Making the Business Case for Knowledge Management:
As Simple as ABC?
Last month (I3 UPDATE No. 51) we looked at developing a successful KM
strategy. Rather naively, I overlooked the related activity of making the
business case. Although to many senior managers the logic for investing in
KM is unquestionable and overwhelming, the fact that I was specifically
asked to talk at a KM managers' conference about this subject suggests that
many KM professionals still value ideas on how to convince their sceptical
In essence, there are only three main planks on which to justify knowledge
- Asset value
- Benefits potential
- Cost effectiveness
This is the ABC. They are closely interrelated, since specific initiatives
could affect all three, and particular outcomes could be put into more than
one category. However, its a useful mnemonic to trigger your arguments.
Let's look briefly at each.
Asset Value of Knowledge
How valuable is knowledge? As earlier articles and Insight No. 24 show, the
value is in the eyes of the beholder - an opinions vary widely. However,
there are several directions you can approach this from:
- market value: what are specific knowledge assets worth on the open market
e.g. a team of experts, a customer database, a licence for a patent?
- cost: how much does it cost to train a new hire? how many person-days
went into developing your intranet content?
- replacement cost: if you had a disaster (a team leaving, your computer
records destroyed), what would it cost today to get back to where you started?
- liability cost: how exposed are you to legal liability e.g. for product
traceability, for long overlooked terms in extant contracts?
Many organizations do not have a handle on the value of their assets. They
spend a fortune monitoring and accounting for physical assets, yet ignore
those assets - that according to most surveys - are worth 5-10 time more
than the assets recorded on the company's balance sheet. Look around you
(if you work for a large organization). Does your PC have a company asset
sticker on it whose value is recorded in an asset register? Quite probably.
But is your value recorded in the same database. Probably not!
Knowledge aware organizations consider human capital as an asset. It is one
several components of intellectual capital - others are customer capital,
structural capital and intellectual property. Well publicized case studies,
like that of Dow's Intangible Asset Management team, show the unrealized
value in such assets.
For most organizations the real value of knowledge management is in the
benefits it brings to the bottom line. These benefits range from increased
knowledge worker productivity, to faster time-to-market for new products,
to better customer service. Usually these benefits can be traced through a
Benefits Tree (see http://www.skyrme.com/tools/bentree.htm). A benefits
tree traces benefits from those that affect the bottom line. Typically the
benefits fall into the following categories:
- Information and knowledge benefits - retrieving vital information faster,
gaining access to expertise, having all the required information accessible
in one pace (e.g. through a portal)
- Intermediate benefits - minimizing duplication, sharing knowledge across
organizational boundaries, getting new hire up to speed faster
- Organizational benefits - reducing costs, increasing productivity,
growing asset valuation, innovation
- Customer and stakeholder benefits - better products and services, higher
quality, better value.
The number of reported KM cases where there are proven benefits running
into tens or even millions of dollars is probably now several hundred. So
there should be no limitation in finding an organization similar to your
own that has demonstrable benefits from implementing KM (there are, of
course, quite a few where the benefits have not been realized - but that's
for a future I3 UPDATE article).
This perspective is often a useful summary of the consequence of some of
the benefits mentioned above. It is often also the primary category for
seeking benefits in cash strapped public sector organizations, or
not-for-profit organizations. Its focus is better use of resources. Look at
the principle cost areas in your organization e.g.
- People - one consultancy reckons that every one percent increase in
productivity results in a flow through to the bottom line of $100 million
- Facility costs - by sharing best practice in areas such as office design,
health and safety, energy. For example, Chevron is cited as saving $100
million through its sharing of best practices in energy savings
- The e-business opportunity - here you save transaction costs or shift
costs to your users. For example, Sun estimates it saves over $100 million
a year on telephone support, but putting much of its technical knowledge on
the Internet and extranet.
- Customers - better customer knowledge and use of CRM (Customer
Relationship Management) systems, can help you focus resources on the most
Is It That Simple?
So there you have it - the ABC of an unassailable business case for
knowledge management. But is that simple? Obviously not, else there would
not be repeated requests for articles such as this. Here are the most
common stumbling blocks:
- Lack of a baseline - few organizations have a good handle on the costs
associated with poor information handling or on their current use of
knowledge resources. For example, is your organization one of many where
professional are not obliged to record their time against clients and
projects? Has your organization conducted an information or knowledge
audit? Does it have a measure of the effectiveness of various KM activities
which it is trying to improve (see the Know-10 quick KM evaluator at
- Costs are immediate and visible - the benefits are typically longer-term
and diffuse (hence the need for using a benefits tree)
- Lack of shared management vision - despite what the corporate plan says,
senior managers in most organizations have divergent views on objectives
and priorities - try to include benefits that get all your stakeholders on
board, but watch for hidden agendas!
- Too heavily focussed on financial measures rather than broader outcomes -
as pioneering work by Karl Erik Sveiby showed, financial measures are lag
indicators ; usually changes in intellectual capital measures are a good
indicator of what financial results will follow
- The link between cause and effect is complex; for example, how much can
an improvement in organizational performance be attributed solely to
- There may be unanticipated benefits. For example, early introduction of
widespread email often alters communication patterns in unexpected ways and
help horizontal knowledge sharing - but how many email systems could
foresee that and use it as a basis for justification?
These factors indicate that making a watertight case is far from simple.
However, there is one tactic that is virtually guaranteed to work. It's the
'turn off' tactic. If, for example, there are concerns about investing more
in an intranet, simply turn it off for a few days. The reaction of those
who pop out of the woodwork will give you plenty of ammunitions for
The one thing that has stuck me in this whole area, is that some of the
most successful KM implementations, making a business case was the last
thing on people's minds. They just went ahead and did it, learning and
measuring as they progressed. But that takes knowledge leadership,
something which in far too many organizations is still sadly lacking.
Whichever route you used to kick off your KM initiative, why not share your
lessons with fellow readers. I look forward to hearing from you.
Email: David J. Skyrme
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