members enjoy the visit of a KM luminary as guest
moderator. During the course of 11 months, the STAR Series will
have delivered the best "conference" of the year to
the desktops of AOK members around the world for a fraction of
the cost of a physical conference and with the convenience of
continuous education that is at the right place at the right
time. Please Join AOK for
free and participate in these knowledge exchanges as they
happen in the future.
Table of Contents (Click on list item to go
directly to each topic)
 Introduction
Jerry
Ash, AOK chief executive:
It is my good fortune to welcome once again the most prominent
of champions of intellectual capital in the world business press
for a second time as guest moderator of the AOK STAR Series discussions.
Tom Stewart reaches
870,000 readers with his monthly column, "The Leading Edge,"
where he pioneered and championed the field of IC. His advocacy
began with a series of landmark Fortune articles and has continued
with sustained coverage of its progress that has earned him an
international reputation as the leading expert on the subject
of intellectual capital.
In 1997 his book,
Intellectual Capital:
The New Wealth of Organizations added fuel to the fire.
Now, his newest book, The
Wealth of Knowledge, Intellectual Capital and the Twenty-First
Century Organization has just been published.
At first, it appears
the world's foremost IC cheerleader has forsaken us with a first
chapter that "makes a case _against_ KM," and an afterword
that talks about "Blowing Bubbles." Not so. Those are
excellent communications techniques that should pack the tent
with both the nay-sayers and the evangelists. The purpose of
this book remains the same: setting out the latest thinking in
creating and managing knowledge assets and providing a detailed
course of action for organizations trying to navigate their way
in a knowledge economy.
Welcome back Tom!
Jerry
Ash: That
said, Tom, I want to begin by recalling your last visit to the
AOK STAR Series in April last year. It was a wonderful visit,
but many of our members felt our topic -- Managing in Real Time
-- was too narrow. They wanted to explore your Wealth of Knowledge
much more broadly.
And so, I invite
you to throw the pages of your new book wide open. Let's see
if a theme will develop on its own.
Meanwhile, I have
arbitrarily chosen "Bursting (not blowing) Bubbles"
because I was intrigued by your thoughts in the Afterword of
your book. You reported that in the Spring of 2000, three out
of four senior executives believed the Internet would completely
transform every aspect of business; more than half said the change
would put away the old rules about how companies should operate.
Eighteen months and 3,000 points on the Nasdaq later, you describe
a second phase -- the "destruction that comes after creative."
You went on to say
that the Nasdaq bubble did terrible harm to the knowledge-business,
because people believed that the two are the same . . . .
Aw, heck, Tom, I'm
telling your story. Maybe you'll pick it up there. But I've initially
labeled your AOK Series "Bursting Bubbles," because
I'm worried about the potential impact of the "crash of
intangibles" on the rise of intellectual asset management.
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Crashing Intangibles
Tom
Stewart:
Thanks, Jerry. It's great to be back. The new book, The
Wealth of Knowledge: Intellectual Capital and the 21st-Century
Organization, tries to move the discussion forward, to
help companies put knowledge-economy ideas into action in a way
that will produce profits.
(Incidentally, I
stopped writing "The Leading Edge" last spring. Most
of my writing now is for Fortune's sister magazine, Business
2.0., of which I am now Editorial Director. Among other things,
I'm writing a column on the web (or via e-mail subscriptions),
called "Barely Managing." The most recent is at http://www.business2.com/articles/web/0,1653,38800,00.html.)
I think those of
us who believe knowledge management matters, who know
knowledge management matters, have shot ourselves in the foot.
Not because we have done a bad job of communicating. If anything,
we have done too good a job -- people have been willing to trust
us with thousands of millions of dollars to "do KM."
We have done a lousy job of connecting our efforts to the businesses
we work in. We haven't made strategic sense of our insights into
the value of knowledge. We have an economy where it is thinking
-- knowledge, intellectual capital -- that tips the balance between
success and failure. People talk about this all the time. But
something is missing in the talk -- a way to turn it into action,
into an agenda for improved performance.
As a result, our
efforts are vulnerable to the small and large catastrophes that
can come when they are not solidly connected to real results
and real strategies. We've recently suffered two of them: The
bursting of the dot-com bubble and the scandalous collapse of
Enron.
The bubble, first.
Those numbers you site -- that three out of four senior executives
believed the Internet would completely transform every aspect
of business; more than half said the change would put away the
old rules about how companies should operate -- come from a survey
by Rosabeth Moss Kanter of Harvard Business School. Happily,
she took the survey in a three-month period that precisely brackets
the NASDAQ high. That is, the numbers present a high-water-mark
of sorts.
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KM Used to Cook the
Books
The problem we
-- as knowledge management types and advocates -- have is that
a lot of that irrational stuff was wearing finery it borrowed
from us. In effect, analysts and stock-hypers, eager to push
valuations to new highs, used some new-economy realities (a lot
of important assets aren't on the books, for example) to lend
credence to the bubble.
Backlash time comes,
as it always does, and we hear the view that the New Economy
is only about the Internet -- cynically, the view that it was
all a lot of hype to drive NASDAQ stock prices to the giddy,
effervescent, irrational heights they attained a year ago. Now
you hear revisionists saying there never was a new economy, it's
all the same. A year ago in Harvard Business Review, Michael
Porter basically set forth the proposition that the information
age is business-as-usual, that the Net is no big deal, and that
competitive advantage is the same as it always was.
Well, no. With all
due respect -- and Michael Porter is due enormous respect --
he's wrong. The New Economy was never about the dot-com bubble
-- though people who hyped stocks for a living tried to say so.
Nor is it about the Web and high-tech; though, again, the Internet
bubble -- which will go down in history among the best (i.e.,
worst) of all market bubbles -- clothed itself in New Economy
rhetoric. It was, and is, about a revolution in productivity.
A jump --basically a doubling -- in the underlying productivity
growth of the US economy; productivity grown so great that it
continued even during the recession.
Usually in a recession
productivity goes down one or two percent -- during this one
it went up two percent -- a spectacular event, and an unprecedented
one. It was productivity growth that was built by the convergence
of telecommunications and computing. Productivity growth that
was built by the managing of information with the same efficiency
with which we long ago learned to manage materials. Productivity
growth that, ultimately, is built on the foundation of developing,
deploying, and investing in knowledge assets.
Same thing goes
for Enron. Those slickers did an amazing job of sprinkling new-economy
pixie dust in peoples' eyes -- including mine. I've never heard
anyone speak more cogently about these ideas than Jeff Skilling.
Enron's collapse has, I fear, done damage to a very important
cause, the need for accounting reform so that we can get rigorous,
audited measurements of aspects of knowledge companies that are
not disclosed by accounting today.
Enron, I think,
proves the need. A major reason the company was able to get away
with the things it did was that we, the business public, were
prepared to overlook the bookkeeping, because we know how flawed
and irrelevant it is even if it's honest. Patent medicines sell
because people don't believe in the official medicines. They
sell because we know that there is something out there -- and
we fall victim to the con artists who prey on that.
Sure, the dot-com
bubble was irrationally exuberant. That's not the first time.
And Enron was a fraud. Not the first time, either. In 1849, tens
of thousands of people rushed out to San Francisco to look for
gold. Most of them went bust and some fell victim to crooks and
frauds. A hundred fifty years later, tens of thousands of people
went to San Francisco to start internet companies, and the rest
started telcos. And most of them went bust, or will, and some
fell victim to crooks and frauds. But was there gold in San Francisco?
And will the knowledge revolution change the world?
It already has.
Back
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We Wounded Ourselves
Tom
Stewart:
At the same time, knowledge management wounded itself. Seven
or eight years ago I was giving a talk about intellectual capital
and was asked if this would ever become a fad. No, I blithely
replied, it won't, because there is nothing to sell.
I underestimated
the ingenuity of consultants and the fertility of capitalism.
This was basically before the WWW, before such things as Intranets,
and therefore before IT and consulting guys got hold of the idea
of KM. A couple of years after I said there wouldn't be a fad,
a full blown business fad was under way. About three to four
years later, a study by Forrester Research revealed that six
out of seven companies spending money on knowledge management
weren't bothering to try to calculate a return on their spending.
That, to me, is the definition of a fad. And I am sure that those
companies got exactly the ROI they were promised.
The problem, I argue
in The Wealth of Knowledge, is that a lot of knowledge
management (on the technies' side) and organizational learning
(on the HR side) has been utterly or nearly utterly disconnected
from how the company makes money. Stan Davis likes to remind
people of the distinction between an organization and a business.
The former looks inward, on reporting relationships, org charts,
hierarchies, politics, and "internal customers"; the
latter looks out on real customers, markets, competitors, suppliers,
and money. Too much KM and too much "learning organization"
has been about the organization rather than about the business.
You've got to find
your knowledge business before you can build your knowledge organization.
Jack
Vinson, knowledge manager, Pharmacia:
One of the things that really rang true for me at the AOK/Delphi
Summit last week was the idea that any learning management or
knowledge management strategy must be tied to the overall strategy
of the organization. Maybe that has something to do with the
fact that I was speaking in the track on KM Strategy. However,
in the Corona-lubricated wrapup session, Carl Frappaolo reminded
us that ANY project must have its own critical success factors.
Ideally, we have
success tied to ROI, but even when a clear ROI is not available
there must be a definition of "What does success look like?"
This is where I was trying to do with my discussion at the ELKE
Summit. The KM strategy or the KM program may sound great, but
if that is not support the overall strategy of the organization,
then the KM strategy should not be pursued.
Tom, can you talk
about what you have seen as exemplary KM strategy tied either
to ROI or to the organizational vision? We've seen too many situations
you describe where, "KM will pay for itself!" Do we
need to begin a new push for measures of intangible assets?
Tom
Stewart:
Always the toughest question. Here are a few, but I'm afraid
they're not particularly unusual.
(1) Buckman Labs.
A specialty chemical maker, it realized that the best way to
produce custom chemicals for its customers in the paper and leather
businesses was to have its brightest chemists working at the
customers' sites, not in a central lab. But it couldn't do that
without redesigning all the flows of knowledge and information
so that experts could live on the rim of the organization, out
where it meets the customers, but still be available to and learn
from everyone else in the organization. All Buckman's knowledge
management is designed to improve its ability to deliver customized
work, which is its strategy.
(2) A lot of major
oil companies -- Shell, Chevron -- have used knowledge management
effectively and strategically to deliver expertise anywhere in
the organization, to improve return on (hard) assets by sharing
best practices, and to collect and share lessons learned in discovery
and drilling. The key strategic insight here has to do with the
realization that drilling and discovery costs and asset utilization
are key drivers of success for integrated oil companies. Knowing
this, they set up knowledge management programs designed specifically
to improve those aspects of the organization. I tell some of
the BP and Chevron story in my new book.
(3) Wal-Mart's amazing
use of real-time information, shared data and stock replenishment
with suppliers, etc. is a coherent, strategic strategy that has
given the chain a cost advantage that others simply can't match,
no matter how hard they try or how much they spend. They're very
close-mouthed -- you've never seen a story titled "The Inside
Story of How Wal-Mart Does It" -- but everything I can see
says that they have an entirely coherent information and knowledge
management strategy, and that it really works. If the oil companies'
issue was return on capital, Wal-Mart's (like Dell's -- the business
models are not dissimilar) has to do with working capital management
and with getting superior knowledge of the market in real time.
All of Wal-Mart's knowledge management aligns to serve those
strategic goals.
(4) Everything at
GE focuses around knowledge sharing in order to do two strategic
things: Make the organization fast, so that its size becomes
an asset rather than a liability; and develop so much management
and leadership talent that GE can run a trade surplus in human
capital, with its cast-offs being better than anyone else's home-growns.
GE has so many different businesses that it can't say (for the
company as a whole), that it has a strategy of customization,
or return on hard assets, or working capital management. It varies
from business to business. GE's strategy is to create the ability
to bring ideas from one business rapidly and effectively to bear
wherever else in the company they can add value. That means having
a fast, informal, gossipy, aggressive, sharing culture; lots
of systems and structures that allow and compel people to share;
systems and structures that act as termites to destroy bureaucratic
walls when they form; and managers who are gossipy, aggressive,
sharing, fast, and informal, move around a lot in the company,
and have enormous networks of contacts. (There are no introverts
at GE.) I think it's a fair, if large, generalization to say
that all of GE's non-financial systems are aligned behind those
two goals.
The generalization
here is that these companies have a clear idea of their business
model -- how they make money. They set up a strategy behind it.
And then put knowledge management to work to help the strategy
happen.
K.S.Srinivasa
Murty, Head of Corporate Knowledge Management, Hindustan Lever
Limited, India:
Thank you very much Tom, for your incisive assessment of what
ails KM practice. I would like to share some thoughts and eagerly
look forward to your comments.
My comments are
in the context of what Tom said, which I believe, beautifully
captures the experience of most KM practitioners.
Whom should we hold
responsible for the low credibility for KM ? (with due respects
to a few pioneers who have demonstrated ample success in a few
organizations). How should we go about improving the credibility?
Ask any manager
-- Is leveraging collective knowledge very important for excellence
in realizing you organizational goals? I doubt if any one will
ever disagree. Ask -- do you think KM is critical to realizing
this excellence? The response could vary from -- "KM is
a diversion from the focus on effective action" to "desirable
but not critical. Only very few might actually acknowledge that
KM is critical to delivering excellence. Why this dichotomy?
Let me share my views:
To me, if knowledge
is the sense making ability of the people / organization, there
can be no debate on its importance in decision making and business
performance. The question therefore is not, if knowledge / intellectual
assets are key to business excellence, but how do we strengthen
the organizational capability to create, capture and leverage
knowledge. As Tom pointed out, many organizations which have
had a consistent track record of high performance have in place
some practices to help leverage knowledge, whether they call
it KM or not -- GE is an example. My own experience is that our
company endorses this view. In most cases, I feel, they don't
call it KM because some of these processes were in place before
we started talking of KM and we developed interventions to tackle
key business issues identified by these companies (to tackle
the pain points in performance management). No doubt, with the
convergence of telecommunications and computing, the paradigm
has undergone a change and organizations must fully leverage
the emerging technologies to leverage knowledge to deliver a
step change in productivity growth. Therefore the practices we
have been adopting for leveraging knowledge will continually
evolve.
Partly, the problem
may be the way KM is organized in Industry, as a specialist function
distinct from HR, IT and Operations management. Who should focus
on Knowledge management /leveraging knowledge? KM function or
operating teams? Who are knowledge workers? KM specialists or
operating management who have to address real problems in real
time and deliver business results?
KM discipline emphasizes
the criticality of creating, capturing and leveraging collective
knowledge to improve performance. It then provides a set of enablers
- culture change interventions, IT interventions, knowledge mapping
and structuring tools, pattern recognition tools and techniques
(econometric analysis, data mining etc.) and decision support
tools and techniques like simulations for scenario building and
evaluation of options etc. What KM emphasizes is an integrated
use of these enablers - focus on one enabler and neglect of the
other enablers will most probably result in failure to deliver
expected results or sub optimal results.
If we agree with
this view, what is KM ? It is a management competence -- an ability
to leverage collective knowledge to tackle real day to day business
issues and deliver excellence. Who should develop / imbibe this
competence? All employees, more so the operating management and
front line employees.
Are we addressing
them to create an awareness of KM -- (emphasizing) what, why
and how, and helping them internalize the know-how of
the KM practice? It is only when KM is embedded in the way of
working in an organization, by what ever name we may call it,
it will deliver the expected results. As long as KM is primarily
seen as a set of tools and techniques and practices prescribed
by specialists, and the focus is not on developing KM as a management
competence, KM will continue to fail to live up to its promise
and potential.
I am not underestimating
the importance of the tools and techniques, and IT. They are
very useful enablers, but enablers are instruments which in the
hands of competent people help them produce better results. Competence
is ingrained in the individual, the one who thinks, collaborates
and acts, not in the enabler!
This brings me to
my concluding point -- Knowledge management is -- Learning, sharing
and collaborating for delivering performance improvement. Learning,
continuous learning both from formal training, learning from
one's own experience as well as from others' experience through
sharing / working in teams is key to our being able to create,
capture and leverage knowledge. While collaboration / team working
is key to creating knowledge assets in the organization, in the
ultimate analysis, it is the effective use of these knowledge
assets in actions that produces performance improvement / excellence.
This is strongly linked to the passion and talent of the individuals
acting. Therefore knowledge management and talent management
must go hand in hand to get the best results.
I would therefore
like to put forward this proposition:
Creating, capturing
and leveraging is key to performance excellence. This ability
must be nurtured as a key competence of people -- especially
the operating people in an organization. The organizational core
values, culture and a collaborative mind set of people are essential
prerequisites to develop this knowledge management competence.
When you talk of a management competence, you don't project it
as a specialist field! Specialists provide useful enablers.
Let us not project
that KM departments and consultants are the knowledge workers.
They support knowledge workers. Let us focus on creating more
knowledge workers - those who have developed the competence to
leverage knowledge for business results, making relevant use
of available enablers. Like in any other field, let us maintain
focus on developing better / improved enablers, but let us not
promise more than what the enabler can help deliver. Let us emphasize
the key role of the people -- developers as well as the users
of the enablers in getting value. For a start, it is useful for
the KM consultants and practitioners to articulate an agreed
list of must do -- knowledge processes, tools and techniques,
adoption of which would reflect the commitment of an organization
to help their knowledge workers perform their role well.
Tom
Stewart:
Very well put, Srini. I'd add that the problem for KM was compounded
by the aggressiveness with which technology vendors (and the
Big Five, er Four, and systems-integrating consultancies) jumped
into the field. In the US at least, they became the dialogue
-- it's a tech issue, it's our baby, it's our software, etc.
Xerox (I think) at one point made a survey of companies with
people who were head knowledge honchos -- CKOs, CLOs, whatever.
They found, first, that almost no company had both. Second, they
found that CKOs often reported to CIOs or CTOs. Knowledge Management
became an inflated label for "the intranet."
I think we can all
agree, or most of us, with Srini's statement "in my limited
experience, in our company we have done a better job when we
practiced KM without branding it as a KM initiative, but branding
it as a business process / functional initiative" -- not
only as a matter of practical experience, but even as a matter
of the theory of the way it ought to be.
However, that leaves
us with a problem/question. Who are the "we" who "practice
KM"? Do we have a separate organization? How big is it?
where do we fit in the company? How do we get power and influence?
Is this a "C-level" function?
I think the general
case -- knowledge matters hugely, knowledge assets matter hugely
-- has been won, most places. And I think -- techie-bashing aside
-- that a lot of necessary infrastructure has been built. Those
intranets never should have been hyped as much as they were,
but they are wonderful new tools and everyone's starting to use
them.
Now what?
Jerry
Ash: I feel
compelled to ask this as I stand here in the debris you described
at the beginning of this dialogue:
Here at AOK we have
been talking lately about tying all KM talk to an organization's
critical success factors, and you seem to be validating that
strategy as a way to repair the damage. But I wonder if those
top execs will be as receptive to our better ideas this time
around? Any suggestions?
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Strategic Imperatives
and KM
Tom
Stewart:
Of course they will, if you are talking the language they understand
and the language they can do something about. But forget it if
you come in and say "hey, knowledge is important and I'm
your tarnished CKO and I want another big wad of money for another
project that has everything to do with management theory and
nothing to do with the general ledger."
Knowledge is like
electricity -- a fundamental force and factor of production and
a very versatile one. That is, electricity doesn't just do one
thing. It can run elevators, cause light bulbs to glow, heat
and cool air, etc., etc. Knowledge and knowledge assets, similarly,
can do anything: They can produce new products and services ;
they can help the incremental improvement of old products and
services; they can transfer old products and services to new
markets or departments; and they can speed the replication of
old products and services.
The issue, then,
is what does the business need? And what role does knowledge
play in meeting that need?
A couple of quick
instances. A few years ago people in the finance function of
Johnson and Johnson, which is determinedly decentralized and
means to stay that way, started looking at some of the unavoidable
problems of decentralization. Decentralized businesses always
need ways to keep costs from creeping up. Different divisions
will perform the same task with different rates of efficiency.
Some will cut an invoice for a ha'penny, some for $2.25, and
the performance will show up on a bell curve.
Their solution was
a benchmarking study, a conference to bring finance people from
around the world together to share the results and to meet and
greet, and then follow-up so that the people on the trailing
end of the curve could learn from those on the leading end, and
thus move the whole bell a few hash marks to the right. They
didn't call it knowledge management, but that's a classic knowledge
management project.
Here's the premise:
Knowledge matters. Matters more than ever. Therefore, if there's
a problem to be solved or an opportunity to be seized, knowledge
and intellectual capital are likely to play an important role
-- certainly a more important role than 30 years ago, and quite
possibly the preeminent, paramount role. If you're clear about
the problem, you'll probably find that knowledge is part of the
solution. However, people often aren't clear about the problem.
They see chills and a fever and diagnose the flu, because they've
never seen systemic strep. One role knowledge types can play
is to ask "what's the knowledge problem here?" Supply
chain and customer relations management are hot now. What's the
underlying knowledge problem? What do we not know that we need
to know? What knowledge is in the wrong place, uncollected and
unshared? etc.
You have to hook
this stuff to the business's strategic imperatives and to the
means it pursues to fulfill its strategy. GE -- I can write on
and on about GE in this context, but will content myself with
a teaser -- knows that its most important business process is
leadership and management development. Executives say they spend
between a quarter and half their time on it.
Knowledge management
-- though, again, GE doesn't use the term -- plays an enormous
role in it, whether it's training at Crotonville, training elsewhere,
action learning projects, Six Sigma projects, quick market intelligence
projects (a methodology adapted from Wal-Mart), or (what's the
fundamental trait of GE), the obsessive sharing of new ideas,
at literally every gathering of managers; and p.s. they're now
starting to buy and develop software to see if KM applications
can help them do these jobs better.
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KM Picture Better
in Europe
David
Skyrme, David Skyrme Associates Ltd., Highclere, England: Hi Tom. Nice to get new
insights from you -- like people in San Francisco not learning
from their past!
I am not as pessimistic
as you about "shooting ourselves in the foot." I don't
think KM ever had quite the froth over here in Europe -- much
more of a softly, softly approach and hard-nosed people wanting
assurance of business benefits, and understanding the links between
KM initiatives and results. And surely you are not blaming the
KM movement for the bursting of the dot-com bubble and the collapse
of Enron?
One thing that continues
to surprise me is that the notion of trying to measure and report
-- by whatever way -- intellectual capital, does not seem to
have taken off in the US. OK -- it's slow over here, but pioneering
work by Scandinavian companies does not seem to have transferred
to the US. On the other hand many US companies are doing environmental
reports. Any thoughts on why this lack of attention some eight
years after you wrote your first article on the subject? Is it
still because we cannot model and do not fully understand the
complex connections between knowledge and financial success?
Another point --
although there is some talk of the knowledge economy in Europe
-- there is probably more on the older concept of the information
society, but now adapted to information society for all, emphasising
themes like social and regional cohesion (minimising the digital
divide), which are high on politicians agendas (though they do
want their economies to be strong).
I'm looking forward
to an interesting dialogue.
Tom
Stewart:
Hey, David, good to hear from you. I agree with you about the
difference between EU and US knowledge management. A couple of
years ago in a Fortune special issue about European integration
I wrote (roughly -- this is copied and pasted from my draft rather
than the final version) the following:
The European strain
[of knowledge management] has bloomed especially strongly, because
it's rooted right, in the need to create value. ...The CEO of
computer-services giant ICL Keith Todd, says simply: "This
is only driven off the principal of creating economic value."
So is everything, but when a business bandwagon gets rolling,
sometimes it's unclear whose value-creation is served. The United
States, with its just-do-it culture and dazzling IT sector, has
a knowledge management industry led by aggressive (and very creative)
sellers of intranet software, data warehouses, online knowledge
libraries, decision-support technology, etc.; the European scene
is dominated by thoughtful (and very creative) buyers.
David wrote: "And
surely you are not blaming the KM movement for the bursting of
the dot-com bubble and the collapse of Enron?"
You misread me --
I said exactly the opposite.
As to the slowness
with regard to published measurements: This will only happen
when and if it's driven by regulators and governments, I think
-- which basically is what is happening in Europe. The whole
"stakeholder" movement in Europe, the greater visibility
of issues of corporate social responsibility, etc., have, I think,
encouraged European companies and their regulators to get at
some of this stuff. So perhaps has a European desire to get a
handle on intangibles as a way of improving competitiveness.
But corporations won't disclose more than they have to disclose.
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Difficult to Isolate
KM Impact
Jo
Parker-Whiting, National Knowledge Manager, KPMG, Australia: Tom, thanks for the most
interesting lead-in! I won't even attempt to refute your core
argument at a general level. However, at a personal level, I
am aware of many Knowledge Managers who are concerned with ensuring
that their KM programmes are really adding underlying value (in
a monetary sense) to the business. I myself am always careful
to map my knowledge management strategies to the goals of the
business ensuring I demonstrate how the KM programme is supporting
the business in its quest to make money.
Having said that,
I feel that where we (or certainly those I know personally!)
have had problems is in establishing direct links between KM
and ROI. For me the real issue is not that we have not recognised
the need for KM to add monetary value to a business but that
we are struggling to prove the connection beyond all doubt. And
this is an old discussion -- how do we prove ROI on KM programmes?
I recently responded
to someone who was in KM start-up mode and was trying to convince
his General Manager of the importance of KM. This person was
writing to ask me how he should respond to his boss' question
"How is KM going to convert into dollars?" I sent him
six different examples that demonstrated ROI with regard to both
cost cutting and revenue growth. These examples are not new in
themselves so I won't bother to list them all but my point to
this person was that this is a tricky process because there are
always other factors at play and it is difficult to establish
if KM really has been the driving force.
Let me give one
example just so I am making sense! Business X was losing a lot
of money and knowledge through high turnover rates. The KM programme
sought to increase staff retention, thus reducing the costs associated
with high turnover by impacting on two of the factors staff had
indicated was causing them to leave, namely, the lack of access
to information/knowledge they needed to do their jobs and the
lack of access to external knowledge that would assist them in
their personal learning and development.
After the KM programmes
had been running for 12 months there was a clear and significant
reduction in staff turnover. The KM team (members) were elated
and calculated the costs they had saved the firm and took this
"evidence" to Senior Management expecting glowing praise.
Instead, the Senior Management team laughed at the notion that
the KM programme by itself had produced the desired effect because
at the same time the KM team was implementing its initiatives,
several other groups had put in place various other initiatives
designed to reduce the turnover rate and during the period there
had also been a recession.
Everyone was claiming
it was the effect of their initiatives that had produced the
desired effect. The problem with this scenario is that it may
have been all or even none of the afore mentioned factors that
impacted on the turnover rate. One would have to survey the staff
who remained to understand which of the factors had created the
effect and what tends to happen in my experience is that there
are many factors that are not accounted for in the surveys and
that often the surveys conducted to prove ROI from KM focus purely
of the KM initiatives in isolation.
So, whilst I think
it is necessary to measure, monitor, and produce ROI to demonstrate
how KM is really adding to the underlying financials of a business
(and I think there are many who are struggling to do so) it is
not such an easy and straightforward task.
Tom
Stewart: Yup
-- been there, done that. I think it's the wrong question. To
see why, substitute HR or IT or risk management for KM in the
question. The right question is this: "I want to reduce
inventory by 25 percent. Can KM help me do that?" or "I
need to improve time-to-market by six months, on average. Is
there something in the knowledge management toolkit that can
help me get there?" Now, yes, you do need to justify the
existence of a group of people who stock and maintain the toolkit,
same as you did with TQM or any other area of staff expertise.
But you'll justify it by its ability to deliver value in a book
of projects.
The fact -- certainly
the theory, and we hope the fact -- is that knowledge management
delivers value over and above the value of each individual project;
the knowledge you develop in one area can be transferred to another,
and a third, etc. That may be the fact or the hope, but it shouldn't
be the way you plan and budget. One of the chapters in "The
Wealth of Knowledge" is about "knowledge projects."
In it I make the argument that knowledge managers should expect
each KM project to pay for itself, in terms of ROI -- every tub
on its own bottom. The rest is gravy. There might be a lot of
gravy, imperial gallons of it, but that's far less certain, far
softer, far more likely to provoke a raised eyebrow and a "prove
it" from the CFO. You want to justify your existence on
the basis of the meat alone.
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Pricing, Valuing KM
Projects
Fred
Schoeps, former corporate KM, IBM:
Tom, as a long-time stealth admirer of your writings -- thank
you for all your many contributions over the years. Your pithy
writing and examples ranging from the information content of
oil, to the Pope have enriched my repertoire and language around
KM and genuinely made a difference in my life.
If you were given
the opportunity to integrate KM processes, values and behavior
in one and only one of the following three programs which would
you choose? How would you make the decision to choose one over
the other? Under what circumstances would you choose not to invest
any of your time in any of the three?
a) Work with the
management development organization responsible for all new and
experienced management training in which participants are encouraged
to spend up to 40 hours a year
b) the executive
development program -- in which participants spend 40 hours as
long as they are so identified
c) or with finance
who wishes to develop pricing policy for intellectual assets
in their services division.
Point of Reference:
Fortune 100 company with one out of ten employees having management
responsibility and a highly respected executive development program
targeted at 1 percent of the company population. A very powerful
finance organization lauded for its operational capabilities.
Tom
Stewart:
Given your IBM background, I'm tempted to infer that your difficult,
interesting question is about IBM, but -- though I cite an IBM
example in replying, I'm not actually making that assumption
and not knowledgeable enough about IBM to offer advice that would
be more expert than the advice IBMers offer themselves, probably.
But to substance:
First, I like the
"forced choice" method of your question, because in
reality people face forced choices like these. One of the luxuries
of being an observer rather than a practitioner is the ability
to say "you should" or "you should have"
unconstrained by the realities of time and budget and the dubiety
of bosses who say "pilot it -- change the organization radically,
but don't do anything that will have a disruptive effect."
That said, I think
I'd pick (c)--but slightly modified. You are referring to "pricing
policy for intellectual assets in their services division."
I'd make it "pricing policy in their services division,"
with intellectual assets being just one of the things priced.
The reason I'd pick "c" comes down to a slide I've
been using in talks recently, that reads: "Knowledge is
valuable. What is your strategy for taking it to market?"
I think few companies have thought that through. We're mostly
used to selling knowledge as an add-on, rather than as something
valuable in and of itself.
Some examples:
- Lou Gerstner was
quoted in the Wall St. Journal a year or so ago saying (quote
not guaranteed to be exact): "We used to sell a box with
a service contract attached. Now we sell a service contract and
try to sell some hardware along with it." In other words,
the value proposition has changed. Same thing has happened at
GE, in, for example, aircraft engines, where they basically sell
the engines at cost (or a small loss) and make their money in
the aftermarket, including repairs. "Product services"
is GE's fastest growing category of business.
- David Smith of
Unilever told me a story about a glue manufacturer, which made
adhesive used to seal the flaps of cardboard packaging. Someone
at the company came up with a process that would use less glue
and improve thruput on box-filling lines. This was very valuable
knowledge. The problem: The company sold glue, not knowledge.
This valuable idea would result in less glue being sold. They
had no means of pricing knowledge.
- Wall Street full
service brokerages offer knowledge -- the reports of stock analysts.
The price for that knowledge used to be hidden in the commissions
you and I paid, not broken out separately. Discount brokerages
began offering cheaper commissions, and no stock analysis. The
resulting pricing pressure forced the full-service brokers to
cut commissions. But they were still offering stock analysis.
Since you and I weren't paying for it, who was? Floyd Norris
of the New York Times suggests that companies and the investment
banking side were paying for it, and hypothesizes that one reason
stock analysts seem to have become unnaturally bullish, even
lyingly bullish, is that he who pays the piper calls the tune.
- Something similar
happened in the advertising business, where cost of knowledge
(marketing advice and consulting) used not to be sold separately
but was folded into the price for ad-making and ad-placing. When
specialized ad-makers and ad-placers disintermediated the business,
the old-line agencies were forced to come up with a new pricing
model.
A lot of companies
are facing similar challenges. Others are facing another set
of choices. If you are selling products or services -- law, accounting,
technology consulting, etc -- you have a lot of ways of taking
your knowledge to market. You can make smart products -- stick
the knowledge into a product, making it smarter. You can sell
the knowledge directly in the form of a knowledge product. A
lawyer, for example, can produce a "form of will" and
sell it rather than sell advice; you can sell packaged software.
You can sell it in services in which you teach people. Deloitte
claimed it did this with SAP (we not only install, but we transfer
the knowledge to you, they said -- a teach-a-man-to-fish offer
that they implicitly contrasted with that of competitors). You
can sell it in black-box services, in which you don't teach people.
(Andersen Consulting, as it then was, was the rival Deloitte
implied had a "sell-a-man-a-fish" black-box approach.)
And within any of these approaches, you can go high-end or low
end, you can go with a human capital approach, a customer capital
approach, a structural capital approach.
And then there's
a lot of choices around pricing intellectual assets, too: do
you license patents or sell them? Either way, how do you price
them? How do you decide which to keep and which to market, and
which of many avenues to the market to take?
There's a big choiceboard,
in other words. And most companies haven't even begun to think
about it.
That's where I'd
go, and I'd go because of my bias toward starting with sources
of cash flow and working back to theory. (Remember the colonel
in Vietnam who said "if you get 'em by the balls, their
hearts and minds will follow"?) I'd undertake a huge review
of pricing mechanisms and strategies, focusing on the question
of the forms and means by which the company sells knowledge.
That's not to say
I wouldn't like to do the executive development pieces. In fact,
what I'd do is use the high-pots (option b) to undertake this
study. I'd get them working in teams of whatever number -- a
dozen, a score -- and send them around to various divisions and
geographies in the company. I'd make this their training -- analyzing
and proposing pricing models for knowledge products, services,
and assets, and, along with it, developing some of the tools
for managing this valuable knowledge -- and have them deliver
reports with recommendations to senior business leaders and the
Board.
And, of course,
as a journalist I'd get to say, no matter which one you chose,
"ah, you should have known better." :-)
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More Disclosure of
Intangibles
Fred
Schoeps: IBM
stock recently was impacted after the Enron fiasco around what
was considered inadequate disclosure of a year end sale of intellectual
property to the tune of $300M. It was alleged that the sale was
timed to improve year-end results. In response the company announced
it would make changes and provide shareholders greater disclosure
in the soon to be published annual report. Is this a harbinger
of inroads KM is likely to make into financial thinking and operations
in context of intellectual asset management -- or simply a tweak
in the ever changing business landscape?
Tom
Stewart: First,
from what I can see -- and I can't see all by any means -- I
don't think IBM did anything fishy. There's nothing wrong with
looking around at the end of a financial reporting period and
seeing if there's any stuff you ought to do before the books
close. We all get year-end tax advice from brokers, accountants,
and Money magazine. We all get the memo saying "hand in
your expense report before year-end please." There's a line
-- not always precise, but a line -- between managed earnings
and housecleaning. So I think partly what we are seeing in this
IBM instance is a jumpy market, perhaps a plaintiff's bar floating
trial balloons hoping that something will come up that would
justify a class action suit, a press very much on the qui vive,
short-selling touts doing their thing -- in short, the hurly
burly of capitalism.
You're going to
see similar stuff about the Roman Catholic priesthood for a while
(especially if they don't come totally clean about this and start
firing some Cardinals): Any priest who puts his arm round the
shoulder of an unhappy teenager to comfort him runs the risk
of showing up in the newspaper -- for a while.
That said, I do
think that we'll be seeing more disclosure. Companies hate to
reveal anything more than name, rank, and serial numbers according
to generally accepted accounting principles. But there was serious
thinking afoot in the SEC before all this shit hit the fan. The
AICPA is interested. FASB has a research project looking at what
intangibles can be described and disclosed under GAAP. Some of
it is just the zeitgeist. GE just broke out sales and profits
for GE Appliances as an individual business for the first time
I've seen, so you can compare apples to apples (to some extent)
with Whirlpool and Maytag. But some of it is the growing realization
that capital markets will do their job better if they know more
about intangibles.
As a practical matter
I don't think Pitt and the Bush administration are much interested
in this. So the pressure will come from us, from the accounting
bodies, from European regulators. But it is coming.
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Research Connects
Knowledge to ROI
Tom
Stewart:
A couple of points inspired by (but not necessarily directly
in reply to) points made on training and development (See
Part II).
The first has to
do with learning and training. Yesterday's New York Times carried
a piece by Mark Hulbert (Note: you must register)
that mentions the research done by Paul Harrison, an economist
at the Federal Reserve Bank; Jens O. Ludwig, a professor at Georgetown;
Laurie Bassi, chairwoman of Knowledge Asset Management; and Daniel
P. McMurrer, chief research officer of Knowledge Asset Management.
(I met Laurie when she was at the American Society for Training
and Development).
It shows "Companies
that ranked in the top 20 percent or so in spending on training
and development which would have earned an average of 16.2 percent
, annualized, in the five years through 2001, or 6.5 percentage
points a year more than the Wilshire 5000 index. Better yet,
that market-beating performance was produced with about 10 percent
less risk." (Laurie's turning this into a money management
venture.)
This isn't the first
time that solid research has shown the connection between investments
in knowledge and returns to shareholders. Nor will it be the
last. All of us reading this list know intuitively that knowledge
pays, but it's sure nice to see it documented again, particularly
at a time when all kinds of "soft side" budgets are
under pressure.
At the same time,
we all know that the appropriate response to these data isn't
to run to the CFO and say "double the training budget."
You've got to spend money where it's worthwhile. There's a horse/cart,
chicken/egg question. Do these companies (the Times story mentioned
Accenture, Agilent Technologies, Allstate, Capital One Financial,
Corning, FedEx , First Consulting Group, I.B.M.,Intel, NCR and
Storage Technology) have high returns because they spend a lot
on training? Or, do they spend a lot on training because the
businesses they are in demand a lot of learning on the part of
their employees -- and it just so happens that businesses that
demand a lot of learning tend to be businesses that produce high
returns?
To some extent,
both are true, but my gut tells me that the latter is more true.
You can support the "training produces returns" argument
by saying, for example, that between two insurance companies,
one that trains its people better is likely to be the better
company; but clearly there is a point of diminishing returns,
beyond which an extra $1.00 of training isn't rewarded by an
extra $1.01 in profit. But there's persuasive logic in the argument
that work that's hard, that demands a lot of training, is more
rewarding than work that doesn't require training. People wouldn't
endure law or medical school if the pay weren't good on the other
end. (Alternatively: If the pay weren't good, the training would
be less grueling; otherwise the professions would not attract
enough people.) That logic extends to businesses. Intellectual
capital intensity is an entry barrier, same as capital intensity
is. Ergo, companies that can erect such a barrier between themselves
and their competitors can enjoy higher returns.
The question is:
Do you have stuff worth teaching? The emphasis is on "worth."
There's lots of stuff that's worth learning, but it's not worthwhile
for the business to teach it. (If I decide it's worthwhile to
learn about orchids, bully for me; but it's not something Business
2.0 should pay for.)
And this brings
us to the question I raised earlier: What knowledge are you buying?
What knowledge are you using? What knowledge are you selling?
What knowledge, in other words, is worth paying for?
Out of the answers
to these questions flow, I think, the answers to many of the
others that bedevil companies and bedevil those of us in the
knowledge management game. Mike Novak wrote about TQM, reengineering,
etc., as "tools enabling a business system." Absolutely
right. In my book I make a crack about the fact that every technologist,
giving a presentation, is obliged to put up a PowerPoint slide
saying "Technology is just an enabler." True, I said,
but enabling what? Sometimes technology (or anything else, including
knowledge management) can be an enabler in the same sense that
an alcoholic's spouse can be one.
You've got to get
the business questions right, first. There's nothing more dangerous
than an utterly persuasive answer to the wrong question. By the
same token, if you have the right questions, then even partly
right answers will make a positive difference.
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Part II
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