"Few managers grasp the true nature of the knowledge creating company - yet alone how to manage it"
(Nonaka - ref 1)

It seems a curious fact of business life that the techniques for measuring and managing a firm's most vital resources are several years behind where they should be. We are today well into the information age, a fact most visibly demonstrated in some remarkable charts published in Fortune [2]. But managing information as a resource is still in its infancy. Although companies who deal in information - publishers, market analysts, database providers - know how to package and sell information, the full ramifications of information resources management in most companies are barely appreciated [3]. Today, we are on the verge of another quantum step, that towards the knowledge based business. Yet what do we know about managing knowledge as an asset? Apparently not much. This short Insight summarises where we are today and the challenges that lie ahead. It also points to some useful sources for further reading.

Since Peter Drucker first described the knowledge worker and wrote that the typical large business 20 years hence will be "knowledge based" [4] there has been an increasing number of articles or books about know-how companies or knowledge workers [5]. Most have some useful insights and some thought provoking discourse. However, none to my mind gets sufficiently into methods to analyse the knowledge asset and its value (though Sveiby has some useful models [6]). The book that I have found the most remarkable is that of Masuda [7]. Although only published in English in 1990, the original Japanese version of 1980 described in some detail how the information age would unfold into 'quaternary industries' that included arts and ethics industries as well as knowledge industries. His descriptions of 'synergistic economic systems' and 'participative democracies' based on information networking show remarkable foresight.

Just as Henry Ford and Alfred Sloan rewrote management theory (through practice) before the writers, so today there are exemplars of business practitioners who act in a way commensurate with innovative knowledge businesses. Individuals and companies who come to mind and are oft quoted are Ray Stata of Analog Devices, ABB, Ric Semler, Ricoh, Kelley of Bell Labs, Xerox, Merck. Much of their practice, especially in R&D, is explicitly aimed at getting the best out of their people - their 'intellectual' capital - and translating it into commercially exploitable products and services. We should look for guidelines in managing the knowledge asset in companies with high net worth compared to their physical assets (for example as measured by Tobin's q factor, cited by Stewart [5]) in industries such as biotechnology or software.

What constitutes the knowledge asset?

Unlike information, knowledge is less tangible and depends on human cognition and awareness. There are several types of knowledge - 'knowing' a fact is little different from 'information', but 'knowing' a skill, or 'knowing' that something might affect market conditions is something, that despite attempts of knowledge engineers to codify such knowledge, has an important human dimension. It is some combination of context sensing, personal memory and cognitive processes. Measuring the knowledge asset, therefore, means putting a value on people, both as individuals and more importantly on their collective capability, and other factors such as the embedded intelligence in an organisation's computer systems.

Today's financial accounting practices must bear some of the blame for our inadequacy of measuring the knowledge asset. Their techniques for valuing physical assets are highly refined, yet most company accounts tell you little about information assets, yet alone knowledge assets. They tend also look backwards in time. Quite remarkably some apparently 'healthy' companies have suffered their demise between one accounting period and the next. 'Intangibles' are receiving increasing attention, but it will need an outside initiative like the RSA's Tomorrow's Company Inquiry to change accepted practice [8]. Their 'new measure of success' working party is developing a balanced scorecard of measures, that include environmental and relationship measures as well as raw financial data. Alan Benjamin has proposed to them an outline of knowledge accounting, based on investment in people's training and experience and the time decay of their knowledge if it is not refreshed.

That we do not handle things right today is evident from the 'downsizing' activities of many companies. Those very companies who just a few years ago were saying that "people are our greatest asset", have today discarded them to "cut costs". Yet there is no recognition of what they have lost. There is anecdotal evidence that some companies who had taken out whole layers of middle management are realising that some intangible asset was also lost, since although their costs have been reduced, other measures of performance such as customer service or quality have suffered.

Like most assets, knowledge is only valuable (at least by today's economic measures) if it can be transmuted in goods and services that people will pay for. Here we get into leveraging knowledge, looking at adding value through its development. Here we move into new areas of knowledge networking and knowledge utilities - people enriching the knowledge asset through collaborative work. These terms are yet to be widely used, although Charles Savage, Debra Amidon (formerly Rogers) and other former Digital colleagues have been promoting their use [9]. In terms of management guidance, beyond these writers, the academics who appear to have most to say on the subject are Badaracco and Quinn [10]. Between them they identify many of the key concepts and mechanisms needed to exploit the asset. I would also suggest that some useful insights would come from understanding the state-of-the-art in the techniques of IRM - identification (auditing), ownership, cost and value, development and exploitation [11]. Developing the parallels for managing and leveraging the knowledge asset is the challenge that faces us.

1. The Knowledge Creating Company, I. Nonaka, Harvard Business Review (Nov/Dec 1991). These ideas are now expanded in The Knowledge Creating Company, I. Nonaka and H. Takeuchi, OUP (1995).

2. The Information Age in Charts, Tom Stewart, Fortune, (4 April 1994).

3. Findings from ASLIB's Information Resource Management Network (1993-4)

4. The Coming of the New Organization', Peter Drucker, Harvard Business Review (Jan/Feb 1988).

5. Brainpower, Tom Stewart, Fortune (3 June 1992).
Knowledge Workers: Bastion of Competitive Advantage, Harrigan & Dalmia, Planing Review, (Dec 1991).
The Knowledge Executive: Leadership in an Information Society, Harlan Cleveland (1985).
Developing the Knowledge Based Enterprise, Brian Burrows, Long Range Planning (Feb 1994).
Leveraging Intellect, J.B. Quinn, Executive International (Oct 1993)

6. The KnowHow Company: Strategy in Knowledge-Intensive Industries, K.E.Sveiby, International Review of Strategic Management (1992)

7. Managing in the Information Society, Y. Masuda, Blackwell (1990).

8. Tommorrow's Company Inquiry, The Royal Society of Arts, Manufacturing & Commerce, London. Work continued by the Tomorrow's Company Organization.

9. Fifth Generation Management, C. Savage, Digital Press (1990). There is now an updated and revised edition (1997).
Knowledge Innovation System: The Common Language, D.M.A. Rogers, CIEC Conference (1993).
Knowledge Networking: Creating Wealth through People & Technology, D. Skyrme, The Intelligent Enterprise (Jan 92).
Knowledge Businesses & Utilities, D. Skyrme, unpublished (1992).

10. The Intelligent Enterprise: A Knowledge & Service Based Paradigm, J.B.Quinn, Free Press (1992)
The Knowledge Link: How Firms compete through Strategic Alliances, Badaracco, HBR Press (1991).

11. Information Resources Management, N. Willard, Aslib Information (May 1993)

© Copyright. David J. Skyrme. 1994, 1999. This material may be copied or distributed subject to the terms of our copyright conditions (no commercial gain; complete page copying etc.)

For a perspective on monitoring the knowledge asset, see these related Insights: Measuring Knowledge and Intellectual Capital and Knowing What You Know. For the Commercialization of Knowledge, see Insight No. 26. Click here for full list. See also Knowledge Management Resources for more up to date books published since this Insight was written.

The ideas expressed above are now more widely accepted but often poorly practiced. Our K-Guides help you redress this imbalance. See, for example, the These ideas are now more widely accepted but often poorly practiced. See, for example, latest K-Guide: Knowing What You Know (and Don't Know): How To Conduct a Knowledge Audit.

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