UNDERSTANDING THE VALUE OF YOUR EMPLOYEES' KNOWLEDGE

By Jeff Hiser

You have tried everything you can think of to gain a competitive advantage for your company. You have eked out increases in performance and productivity by leveraging inventories, cash flow, real estate, and other tangible assets. But the most valuable asset, knowledge capital, remains untouched, overlooked, and underused. Not any longer!

An organization's collective knowledge capital is embedded in the skills and experience of its employees, as well as in its processes and corporate information repositories. Product knowledge, customer and supplier information, and operational expertise can give a company a business advantage in its industry. Knowledge capital is the lifeline of an organization, but management often underestimates its value.

Knowledge Rich Companies

To gauge the value of your company's knowledge capital, you can account for it the same way as traditional assets. Take, for example, a comparison between two companies: one from the industrial era, General Motors, and one from the information era, Microsoft.

General Motors' $40 billion market value is comprised primarily of traditional assets, while Microsoft's $70 billion market value consists of only a few traditional assets other than the buildings that make up its headquarters. IBM's purchase of Lotus is yet another example of the hidden value of knowledge capital. IBM's share price rose immediately after the purchase as investors realized Lotus held software knowledge IBM could convert to profit and business advantage.

It is the employees, not the company, who provide the knowledge necessary to gain a business advantage. That is why knowledge capital is a better indicator of the future earnings capabilities or net worth of a company than any of the measures of traditional assets currently used.

Companies like Dow Chemical, Monsanto, and Skandia AFS have already recognized that untapped knowledge capital is an enormous loss and are identifying ways to recognize it as a valuable asset. Skandia AFS has appointed a director of intellectual capital who is responsible for the preparation of a supplement to the traditional annual report identifying the value of the company's knowledge capital.

Dow Chemical has appointed a director of intellectual asset management to measure the value of its information and knowledge capital through specific management processes. These positions will help companies identify the role of knowledge capital in the business, apply the best strategies to capture it, and optimize return on investment. Similar to financial capital, it must be captured, managed, and accounted for in a strategic manner.

Effective knowledge management, like effective management of any kind, starts with a strategy. An organization can begin to define its knowledge management objectives only with a clear idea of what the business as a whole is attempting to achieve. Successful knowledge management initiatives begin with a clearly defined strategy. It must be an integrated one that includes a company's business processes, organization, and corporate strategies. To begin formulating a solid knowledge management strategy, you need to examine corporate culture, knowledge content, information technology infrastructure, and the company's success factors.

Corporate Culture

Companies must create a culture that emphasizes the importance of knowledge capital in achieving business advantage. Many companies do not clearly articulate the importance of sharing knowledge nor do they recognize individual knowledge contributions. As a result, individuals often take the knowledge they possess for granted or simply refuse to share it because the incentives are not in place.

Knowledge management (or KM, for short) requires that knowledge-sharing behavior become one of the core competencies of the company. This type of behavior is not common in most companies. To make the transition to this type of environment, you must take a close look at human resource issues such as career development, rewards and recognition, performance assessment, and promotions. These human resource areas invariably will have to be realigned to begin to reinforce, instead of inhibit, the type of knowledge-sharing behavior required for a successful KM strategy.

Knowledge Content

Knowledge content is defined as the actual content within a knowledge management system. The knowledge content must be designed to provide the right information to the worker at the right time in the appropriate level of detail to do the job. The content must be interactive and allow for the worker to comment on the information provided and add appropriate insights to the company's knowledge capital. The content should be an accumulation of all other knowledge resources within the company and provide the most current, complete knowledge available.

In addition, groupware discussions should be facilitated within the system to support the generation of new knowledge capital as well as address immediate, practical issues. These discussion areas provide platforms for emerging knowledge, which after refinement and use becomes the next generation of knowledge capital for the company.

Information Technology Infrastructure

The knowledge management strategy should define the information technology (IT) challenges and opportunities for the existing IT infrastructure. IT opportunities for improving the existing system are derived directly from the business strategy. The goal is to identify and define strategies, methods, and tools for integrating legacy systems into KM to maximize the existing infrastructure investment.

For example, the new system should be comprised of Internet connectivity, a discussion environment, knowledge bases, and data warehousing capabilities. By specifically defining a technology strategy, a company will attain the maximum benefits KM has to offer.

Success Factors

Successful knowledge management objectives must be closely aligned with the overall corporate strategies, like increasing productivity, decreasing time to market, and delivering high value at lower costs. The strategies must become involved with many areas of the company to accommodate the wide variety of needs and enable knowledge sharing across organizational boundaries.

Another critical factor in attaining a company's KM goals is getting strong and consistent commitment from upper management. The most successful knowledge management has come from companies that have had support from senior-level executives. Those companies have usually appointed dedicated leadership to assume a full-time role as the chief knowledge officer. Someone in this role has the ability to concentrate on knowledge initiatives across many departments, functions, and processes.

Because it plays such an important role as a key tool in knowledge and information management, companies must look toward IT for guidance in supporting the knowledge management strategy. Therefore, it is important to have a clear and consistent IT strategy across the entire organization.

IT must be seen as one of the many tools in enabling knowledge management for business advantage. From an IT perspective, the ultimate goal must be to enhance organizational knowledge. Therefore, information systems executives must have a broad-minded perspective when approaching solutions for knowledge management.

Knowledge Management Melds People and Technology

Smart companies are using knowledge management as a tool to help them integrate strategies that are appropriate to their organization. Any KM strategy must be tied to a business advantage. To do that the KM strategy must cut through all areas of the company.

Knowledge management isn't only about databases and e-mail. Successful knowledge management is a concerted effort of people and technology. This effort produces communities of practices and transforms individuals into "knowledge workers"--informal groups of people whose collective knowledge provides unique insight into complex business problems. *

Jeff Hiser is a consultant with Inforte, a firm specializing in knowledge management with its headquarters in
Chicago, Ill.

Reprinted with permission of Insight, the magazine of the Illinois CPA Society.