David Skyrme Associates


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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.

On the administration page you will find important information about leaving and joining the distribution list. We hope you enjoy this UPDATE, and welcome comments, contributions and feedback at david@skyrme.com.

David J. Skyrme
Managing Editor

Measurement Myopia:
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 creating value?

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 knowledge leader.

Email: david@skyrme.com
A Briefing about this topic: 'Measuring Intellectual Capital' is at http://www.skyrme.com/insights/24kmeas.htm

See A Reader Replies

1000 Per Cent Return on Your Knowledge Investment?

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 already has?

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.

Targeting Investment

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 cash flows.

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 - great.

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 david@skyrme.com. (and remember to mark it NOT FOR PUBLICATION if you do not want your views shared with others on the next I3 UPDATE).

Trends in the Knowledge Economy

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:

  1. 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.
  2. Growing pressure for intangibles reporting and governance - why boards of directors should take governing 'soft' assets seriously.
  3. Knowledge filtered by experts to knowledge filtered by interested parties - new decanters for knowledge, new knowledge recipes; how to tackle the analysis gap.
  4. International to Interlocal perspective - how the Internet is creating new opportunities from emerging changes in the ecology of local communities.
  5. 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.

New Knowledge Management Resources

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: rj@ifsinternational.demon.co.uk

Knowledge Management.
Case studies and expert articles. 6 times/year. £245 ($345).
Ark Publishing. Tel: +44 171 795 1234. Email: ark@dircon.co.uk

Information Strategy.
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

  • Y2K
  • Electronic Exchange systems - Ecash, virtual banking
  • Groupware
  • NCs

Update (1999) - See Trend Monitor International web site for current publications list

More resources and links at http://www.skyrme.com/resource/kmres.htm

Next Month:
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 (info@skyrme.com) with details. Thanks.

Knowledge Management Events

The key event is:

Knowledge Management '97, 2-3 Dec, London.
I'll be chairing a session here and ENTOVATION colleague Debra Amidon will be speaking.
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.

This newsletter is copyright material. In the interests of dissemination of information, forward circulation is permitted provided it is distributed in its entirety including these notices, that it is not posted to newsgroups or distribution lists and that it is not done for commercial gain or part of a commercial transaction. For other uses please contact the publisher.

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.

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