No. 14: November 1997
Measurement Myopia - Those Who Measure and Those Who Act
1000 Per Cent Return on Your Knowledge Investment?
Trends in the Knowledge Economy
New Knowledge Management Resources
Knowledge Management Events
Next Month - Knowledge Management Tools and Techniques
Welcome to this issue of I3 UPDATE, a free briefing analysing developments in the networked knowledge economy.
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David J. Skyrme
Those Who Measure and Those Who Act.
David J. Skyrme
One of the hottest issues around at the moment in knowledge management,
indeed around business performance in general, is that of measurement. With
the decreasing relevance of financial measures as an indicator of the value
of a business, what measures should you use?
The last six months have seen four books come out with the words
Intellectual Capital in their title - details at
http://www.skyrme.com/resource/kmres.htm. Conferences on performance measurement systems, such as the balanced scorecard, have been sold out. All indicate a quest for that elusive measure - the true indicator of a company's potential to create wealth for its stakeholders, such as shareholders and employees (particularly if you have stock options!).
Meaningful Measures and Illuminating Indicators
It is generally accepted that the traditional balance sheet significantly
understates the true value of a company. A recent IBD analysis put the
average of market value (representing many of the intangibles) over book
value (which measures tangible assets) of the companies in the Dow Jones
industrial index at 5.3, while that for many knowledge-intensive companies
(such as high-tech or biotechnology companies) is more than 10. The gap is
largely attributed to intellectual capital (though some is due to market
factors - were companies really worth 15 per cent less at the end of
October than the beginning?).
There are now a number of models and methods that help managers assess, if
not the absolute value, at least the general trend in key indicators that
contribute to future wealth. Among these are:
The Skandia Navigator and its associated Value Creation Model
Karl Erik Sveiby's Intangible Assets Monitor, now with an interactive Web
form to help you assess the value of your company's intellectual assets
The IC-IndexTM of Intellectual Capital Services
Each works from an approach of
- Creation of IC categories e.g. human, structural, customer capital
- Development of informative indicators
- Putting in systems and processes to monitor and manage these
Among popular indicators are customer satisfaction and proportion of
revenues due to new products. Some of the more interesting ones are
Sveiby's 'rookie ratio' and his 'customers who increase our competency'. So
far - so good. But what is really happening out there?
Bean Counting, Slicing and Dicing
There is no doubt many people love counting. One can also observe that many
people create unnecessary work. Armies of accountants, analysts and
auditors, count everything they can see (the tangibles). The result is the
creation of reports and accounts that some regard as 'works of fiction' - a
bit harsh, since they are generally true as far as they go - the problem is
they do not go far enough or go in the wrong direction On the other hand
an army of analysts then spend time to get behind all this smoke screen,
slicing and dicing the numbers, and recalculating to a new set of measures
(which for analysts may include measures like SVA - shareholder value-added
and EVATM - Stern Stewart's Economic Value Added).
As already know, the world of financial markets is a separate world from
the world of products and services. Over a decade ago Peter Drucker talked
of the decoupling of the intangible economy from the tangible. He estimated
then that the value of financial trade (foreign exchange etc.) was 30 times
greater than that needed to support the physical trade of goods and
services. Today with derivatives, and derivatives of derivatives (and all
the other innovative products that financial markets come up with), this
figure must be much higher - all those speculators swishing money (or
information that may at some time get converted into money) around the
networks, gambling on slight movements in one direction or another.
Incidentally, while talking about Drucker, in a recent radio interview (BBC
'In Business', 19 October), he showed that at aged 87 he is as perceptive
as ever: "despite all this investment in information technology managers
don't really understand information. They also focus too much internally
and not enough externally".
The challenge before us is: how can we reconnect the world of measures and
intellectual assets (which, after all, are more complex to get to grips
with than what accountants deal with now) with the real business of
Sleeves Up and Down to Basics
What we have found in our investigations of knowledge management
initiatives is that there seems a gulf between those who do and those who
measure. The companies and individuals who we regard as leaders have often
built teams and attracted investment (yes real money) without cost-benefit
analyses or detailed justification. In the meantime, others fret about what
will it cost and how to justify investing in knowledge management.
For me this is deja vu. These two camps existed when office computer
systems (e.g. word processing, email) came on the scene in the 1980s. What
happened then was that those who worried about justification didn't really
understand what the new agenda was about and didn't get the benefits.
Meanwhile the pioneers had a 'gut feel' or were willing to experiment, and
discover the benefits later - many of which were not originally anticipated.
That does not mean that the ones who go ahead don't measure. They do, but
retrospectively - once they have realised some benefits and can articulate
them; once they have developed their understanding of the real impact in
their business. For them getting a strategic lead is a priority, not
fretting about counting beans, or peas or bits or bytes.
To me, that's one of the differences between a knowledge manager and a
A Briefing about this topic: 'Measuring Intellectual Capital' is at http://www.skyrme.com/insights/24kmeas.htm
See A Reader Replies
David J. Skyrme
No - we can't get away from cost benefit can we? These are the figures
being cited by IDC as a result of their survey of Netscape corporate
Intranet users. Typically they found investment in people - developing the
system, maintaining the content, 4-5 times higher than investment in
hardware and software. However the returns were typically calculated on the
time saved by professionals. For example, it estimated the equivalent
savings at Booz Hamilton Allen of over $6 million a year against annual
outgoings of less than a million. Typical payback periods on several
projects was 6-8 weeks!
Too good to be true? In another case (quite separate from the IDC study)
one company is reputed to have spent over $15,000 investigating a
solution, when it was publicly available for $13 in a technical
publication. I calculate the ROI here if they had invested the $13 as
over 100,000 per cent!
Look at your own market research spending. How much does your company spend on surveys and studies to get answers that someone in your organization
Of course, the key to all these cases is making what you know more readily
available and reminding people that it is available. And, as the Booz
Hamilton Allen case shows, it's not just putting in an Intranet that is
important, it is putting in the information management infrastructure, in
their case in the form of knowledge 'editors' or 'superlibrarians', that
really brings home the benefits.
Time and time again we see pressures from senior management to "let's get
on the Internet" or "let's put in intranet" without thinking through the
strategy of how it will support corporate or marketing goals, or how to
exploit its characteristics to their best potential. Mind you, with
Netscape and other vendors pushing figures like that 1000 per cent, you can
understand the "jump in now, no need to justify it" approach. After all, we
all have to start somewhere with this 'wired' revolution. The challenge is
to know how to spend your investment wisely. We've noted in earlier I3
UPDATES how enthusiasm to jump on the bandwagon without understanding where
it was going has lost companies like Bertlesmann millions (with Europe
Online), while even MSN (the Microsoft Network) has not displaced AOL from
top position despite all their investment.
So What's The Truth?
Can you realistically expect 1000 per cent return of you investment in
Intranets or other forms of knowledge management activity? Our belief is
NO. Further, as you will have guessed from the piece on measurement, we
think this is the wrong perspective to take anyway. It's a bit like
believing those unsolicited emails you get promising to make you rich. At
least in this case, the benefits are supposedly more tangible, like real
In the intranet case, there genuine savings, such as on copying costs and
costs of distributing paper, but that's small fry in general. The less
tangible savings, which create the large ROI figures, are essentially those
of the saved time. But is this time saving put to good use? If it really
does result in more billable time to clients, then it becomes real, but in
many cases it may not. My own experience of time management by
professionals is that it is very difficult to translate the odd 10 minutes
per person per day (that's the kind of figures that were found in the BHA
example) into productive output. If it can be aggregated with other time
savings and is used to think smarter and increase your company's
intellectual capital, in a form that is realisable in future revenues -
As I see it, the real benefits are not measurable in such simplistic terms
as cost of time (which is after all only one of five key resources used by
knowledge workers). They come through better information, better knowledge
connections, better insights, and better 'peripheral vision'. Still, let me
not pour a damp squib (its firework night in England as I write this) on
those suppliers, users or consultants who like to justify everything with
numbers. After all, their intentions are spot on - to get you to make
effective use of Internet technology.
I await to hear your views on any aspect of measurement with interest.
Please email me at email@example.com. (and remember to mark it NOT FOR
PUBLICATION if you do not want your views shared with others on the next I3 UPDATE).
As part of our analysis work for the Knowledge Kaleidoscope, http://www.entovation.com/services/kk.htm, we have identified 30 established and emerging trends in the knowledge economy and knowledge-intensive businesses (that's over 90 per cent of all large businesses). Here's a taster of five of them:
- Shift of focus from knowledge management to knowledge innovation® -
simply sharing existing knowledge e.g. best practice, is not as potentially
rewarding as innovation -creating, converting and applying new knowledge.
- Growing pressure for intangibles reporting and governance - why boards of
directors should take governing 'soft' assets seriously.
- Knowledge filtered by experts to knowledge filtered by interested parties
- new decanters for knowledge, new knowledge recipes; how to tackle the
- International to Interlocal perspective - how the Internet is creating
new opportunities from emerging changes in the ecology of local communities.
- Additive measurement to combinatorial measurement - how the old rules of
counting assets break down for knowledge products. New mathematics and
methods are needed to measure intellectual value.
These are glimpses of the ongoing analysis work that will make Knowledge
KaleidoscopeSMmore than simply a newsletter, but a well structured and insightful analysis of key developments that affect every supplier, user
and policy maker. Our association with Trend Monitor International will
ensure that the key factors for success in the knowledge economy are
continuously tracked through a rigorous content analysis approach, while we
and ENTOVATION International draw out additional insights and the management implications.
SM Knowledge Innovation and Knowledge Kaleidoscope are service marks of ENTOVATION International.
Update (1999) - For a fuller description of the trends, see Knowledge Economy Trends. Knowledge Kaleidoscope has not been launched as a separate publication or service, due to lack of an investor or sponsor. However, analysis continues, and this is used in our trends analysis services. See also Knowledge Trends Analysis.
The number of resources for knowledge managers is increasing daily. Recent
magazine and periodical launches include:
Journal of Knowledge Management.
Inaugural edition in September 1997. 4 times/year. Peer reviewed. £225.
IFS International. Tel: +44 1234 853605. Email: firstname.lastname@example.org
Case studies and expert articles. 6 times/year.
Ark Publishing. Tel: +44 171 795 1234. Email: email@example.com
Now has regular knowledge management coverage. Monthly. £35.
The Economist Group. Tel: +44 171 830 7000.
Journal of Systemic Knowledge Management. An e-journal (online). Awaiting
the inaugural edition.
Keep tuned for Knowledge KaleidoscopeSM - the pilot edition will be out soon.
Update (1999) - Some of these details have changed e.g. Information Strategy was sold and incorporated into Computer Business and lost much of its focus on knowledge management. See the resources page for latest resources information.
Other Web Site Links
Knowledge Management Links (Jerry Ash) - A selection of links. Also
includes State of KM Practice Among Early Adopters, researched by Jerry and
published in Knowledge Inc., August, 1997.
Update (Aug 1999) - Link removed. Jerry Ash does not currently have a web site.
Emerging Thoughts (Gene Bellinger) - Over six pages of links (at one per
line!): articles, organizations, and products (categorized by knowledge
management, hypermedia, problem resolution, document management, problem
tracking and database). Updated link (Aug 1999): http://www.outsights.com
Recent Features in Unisys's online magazine Exec! (October 1997)
Innovation: What Every CEO Should Know - Debra M. Amidon
Measuring the Mettle of Intellectual Capital - Karl Erik Sveiby
Update (1999) - Links Removed
New Content Analyses by Trend Monitor International
- Electronic Exchange systems - Ecash, virtual banking
Update (1999) - See Trend Monitor International web site for current publications list
More resources and links at http://www.skyrme.com/resource/kmres.htm
Knowledge Management Tools and Techniques
We are currently developing a list of high leverage tools and techniques
that are being used for knowledge management for one of our features in
next month's I3 UPDATE. If you have one you would like to us to consider, please email us (firstname.lastname@example.org) with details. Thanks.
The key event is:
Knowledge Management '97, 2-3 Dec, London.
I'll be chairing a session here and ENTOVATION colleague Debra Amidon will
Business Intelligence. Tel: +44 181 879 3355 http://www.business-intelligence.co.uk
For the knowledge centre manager:
OnLine 97, 9-11 December, London.
Includes several sessions on knowledge management. David Skyrme is presenting 'From information management to knowledge management: are you prepared?'
Learned Information. Tel: 01865 388000. http://www.online-information.com
For the (would be) systems thinker:
Phrontis courses on SSM (Soft Systems
Methodology) 24-25 November;
Introduction to Systems Dynamics 27-28 Nov;
Simulation using Powersim 1-2 December.
Tel: +44 1295 812262 http://www.phrontis.com
Tomorrow's Workplace - flexible working, telework, 18 Nov, Oxford.
Tel +44 1865 484876.
© Copyright, 1997. David Skyrme Associates Limited and Authors - All rights reserved.
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I3 UPDATE is a publication of David Skyrme Associates Limited - providers of market studies, consultancy and strategic advice in knowledge
management, knowledge networking and collaborative technologies.