Conversations
with Karl-Erik Sveiby
Why Measure?
"By the Numbers Doesn't Compute"
Karl-Erik Sveiby
Sveiby
Knowledge Associates
Caloundra, Queensland, Australia
Professor in Knowledge Management
Swedish School of Economics and Business Administration, Helsinki
Editor's
note:
This is a synthesis of the "Conversations with Karl-Erik
Sveiby" held in November, 2001, the final episode in a parade
of KM luminaries who served as guest moderators of the monthly
AOK STAR SERIES. During the course of these dialogues, the STAR
SERIES 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 and
participate in these knowledge exchanges as they happen in the
future. As always, when we present long documents we provide
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Just click on the titles below
Table of Contents (Click on list item to
go directly to each topic)
 Introducing Karl-Erik Sveiby
Jerry
Ash, AOK chief executive:
It is my exceptional good fortune to welcome Karl-Erik Sveiby
to the AOK STAR SERIES discussions.
Karl-Erik Sveiby
is principal of his own consulting company, Sveiby Knowledge
Associates, in Caloundra, Queensland, Australia, and professor
in Knowledge Management at the Swedish School of Economics and
Business Administration in Helsinki (Hanken).
He was formerly
Executive Chairman and co-owner of Ekonomi+Teknik örlagF,
one of Scandinavia's biggest publishing companies in the trade
press and business press sector. Among the publications are Sweden's
most prestigious business weekly ärsvärldenAff and
the country's only technical weekly Ny Teknik. In 1994 he and
his partner sold the company and Karl-Erik formed his own consultancy
around the concept of The Knowledge Organization.
He has researched
management of knowledge and knowledge organizations since the
early 1980s, which makes him a veteran in the rapidly emerging
field of Knowledge Management. Having been a manager in a knowledge-based
business himself, his approach is practical and hands-on, rather
than theoretical. He does not believe much in lectures as a means
of transferring knowledge, so he develops tools for people to
apply and experiment with. Perhaps the STAR SERIES is like that
-- not a lecture, but a place for interactive discovery.
For a deeper understanding
of the thinking of Karl-Erik Sveiby, go
to his STAR SERIES page, and read
the articles.
Back
to top
Moving KM From Cost to Asset
Jerry
Ash: To
get the dialogue going, it seems to me that knowledge strategy,
knowledge management and the knowledge manager, will be viewed
as "cost centers" -- just like human resource management
-- unless a direct line is drawn from the practice to the bottom
line.
When we attempt
to measure the value of knowledge -- including tacit knowledge
-- are we getting any closer to moving the knowledge asset from
the cost to the asset column? Leif Edvinsson, one of our earlier
Stars, is well known for his annual report to the board of directors
on Skandia's intellectual capital. Can you give us some examples
of other companies that are successfully measuring the value
added of KM? And, how are they doing it?
Karl-Erik
Sveiby:
You address one important issue for many KM change agents: How
do we sell KM as an important tool/function? It is in fact a
third reason for measuring (apart for the two reasons I mentioned
as in the title of this series): Justification of one's existence!
Why is there so
much benchmarking in the field of HR? In every country there
is at least one organisation offering databases for HR benchmarking;i
n the US there are several.
Using measuring
for justifying one's existence is more common than one might
like to believe. There is a great belief that numbers give the
"truth" and thereby carry the ultimate argument. Particularly
a "soft" function such as HR looks to numbers as THE
argument.
How many benchmarking
databases exist for comparing the Accounting function of companies?
None that I know of! Have the HR numbers in any way improved
the status of HR in companies? I venture to say: NO!
The trouble is that
numbers per se do not convince. Only when the organisation has
a leadership that is willing to challenge existing paradigms
does an alternative measuring approach offer value.
The Swedish computer
consulting firm WM-data is one of the best examples I know. They
use "soft" indicators such as "gender mix"
and "Value Added per Revenue creating person" to guide
their strategy. Their CEO is quoted to say that traditional metrics
such as Return on Capital employed are useless for control".
Please visit their website http/www.wmdata.com to read their
Annual Report.
I say that WM-data
is good, because they use the metrics strategically and their
leaders are bold enough to state publicly that they have a different
world view.
Many companies have
reported the more narrow purpose of measuring the value of KM
initiatives: Buckman Labs claim a 50% increase in innovation
as a result of KM, BP AMOCO $100 million in cost savings, Xerox
$25-125 millions in cost savings, etc.
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Tension Between Collaboration
and Intellectual Property
Carol
H. Tucker, Credit Manager, Maryland Permanent Bank and Trust: An aside: as we look at
proving ROI, and tying both HR and KM [two facets of organizational
learning and development] to the bottom line, one route that
companies are taking is the "intellectual capital audit"
-- including the tacit knowledge of employees.
Once senior management
knows what these assets are, the knee-jerk reaction before leveraging
them is to protect them -- to define them and keep them proprietary.
How do you see the tension developing between collaboration and
intellectual property playing out in the future?
Karl-Erik
Sveiby:
The tension between collaboration and intellectual property is
one of many battles between the old Industrial society paradigm
and the new knowledge paradigm.
You are right, the
knee-jerk reaction is to "protect" and the reaction
is typical Industrial Era. The legal framework we are still using
was developed in the late 1800s for protecting tangible inventions
such as light bulbs and phones. But when it is now applied to
Knowledge Era inventions follies proliferate, such as patenting
genes and trademarking concepts such as EVA. IP laws were developed
for the Industrial society and they are totally inappropriate
in the world of intangibles and ideas.
The K-era approach
is to be open and to maximise "Value Creation", which
consists of intangibles to a very large part. What is the value
of a KPMG consultant's advice? For the client, for society? Should
it perhaps rather be measured as the impact in your client's
business? Can the value of the advice be increased if we give
more knowledge or if it is delivered as an event rather than
a report? Can we then charge more?
I'm afraid that
we will not see a real change until the Industrial Era paradigm
is completely dead, and that will take another 20 years at least!
Carl
Frappaolo, EVP, the Delphi Group:
I was wondering if you could comment on the paradox that exists
in many organizations -- if not all. The highest levels of senior
management continuously looks for hard dollars to show the value
in a company -- including its personnel. This is the dilemma
that Jerry refers to above. Yet, when we look at the salaries
typically afforded to the senior most staff they are quite large
-- and yet, no direct revenue production associated with these
individuals. Their salaries are typically justified under the
pretext that it is their know-how, expertise and ability to make
decisions and steer the company that justifies their salaries.
Sounds like KM to me. Why are organizations ready to embrace
the value of intellectual capital at its highest most levels,
but almost hypocritically unable to do the same across the enterprise?
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Using a
System of Non-Financial Indicators
Karl-Erik
Sveiby:
A very good question, as my teacher used to say when he didn't
know the answer.
It is well established
that the CEO has a huge impact on the performance of a corporation.
This is why, I guess, that Boards have been using stock options
for the executives in the last few years to establish the link
between bottom line and remuneration.
In theory it is
a good idea. However, the trouble is precisely that of measuring
in dollars. The link between a stock price movement and what's
going on inside the corporation is so elusive and only indirect.
There is no way of establishing the causal link between the actions
of the CEO and the share price movement except long-term.
Your question is
pointing towards one major reason for choosing a system on non-financial
indicators as I advocate.
In the USA the stock
option schemes have moreover gone completely out of hand with
some executives cashing out MORE when they are doing a poor job
just so the Boards can get rid of them!
Jack
Vinson, Knowledge Manager, Pharmacia; and writer/editor, AOK
Knowledge Architecture EZine: If
we don't measure the impact of any activity, what does that say
about its value? Is the activity so valuable to the company that
it just must be done? Is it one of those enabling competencies
without which the company will not be able to compete? Or is
the activity of such low importance that it is not even on the
radar screen?
Thinking back to
our recent discussions of the value of AOK, don't we need to
understand the business use of any activity? What do we expect
the activity to provide? I am guilty of attempting a justification
of the form, "It will improve our ability to meet milestones"
without giving specifics about percent improvement or the impact
on some useful version of the bottom line. (Doing this for an
R&D organization is difficult, but not impossible.)
So, why measure?
And, yes, what to measure? Can we use some of the discussion
of Intellectual Capital to use as a measure, or do we go back
to the traditional bottom line?
Karl-Erik
Sveiby:
I used to be a publisher during the 1980's and my concern was
that it was becoming increasingly difficult to charge money for
information (even before the Internet). Why? I learned the hard
way that information has a very low $-value. And I also learned
that information that does not encourage action is noise and
draining energy. The question an editor must ask oneself then
is: What action can our readers do by reading our ezine? Or are
we only producing noise? This is (or should be) the start of
search for the value proposition.
I have drawn the
conclusion as regards my own publishing activities, for instance,
that all I write should be free of $-charge and available on
my website for download. This puts me at odds with publishers
and people ask me: How can you give all your stuff away for free?
My answer is that the Knowledge Era business must be much broader
in its scope; I receive huge intangible value from my website:
Increased Brand recognition, project proposals I would otherwise
never receive, time savings because I can refer people to the
website and don't have to prepare and send written materials,
etc.
The 'free' information
is not free for you. You must spend time on reading it
and the risk you take is that it is useless. Trouble is that
you don't know until you've read it! So it had better be good!
If the stuff I write
is good it enables me to charge more for f2f time. It also spreads
the 'Sveiby way' of thinking, which increases the scope for my
services and it supports the tools I design. Tools leverage my
time and the client's time and tools help people to act. BTW,
my definition of Knowledge is: A Capacity to Act..
So the answer is:
One has to 'unbundle' the whole value creation process and make
sure one covers all the intangible flows. Then -- but only then
-- one can start measuring them! Think Linux!
Back
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Justifying
Projects Based on Projected Outcome
Carl
Frappaolo:
Thanks for addressing my last question regarding justification.
Yes, in your previous
post you do recognize the need to justify KM, and thus we measure.
I was wondering, however, if you have any experience with this?
What have you seen work -- and not work? Justification is always
a tricky thing because you are asked to measure the impact and
benefit of an investment, before that investment is made. But
while difficult in areas such as database or document management
-- it is often frustrating with regards to KM. Any tips or from
the trenches stories? I always counsel my clients to first look
at the business mission and goals and then align anticipated
results from a KM initiative behind these. At time this yields
hard dollar savings. More often it lends a soft dollar promise.
Do you agree?
Karl-Erik
Sveiby:
When you measure for justification you try and sell your project/solution/etc
to your boss or the one with the money bag. Thus you will have
to cater for his/her view of the world. Most likely success approaches
ranked from higher to lower probability of success:
- Justify your KM
project in $ cost reduction terms.
- Justify you KM
project in $ revenue creation terms.
- Justify your KM
project in value creation terms (other than $$), such as higher
customer satisfaction, improved environment, etc.
- Justify your KM
project by changing his/her view of the world (this is what I
have been trying to do for 15 years. I'm still working on it
. . .)
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Use CoPs to Expand Knowledge
Asset
Jo
Parker-Whiting, Knowledge Manager, KPMG:
I would like your thoughts on two key issues that I am struggling
with at present:
- How to most easily
show/explain the value of sharing tacit knowledge.
- How to go about
identifying and establishing forums that enable effective sharing
of tacit knowledge (e.g. via on the job learning, COPs,
etc).
I'm afraid my company
thinks managing knowledge is all about putting content into an
intranet and I am struggling with showing them the value of focusing
on the exchange of tacit knowledge.
Karl-Erik
Sveiby:
You are quite right! The value of tacit knowledge is completely
and utterly underestimated not only in KPMG but in most companies.
How about doing
a little survey asking your senior partners what knowledge they
find most valuable when they work with clients? A friend of mine,
Dr. Kate Andrews,
did this with senior researchers in a medical research institution
in Melbourne. Her PhD thesis showed very convincingly that despite
the very explicit nature of medical research the real value was
in the tacit knowledge of the senior researchers. I believe you
will find the same in KPMG! Her thesis will give you the methodology.
I also believe KPMG
has developed a methodology for valuation of Knowledge (Marc
Andriessen et al), which is being sold to clients. How about
trying your own methodology? It should be the best argument!
To encourage the
formation of CoPs seems to be a very effective first-step KM
initiative. Take a look at the CoP literature for ideas on how
to get started.
Josephine
Mifsud, Knowledge Management, PriceWaterhouseCoopers: My thoughts on this were
also down the same track as Karl-Erik's -- apply the same processes
etc. that we sell to our clients to our own organisations. If
we focus outside the organisation in terms of "exchanges
of tacit knowledge" rather than the internal exchanges,
we can then perhaps understand/realise the value of the internal
ones.
How do our practitioners
apply their skillsets to/with clients? We share our tools, people,
and Knowledgebase with clients. We develop relationships with
clients that are crucial to the success of the services we deliver
to them. That in itself must manifest in the exchange of tacit
knowledge on many levels. So if we place enormous value on this
then we should be acknowledging and duplicating the same value
and processes from an internal perspective. And in fact if organisations
can do that successfully then it enhances what & how we deliver
to our clients.
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Highlights
of World Activity
Debra
M. Amidon, founder and chief strategist, Entovation International: Karl-Erik, you certainly
have more perspective on measuring and managing intangibles --
from both a practitioner and theoretical view. I was pleased
to see your wellsprings metaphor used in the AOK briefing that
you developed for our publication.
You have seen the
field evolve (since 1987) and the progress made . . . and perhaps
(even better) the pitfalls. You've also seen our efforts to make
some of the recent work in the field visible for a measurement perspective -- (e.g.,
the work of Baruch Lev, Ante Pulic, Leif Edvinsson et al).
And so, please share
your observations of current worldwide activity - the applauds
and the pearls of caution.
Karl-Erik
Sveiby:
Debra, great to 'see' you in this conference! And thank you for
your kind words!
Some highlights
in the measuring field:
- Ante Pulic's VAIC
equation. Those of you who are not familiar with it, please visit
Debra's link and continue from there. It
is unique and new knowledge.
- Baruch Lev's measuring
of Knowledge Capital. Although the approach is not unique the
data and industry comparisons that he has produced are very interesting
and much more illustrative than EVA. It is also interesting from
the perspective of Intellectual Property (see the other thread
in this conference). He is currently attempting to get a patent
on the computation process. If he does succeed, there is something
seriously wrong with the US patent laws.
Negatives
- Why has not one
single US company produced a serious attempt to publish any data
on intangibles (except environmental reports)??
- I'm not fond of
the recent attempts to make the IC metrics more and more complicated,
such as three-dimensional surface diagrams, etc. It is enough
trouble to create buy-in for the simple methods, and the key
issue in measuring intangibles is not in the design of indicators,
but in the creation of meaning. What do the numbers and trends
mean (in the company and for investors)? This is where Skandia's
IC supplement failed both internally and externally.
Back
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KM Valuing By Financial
Institutions
Paul
Cripwell, J.P. Cripwell & Associates:
The stock market, accounting and basic financials systems have
no true measurable way of valuing KM, IC or the tacit knowledge
of a company. As the service and KM, industries get going, what
they will be selling is their embedded tacit knowledge. This
knowledge has a value, but that value does not appear on the
books of a company. Yet this value is just as important as the
bricks and mortar.
Do you see any changes
coming, in areas such as the banking industry, that will reflect
this new intellectual capital?
Can we look to a
measurable indicator along the lines of "dollars per synapse
closure"?
Karl-Erik
Sveiby:
The banking and investment communities are already taking intangibles
into account when they do valuations. Just open and read any
research report! However, it is in text form in the form of statements
and opinions, such as we believe that the company will increase
its market share because . . . . The perceived value of intangibles
is also quite visible on the stock exchanges (in the form of
market value above net book value). The VenCap industry is focusing
almost entirely on the intangibles when they do valuations I
see a positive trend, albeit slow, that some banks are beginning
to look more into intangibles even as collateral for traditional
bank loans, most notably CIBC in Canada.
To go as far as
you suggest '$ per synapse closure' is not on the horizon and
I'm not sure I'd like to see it happen!
Carol
Tucker:
Regarding Karl-Erik's point: The Banking and investment community
are already taking intangibles into account when they do valuations.
I wanted to point
out that there are limits to the banking industry's willingness
to measure and deal with intangibles! As a quick word of explanation,
I "grew up" in commercial lending -- from processor
to analyst to lender to support. And from the viewpoint of whether
or not you are going to get that loan, the intangibles have two
problems:
First: I cannot
quantify (intangibles). The problem that a lot of small businesses
face is showing a strong balance sheet -- proving that they have
assets. When the preponderance of your assets are cerebral, that
does not show, and for the purposes of analysis, I am looking
for capital, assets and cash flow.
Second: I cannot
leverage them. No control = no collateral = no tertiary source
of repayment. Nine times out of 10, that means no loan. And this
speaks to Jerry's question of why value IC -- the same small
business that I described above relies on what their workforce
knows. But if I cannot take it to the courthouse when there is
a default, it just doesn't count. I don't like it, I don't know
how to change it.
Where we do examine
intangibles is in the area of establishing the level of risk.
The company that "doesn't have a clue" is a poorly
managed company, and a poor risk. If we do the loan, it will
be priced higher and have more financial covenants in place.
The company with a strong management savvy might be able to get
the loan, and will be given a better rate and better terms.
Karl-Erik
Sveiby:
I agree with you about the intransigent attitude of banks of
course. I just wanted to point out that at least some in the
financial industry are taking intangibles into account in financing
-- albeit in a less structured way.
As I see it the
way forward must be via market response. Nothing speaks louder
than results. Since there is no doubt that intangibles will have
to be taken into account in the future, the first banks that
develop a more structured approach, make the investments in the
system required and take the risks involved, will reap huge benefits.
This will pull more banks onto the bandwagon, etc. Where will
Maryland Permanent Bank & Trust be placed when the train
leaves? In the engine room or in the caboose?
Carol
Tucker:
*sigh* Karl-Erik, you hit the nail on the head. MD Perm will
be on the station platform, with 98% of the other American banks,
waving goodbye. The banking industry needs to make some profound
changes in the way in which they do business or someone else
will be eating our lunch [breakfast and supper are already lost]!
Part of the challenge
here in the US is the regulatory environment. Two years ago,
I saw a wonderful window of opportunity for community banks to
position themselves as champions of the privacy issue and conduits
by which vendors could have access to customers -- whether you
use the word infomediary, navigator, whatever. Internet banking
was one of the means by which such community banks could extend
and expand their reach, and a technologically adept bank could
vault into cyberspace and start servicing. Alas! that particular
vision crashed into the regulatory "know thy customer"
bulwark. Today the infamous trio of auditors, regulators and
examiners are choking the initiative on valuation of IC.
Paul
Cripwell:
Throughout this conversation, I have developed a postulate that
might help . . . well it does for me.
KM could be interpreted
as turning tacit knowledge into explicit. You can measure explicit
but you can't measure tacit.
Take an example
of the fast food industry. How to make a better burger?
Take a good chef
(lots of tacit K!), watch what he/she does and break down every
step and task into a routine.
1) Take 8.25 oz.
of meat.
2) Press into patty, 1/2" thick and 3" in diameter.
3) Cook on first side for 5 min. 45 seconds.
4) Turn over
5) Cook on second side for 4 min. 50 seconds.
Makes one burger.
This will make a
measurable number of burgers in a measurable amount of time.
(We don't mention quality at this point!)
Now that we have
converted the tacit K of the chef into explicit K, we no longer
need the chef! He/she is too expensive!
In true entrepreneurial
style we create process, based on tacit K, that can be duplicated
by explicit K, and monitored.
What is happening
more and more in the Knowledge era, is that we are creating processes.
Entrepreneurs the world over are finding areas of tacit K and
turning out a process, or software, that transforms it to explicit
K.
So why do we have
to measure? As Carol pointed out it is all about money. You can
only get loans with measurable explicit K.
Carol
Tucker:
Let's take Paul's example: How to make a better burger?
So now you have
a process. That's nice.
You are going to
come to me, the commercial lender, and say: I want to borrow
$500K so that I can build a restaurant to serve hamburgers, and
for collateral, I want to put up the building and this process.
Let's walk through
what happens!
A commercial loan
application requires: a business plan [let's assume you actually
have one, complete with competition research, demographics and
other marketing research, pro forma cash flows, etc. -- a big
assumption] and a business entity [corporation, partnership,
LLC or sole proprietorship newly created]. And you want me to
give you $500K -- $300K to build a restaurant, $150K to finish
off the interior, $50K for inventory. Because you realize that
I am looking for your stake in this, you point out that you have
already spent $250K purchasing the land where the building will
be, and offer me your personal guaranty.
Now, I look at the
loan. Right away, this is classified as high risk -- you are
a restaurant. Historically, the percentage of food places [restaurants,
bars, grills, delis] that fail is about 75%. Usually I rely on
the cash flow of the business first, the guarantor second and
collateral as a last resort. But in this case, due to the high
rate of failures, any cash flow analysis is immediately suspect.
If I make this loan, it will be on the basis of you being able
to service the debt personally while sustaining a loss, with
collateral as a secondary source of repayment rather than a tertiary
source. The rate and fees just jumped up.
And as collateral
you offer me: the building [tangible] and a UCC-1 on all business
assets [tangible -- equipment, furniture, etc. and intangible
-- processes, IC]. So I have to document how much each of these
assets are worth, and how likely I am to come out whole in case
of default. The property is worth $600K according to the appraisal
[which infuriates you, you thought it would be at least $750K]
-- for me to even think about making this loan [assuming that
your credit is impeccable and I am convinced that you have a
viable plan], I need to come up with a LTV > 65%. Why? because
most restaurants fail, and even though I have spread your personal
financial statement and tax return and am convinced that you
could pay the loan from your own pocket, I have to assume
that your personal financial state will also deteriorate too
and I may need to fall back on that collateral. The equipment
and furniture? Worth about 10% of what you paid for it -- if
we are lucky. I don't even factor that in. Is your IC, that process
worth the additional $169K?
Yeah, sure.
Okay -- you are
one heck of a salesperson, and I have vision. I accept that the
IC is worth $169K at the courthouse steps. I have to sell the
loan committee -- they know me and although they have some reservations,
and add financial performance covenants and additional origination
fees into the deal, I get the loan approved. You build your restaurant,
things run fine, you pay on time -- you and I are both happy.
Now -- enter the
examiners for the bi-annual safety and soundness exam. They pick
up this loan, crunch the numbers -- and decide that the IC is
worth $0 because it cannot be sold on open market. The LTV on
the loan [based on a current principal outstanding of $450K to
the original appraised value of the property of $600K] rises
from the 65% I calculated to 75%. It is now an exception to policy,
and the regulators downgrade the risk rating to "special
mention" even though it is a performing credit. I now have
to take $22,500 of income, and place it in the Reserve for Bad
Debts to insure against that risk, reporting to the Board of
Directors and my stockholders that I have made a high risk loan.
If I have done more than one of these, multiply the impact. If
you have been late with a couple of payments, or I do not have
current financial information in the file, the rating may become
"substandard" and require a 15% allocation to the reserve.
Now -- you tell
me: why do I want to do this loan?
And the answer is:
I would not -- unless you could provide me with tangible collateral.
Not only will my
bank be on the platform, waving as the train pulls out of the
station, they will be shaking their heads and muttering "poor
devils." Then they will turn around and trudge back to the
office and take up the daily grind again.
Karl-Erik
Sveiby:
Carol, you just provided a most insightful and eloquent "Case
for intangible banking." Thank you! I urge Jerry to be light
on her editor's red ink; it is a piece your superiors should
frame and pin to their walls!
I have no good answers;
let me instead suggest how a 'knowledge perspective" may
shed some light on the intangible banking business.
Suppose your bank's
superiors would ask themselves these questions:
- What is it worth
to decrease the failure rate among OUR restaurant clients from
75% to <25%?
- What is it worth
to decrease the number of loans requiring 12.5% bad debt provision
by $100 million?
- What is it worth
to increase the market share of the restaurant businesses by
20%?
- What is it worth
to increase the margin by 0.1%?
My guess is it's
a lot of money.
OK. So, can we create
a project with the purpose of harnessing all our intangible
resources at our disposal to deliver this?
Money is a commodity
and commodities command very low margins. Can we change the mission
of our bank? Does the bank provide commodity only or does it
provide its clients with an increased Capacity to Act (=Knowledge)?
- Knowledge flows
from our Internal Structure
We -- as a bank
-- must have a lot more knowledge in our databases about the
restaurant business. What are the profiles of the successful
and the unsuccessful restaurant business owners? Can we distinguish
patterns that reduce our risk? What branches in our bank have
the best records in lending to restaurants? What can we learn
from them?
- Knowledge flows
from our External structure.
What does the restaurant
owner know (apart from good food!) that we as bankers might benefit
from? What knowledge and services can we provide him with in
order to increase his probability of success? What do our other
(non-competing) restaurant clients know that might benefit this
new start-up? How can we ensure that he learns from them? What
other bank has the best records in lending to restaurants? What
can we learn from it?
- Knowledge flows
to our Staff Competence
What knowledge can
we equip our lending officers with to increase their capacity
to estimate loan defaults in the restaurant industry? What loan
officers have the best records; loan volume/defaults n the restaurant
industry? What do they know that our other officers might benefit
from?
Etc, etc.
The knowledge perspective
sees the bank and your client as one. The purpose of the
relationship is to maximise the value created for both
parties.
Questions like these
constitute the 'knowledge lens' by which we can uncover the value
creation potential dimmed by the obsolete lens of the Industrial
Era and unleash the energy. Banks have enormous idle, intangible
resources. Free them up!
I don't wish to
burden this space with too much text; all I wish to do is to
display the benefits that a different perspective will have and
help you to encourage your bosses to start asking new questions.
For more about the knowledge perspective, please visit my library and download 'A Knowledge-theory
of the Firm.'
Annette
Copper, Cybrarian, NHS Modernisation Agency:
My experience to date is that justifying KM to senior managers
who, as has been mentioned, are paid large sums of money for
their know-how, is to present it strategically in the first place.
As all organisations are complex adaptive systems, KM needs to
be viewed as the largest strategic tool to operationalise people,
processes and technology and that it is the best option in ploughing
the organisations' furrow that neither veers violently one way
into stifled planning and management or chaos of thought or deed
the other way.
Karl-Erik
Sveiby:
I agree with you that KM needs to be presented as a strategic
issue. My experience from top managements is that it is a double-edged
sword. Yes, they agree about it in principle, however, positioning
KM as a strategic issue has such huge implications for the whole
organisations (and even for the top job!) that many put in the
'too-hard basket.'
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Measure
for Learning, Not Control
Karl-Erik
Sveiby:
Originally I wanted the AOK group to reflect on why do
we want to measure intangibles? If measuring is the answer, what
is the question?
We rush far too
often into the solution without asking ourselves first about
the purpose of the exercise. For measuring the 'why' is a particularly
hairy issue because there are lots of hidden agendas and taken-for-granted
purposes.
The most common
purpose is the Industrial Era approach to measure for control.
Management accounting is still under the spell of Taylor's "Scientific
Management." in which some one up there controls the lesser
beings down there.
However, we are
already on the threshold of the Knowledge Era and people detest
being measured from above. Since we are well educated, smart
and empowered compared to Taylor's days we find all kinds of
ways to manipulate the process and make the control worthless.
The old accounting approaches are more or less useless.
There is a disconnect
between an obsolete purpose and the new need: to learn as much
as possible about the way of doing business in the Knowledge
Era. We are only in the beginning of learning how to measure
intangibles and we must not allow obsolete Industrial Era approaches
destroy the future Knowledge Era processes.
I advocate that
the Knowledge Era purpose of measuring should be for learning,
not for control. Mathematics and statistics are languages that
help us crystallize and see things we can't see with words and
pictures so they should be used as much as possible.
Debra
Amidon:
Recently, I was on a plane returning from Singapore and began
a conversation with a fellow passenger. Since he was an accounting
professor at Columbia University (my Alma Mater) and also on
the staff of Morgan Stanley, I asked his opinion on this focus
on managing and measuring intangible value and intellectual wealth.
His response, was that he did not put much stock in it, and worse
-- that this focus was just providing more confusion to an already
complex reporting procedure.
The more we talked,
I learned that he had just released a document entitled Global
Valuation and Accounting' in which he argues that the old valuation
methods still apply in the new economy. Upon perusal of the report,
I discovered that they outlined many indicators that -- I would
argue -- are precisely the new intangible value indicators we
are all discussing! In other words, the FASSTEST (copyright)
Companies maintain the highest operating margin and operating
asset turnover based upon indicators for: Flexibility, Agility,
Scale, Scope, Talent, Education, Servicing Customers, and their
Technological edge.
The point is that
we have leadership at two ends of a continuum -- both articulating
(in my estimation) the same thing! On the one hand, we have those
who believe that the new focus is only an evolution - continuous
process improvement - of the old methods. The other extreme argues
that our old measures simply do not apply to the 'new' knowledge
economy.
The question, then,
is one of strategy and influence. Have you found more success
with either form of "measurement leadership?"
For
a copy of the Report, e-mail Debra.
Zora
Valeska, Knowledge Manager, Optus Professional Services: We all know that traditional
ROI doesn't adequately measure knowledge assets within an organisation.
Citing those PWC (PriceWaterhouseCoopers) studies that "show"
that 80% of an organisation's assets are intangible sometimes
doesn't seem to work with senior management either.
I'm often asked
for a substitute intangible ROI -- something to neatly replace
traditional ROI that business folk seem so fond of. I really
don't think this exists. What I'm really asking is instead of
why measure (because I can fully see that humans, being what
they are, they need some sort of measurement in order to feel
validated) -- how to measure?
Is there a substitute
ROI that we can use to measure the intangible asset, that follows
the same formula? My guess is no . . . ?
Karl-Erik
Sveiby:
Zora, I answered your question partly in a previous post. I'd
like to add, though, that YES, there do exist "intangible
metrics" that can replace ROI and ROCE (Return on Capital
Employed). One I have suggested is 'new' ROCE: Return on competence
employed; Value added divided by total Remuneration. Another
is Value Added per Employee, Another is Value added per Intellectual
Capital (suggested by Ante Pulic). A third is Return on Knowledge
Capital (suggested by Baruch Lev) I don't want to go into detail
on how to calculate them, however, all indicators are easy to
calculate.
The problem is not
the lack of 'intangible' indicators. The problem is that they
are new compared to the established range of indicators so analysts
and managers don't know how to interpret them. There is still
very little research published that validate the new metrics
compared to the deluge of research on financial indicators. Traditional
accounting was invented 550 years ago in Italy. The field of
new accounting is like America in 1492 and we are Columbus!
Jo
Parker-Whiting:
I agree with Karl that we should not be measuring to control
but rather to learn. Problem is, I think there are very few business
leaders out there (particularly in Australia?) who would accept
this model. We are not even talking about measuring our IC here
at KPMG and I can't see it happening any time soon!
Business Managers
are held responsible for certain outcomes and their natural instinct
is to try to control everything that may affect this outcome.
If it can't be controlled then it is best left alone (one reason
why the technology part of KM is so popular in Oz compared with
the other aspects of KM).
Also, learning is
really only useful when you can apply what you have learnt. So,
if we measure our IC and learn for example that we don't have
the right rookie to experienced ratio then we would expect to
do something with this learning (hire more rookies for example).
Is this not control?
One of my responsibilities
is to measure how far we have come on the knowledge journey (obviously
a different focus to measuring IC) and I do this so we can see
if we are making progress and if we are not then we need to do
something to ensure we are making progress. Is this not control?
The expectation is that I am doing this for the purposes of control.
Karl-Erik
Sveiby:
Very good point! We are finally getting to the core of the topic!!
What is the difference between measuring for control and measuring
for learning? It is by no means a clear division.
First: what is control?
Is it some one else controlling you? Like when your supervisor
tells you as to work overtime because he just discovered that
his unit is lagging a sales benchmark? Or is it self-control?
Like when YOU discover that you are lagging behind and decide
yourself that you need to work overtime?
Measuring for control
tends to be top-down, your supervisors trying to influence you.
Measuring for justification is often bottom-up, you trying to
influence those above you (to give you more time or more resources,
etc).
Measuring for learning
is when you as an individual are looking around trying to get
some control over your own life.
It is to discover
the hidden agendas that we need to discuss the purpose of measuring!
Jack
Vinson:
I've just been reading a bunch of the Eli Goldratt literature
on Theory of Constraints (The Goal, Critical Chain) and
wonder if this idea of Intellectual Capital valuation might be
complicating matters, as Debra Amidon's recent seat-mate suggested.
The idea in Goldratt's work is that any moneymaking organization
wants to simultaneously increase throughput, reduce costs and
reduce investments in order to improve. (Efforts that do one
of these things at the expense of another are counterproductive.)
Our organization is very excited about the Theory of Constraints.
Has anyone discussed
or thought about how various KM projects help the bottom line
of the company in these ways? Some KM efforts could clearly be
linked to improving throughput, as they are geared towards making
information more readily available to people who need it.
Karl-Erik
Sveiby:
Eli Goldratt's theory is well in line with how most KM efforts
are seen by managers: to increase efficiency. According to a
conference board Paper the vast majority of KM efforts (some
70% are in this category). The theory of constraints however
completely misses the impact of innovation and knowledge creation.
Innovation blows away the constraints! This is where KM has the
greatest potential. However, according to the same paper only
some 8% of the KM initiatives in the US, up 'till 1999, were
in this category.
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Impact of TANGO on Knowledging
Charles
Savage, President, Knowledge Era Enterprising International: Certainly, measurements
are one way to get people's attention, but equally as important
is people's ability to value one another's knowledge and insights.
After all, it is not just what we know, but how you and I combine
what we know in creative and novel ways.
What impact does
the playing of TANGO have on the participants and their self-understanding,
and their understanding of one another and the value of this
knowledge when they value one another in a more active way?
Karl-Erik
Sveiby:
Charles, I'm glad and honoured to see you here! Long time no
see! You are the first person to suggest many years ago that
measuring should be for learning.
You are now suggesting
a 4th measuring purpose; getting attention! Your question really
concerns why measure at all? I couldn't agree more. If getting
attention and influencing the frame of reference of other people
is the purpose, metrics are not particularly effective. By measuring
we try and uncover (make explicit) the unknown for some kind
of (often hidden) purpose. A simulation like Tango serves the
purpose of influencing the frame of reference and is of course
much more effective than metrics in doing so. However, you will
have to spend at least a day on playing it! Many people believe
they don't have the time!
Nick
Bontis, McMaster University and previous STAR SERIES guest moderator: Charles, I have written
an article that actually answers this question. I tested individuals'
perceptions on intellectual capital before and after they played
the Tango simulation. The results showed a statistically significant
increase in appreciation for these concepts after the game.
Bontis, Nick and
John Girardi. (2000). "Teaching Knowledge Management and
Intellectual Capital Lessons: An empirical examination of the
TANGO simulation", International Journal of Technology Management,
20, 5/6/7/8, 545-555.
I would also like
to add that I have used Tango for several years for both MBA
and corporate audiences with great success. In fact this past
year I launched a KM minor within the business school at McMaster
University and used the online version Tangonow.net as a mid-term
exam with my students.
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Devil is in the Details
Keith
Housey, Consultant, Exaccurate Consulting:
Here are some of my
thoughts.
It (measurement)
is a must. I agree that most of us know it as a fundamental truth
that the principals of KM are the foundations of success for
companies in the new economy. But as usual the devil is in the
details. As of today, companies are still judged by the revenue
and cost numbers they put into their financial statements. Thus
this is the driver of all evaluative criteria for monies within
companies, and until the FASB and the government fundamentally
change the accounting rules, we will always have to deal with
ROA, ROI, etc measures for KM initiatives.
This is not to say
all is lost. For the most part, the requirement to provide "external"
metrics is to justify initial or continued funding or demonstrate
the success of the KM initiative. So, with these types of metrics
being difficult to identify/collect for KM initiatives, we just
have to look at KM from a different angle and talk those members
of the "powers that be" (the ones that only see thing
in profits and costs) in their language. To this end, I have
found success using the following strategies in building the
business case and approval for funding of KM initiatives (I am
writing from the point of view of being an external consultant
working with a client looking to gain funding for or expand a
KM imitative, since this is from where my experience originates):
1) Broaden Scope
of Initiative. Include in the business case components that can
be tied to hard dollar savings where possible; thus justify the
expense with hard dollars and soft dollars (a much easier sell);
2) Link to key business
goals. In justifying the business case, link the KM initiative
to the business' key goals and demonstrate how the KM initiative
will be of value in attaining these goals; 3) Coalition building
-- if needed -- include other people that once on board will
strengthen the financial section of the business case or politically
enhances the approval process for the initiative;
4) Trust (between
you as an external consultant and the client) cannot be understated.
I have found that if you can build a relationship that is one
of a partnership and not one of "consultant selling services
to client," that the client will be more conformable with
you dealing directly with the =ECpowers that be,=EE and I have
found that in speaking with "the powers that be," your
word as a consultant does carry significant weight as an expert
and objective opinion;
5) Value Propositions.
In the business case be sure to focus on value propositions that
are "hot buttons" for the people key to approving funding
of the initiative; and
6) Demonstrate Understanding
of Metrics "Great" Importance: Make the best initial
attempt and adjust later. In many cases, I have found that if
you are up front that you do not know the exact metrics and predicted
benefits, but you demonstrate that you are very cognizant that
you need to be diligent in regards to the importance of the metrics
matter as part of the success of you KM initiative, you can gain
significant point for funding approval.
P.S. I have found
it best to separate metrics into two categories "internal"
and "external" metrics. The "internal" metrics
provide info for the management/refining of the KM initiative.
The "external" metric provide the bottom line results
(cost savings, increased revenues, increased market share), best
as possible, resulting from the KM initiative.
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Conversations
Continue Following Sveiby Departure
Jerry
Ash: Karl-Erik's
departure as guest moderator, does not mean the discussion needs
to end. If you want to pursue the topics raised during these
past two weeks, continue! Following are messages received following
the conclusion of Karl-Erik Sveiby's two weeks in the STAR seat:
Leif
Edvinsson, Skandia and former STAR Series moderator: Hello Karl-Erik. Thank
you for this very interesting conversations and insightful reflections
from you. I also would like to have your thoughts on the following:
- what do you suggest
as tentatively emerging corporate behavior to the launch in October
this year, from the new SEC chairman Mr. Harvey Pitt in USA,
to overhaul the whole financial reporting system?
- might the emphasis
on monitoring measurement and metrics be an excuse or discourse
for a deeper focus on intangible values, culture and nourishment
of the potential of talent as well as enterprise opportunities?
- what do you think
about the opportunity cost perspective, i.e., actual value
added/value added potential, and the gap as a leadership liability?
Craig
Jolley, Independent Communications and KM Strategist: Although too late to get
this in for Karl-Erik, I thought I'd share an interesting discussion
I participated in last night at the local chapter meeting of
NIRI (National Investor Relations Institute) in Cincinnati, OH.
The broad topic
theme was an exchange of ideas and best practices of what IR
professionals were communicating to Wall Street in this Bear
Market. With financial performance in the toilet and stock prices
rapidly falling, it was interesting to me to note that a lot
of discussion centered on several members' comments of the need
to communicate the "intangible" capabilities of their
companies to the buy side analysts that follow their industries.
This is the first time this type of discussion has taken place
in the past year that I've been attending meetings.
It was obvious,
however, that beyond the blanket statements of the need to communicate
"intangibles," this was largely uncharted water for
this group.
I directed the group
to check out Karl-Erik's web site, as well as that of Baruch
Lev, to gain some additional information and valuable research
and examples of this topic and it spawned an idea/question: Could
it be that the recent economic recession will be the catalyst
to elevate KM principles into serious consideration in the executive
suite?
Jack
Vinson:
While I agree with Karl-Erik's comments that TOC (Theory of Constraints)
misses the mark on innovation when the focus is strictly on efficiency,
I disagree that TOC ignores innovation. One of the "new"
ideas of TOC is that local efficiency increases are not beneficial,
unless they impact throughput of the entire system. As long as
an organization encourages thinking about the whole system, rather
than the constraining components, innovative ideas can come along
that rearrange the entire system to increase throughput while
decreasing investment and costs.
Carol
Tucker:
While we are talking about adding the value of intangibles to
the balance sheet, here's an abstract to an article I recommend:
Abstract: Examines
certain issues related to application of total quality management
to the information systems setting, in particular to the measurement
of output quality. Data produced by a system are often transformed
for decision making by end users. Although ensuring the quality
of the data can be achieved, it is difficult to control for all
the inferences made by end users. Using a financial reports database
as an example, demonstrates how the choice of measure of information
quality can sometimes bias the survival time of firms in the
sample. The analysis uses the Cox proportional hazards model
to demonstrate that when immaterial data errors are present after
firms have incurred a loss, sometimes they increase their survival
chances. Such consequences are valid in other settings as well
and demonstrate that defining and measuring the quality of information
systems needs more considerations than is generally assumed.
The whole article
can be found [until the free access is gone] in the International
Journal of Quality & Reliability Management & Qualitative
Market Research: An International Journal between the dates 26/11/01-02/12/01.
If you email me, I have
downloaded and saved the article.
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Thanks Karl-Erik; Lessons
Learned; Links
Carol
Tucker:
I want to thank Karl-Erik for his time and attention -- I appreciate
his thoughtful reply to me specifically. I know that the others
he has replied to also appreciate his energy.
And he makes some
great points!
I could not have
built the case for my need to operate in 'stealth mode' any better
myself! And it was nice to read down the list of points and be
able to pat myself on the back for what I have been able to accomplish
. . . . Not me of course, but the organizations I have worked
for, even though such thinking is not common in the industry
as a whole, especially in community banking.
Debra
Amidon:
In addition to referencing the work of Karl-Erik (Australia),
Ante Pulic (Austria) and Baruch Lev (USA), I referred the audience
to the publication 'The Intangibles of Cooperation and Competition:
Euro-Asian Perspectives -- which I still believe is one of the
most progressive and insightful documents of where the measurement
focus provides value (again) . . . and where the agenda may be
headed. Parthasarathi Banerjee (India) -- another expert on our
Global Knowledge Leadership Map -- is one of the principle authors.
I rarely recommend a book, but this one it top notch -- at least
for those who know that their efforts on the 'practice' level
are establishing the foundation for the broader picture.
I also had the privilege
to meet with Dr. Charles G. Goldfinger (Belgium), managing director
of Global Electronic Finance Management, who offered his concepts
and research results opening. His latest work on the 'Intangible
Economy' has been received as counsel to the OECD, The World
Bank and the World Economic Forum. Your readers can review in
more detail by visiting
the website.
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