Introduction to Knowledge Management

Bob Flanagan
Associate Director, KM Solutions
Cambridge Technology Partners

Bob Flanagan – What I would like to do is provide an overview of knowledge

management – what it is etc, so that I can set a context for some of the
presentations you will see later in the day. Specifically, I would like to start off
with defining what knowledge management is and then talk about how it really
translates down into leveraging your business confidence. Then mapping
back to knowledge management in terms of various business value
orientation models, talking a bit about the emerging field of metrics for
measuring the effectiveness of knowledge management and touch very briefly
on a few case studies we have done and then a couple of quick pointers on
getting started.

What’s happened in the knowledge management area is that its become such
a buzzword area is that a lot of people have jumped on the bandwagon and
caused quite a lot of confusion. What I hope to be able to do is provide a
definition of knowledge management that is pragmatic and pretty free of
vendor and consultant speak. For me knowledge management really started
become a buzzword about 18 months ago. At that time the Harvard Business
Review published an entire edition that was focused on knowledge
management and knowledge as it pertained to the enterprise or the
organisation.

Theoretical view (from the HBR) ‘the productivity of knowledge and

knowledge workers will not be the only factor in the world economy. It is,
however, likely to become the decisive factor.

Market Reality (from Hewlett Packard) if we only knew what HP knows we’d
be 3 times more productive.

Essentially, as we move from the brick and mortar manufacturing economies

into the knowledge economy, we’re seeing a whole series of new economics,
from basing the competitive advantage of a company shifting from use of
tangible assets to leveraging intangible assets such as intellectual capital and
knowledge. One indication of that is if you look at the capitalisation of
companies versus the book value of the company, in other words the tangible,
fiscal assets of the company versus what the market views it at, you’ll see
multiples of 5,10,20. In the case of Microsoft that multiple is around 26 and
growing. What that says is if you took the total market capitalisation of
Microsoft and divided it by the assets that they have, that ratio is 26. That
means that 25% of their value is not attributable to tangible assets. Its really
attributable to the knowledge in the company.

We’re seeing the net effect where URL to us means ubiquity now revenue
later – lot of people getting on the bandwagon, not much money being made
yet but that will change. Also seeing the ratio of internet to intranet
personalities of a company; by that I mean how many public facing websites
there are as opposed to internal intranet websites, is often a ratio of 1 to 20.
There is a lot of need for sharing and disseminating information through a
company. That then leads to the problem of navigating through all that data
within a company. We’re also moving into the post re-engineering phase
which focuses on eliminating processes that you’re not good at as a company
instead of trying to rebuild them and focusing in more on what your core
competences are, how you create value, how you retain value and so on.
Moving on to more of an empowerment model as you move into the
disseminating of information to people that need it so that they can act on it.
One of the key things in knowledge management to keep in mind is what it
really translates down to is the ability to take information, take knowledge and
take action on it. Another area that gets overlooked is what I’ll call knowledge
deficit disorder.

Example – say you’re a company of 100 people and you’re experiencing rapid
growth – 20% a year. If you add to that an attrition rate of 20%, this means
you have to add 40 people to your company, therefore a third of your
company workforce is new. Two things stem from this – one is the loss of
knowledge within the people who are leaving, and the second is how to take
those 40 incoming people and make them effective in as short a time as
possible. Some of the business drivers behind knowledge management are
accelerated cycle times, requiring faster time to market/profit – that’s pretty
much cross industry. A number of transformed relationships with customers
who are expecting higher levels of customised service often in an internet
model. With business partners where you’re integrating value change which
can be extranet and internet models. And also with employees where you’re
disseminating information quickly to the appropriate places within your
organisation on an intranet model. Also with global and expanding
organisations the need to share information on a global basis e.g my
company has 53 offices and we live and breathe by our intranet to ensure that
we disseminate information around our methodology, standard operating
procedures and so on so that we are delivering consistent services regardless
of the location of where that service is being delivered. There’s also a need to
bring new employees up to speed very quickly.

Knowledge management really boils down to the ability to realise increased

returns from your managed business competencies, in other words reinforcing
the core competencies of your company in order to create value, to retain
value and so on.

Two of the mechanisms that you can look at for the core competencies
includes work practice execution which includes your practices, your
processes the core values of your company and so on and the expertise
within your companies both on a technical and a business level. That can be
how many inventions your company creates, the skill level of your staff, the
know how within your company – how you take the what needs to be done
and actually do it within your company – the process level view of how you
work, and the skillset of your employees.
(Talking about diagram) – on the left side of the diagram we have the content
repository, persistent expertise knowledge – this is where explicit knowledge
resides. On the right side is the collaborative solution space and this is where
the knowledge worker lives, where people come together in teams to solve
problems, create new products etc and this is where a lot of the tacit
knowledge and experience that resides in peoples heads is leveraged to
competitive advantage. Its interesting to note that this diagram also shows
two very different philosophies on what knowledge and knowledge
management is. On the left side, on the content repository side it is very
much as US or western view of what knowledge management is – knowledge
is a thing, something you can manage, throw in a database and spread
throughout an organisation. On the other side is the collaborative solution
side, that’s more an environment view; what you have to do to create an
environment where people create knowledge, share knowledge freely and
that’s very much a Japanese/Eastern view of what knowledge management
is. So this model takes both of those together – you can’t have one work
effectively without the other. We view this as a comprehensive way of putting
together a view of knowledge management.

On the content repository side you’re going to talk about shared content and
experience within the corporation so you get into discussions about how you
navigate through information, what information sources are required to
conduct or execute on a process and that can be both internal or external
information. Support for multiple data types and making delivery independent
or browser based delivery across your organisation. On the collaborative
solution space its more working on a shared problem or executing a process
or developing a product and you get into communications whether its
synchronous or asynchronous communications and how you share
information in terms of discussions and so on within companies that
effectively support the transfer of tacit to tacit or the knowledge within
someone’s head and sharing/externalising/socialising that with other
members of the organisation that are trying to develop a new product or solve
a problem etc.

Like to take you through a decision loop and show how this plays out. What
often happens is something occurs, something comes up, you have a new
idea for a new product, an event happens, maybe a competitor has made a
certain move and that becomes a trigger event. What you first want to do is
say ‘OK I have a problem’ and then ‘where did we do this before, what
experience do we have in this type of solution’ and that will trigger a search.
You’ll want some sort of counsel on where you’ve done this before and so on
and what you find is you’ll dip into a content repository to look back and see
where you’ve had this experience before. From that you’ll come up with some
initial findings and conclusions on the experience level of your company in
tackling this type of issue. Then you can also, if you’re repositories are
structured properly you’ll be able to establish who contributed that piece of
knowledge to your repositories so through attribution you begin to get an idea
of who the experts are within your company and also experts outside of your
company. So you begin to move more into the collaborative solutions space
and you begin teaming. So you’ve gone from identifying the process, coming
round to who has first hand experience and knowledge and moving into the
teaming and collaboration space where you work through the problem.

As you come out of that you make a decision and take action. After that, you
capture what has happened as you reach the decision and put it back in the
repository so that next time you go through the loop you are that much
smarter and efficient at tackling the problem. A lot of companies end right at
the decision/action part and don’t capture or harvest the last bit where you go
down into the lessons learned repository, but that becomes critical if you’re
going to become more effective and keep going forward.

(new diagram) As you start going through the shared work processes this is
where you start getting into process management solutions or workflow
solutions typically. Moving up through the teaming as you being working on
shared work problems or products that becomes more the collaborative space
or group work solutions. Coming out as you make the decisions you get into
conferencing solutions and such synchronous environments because what
often happens when its time to make a decision – decisions are not made in
discussion databases – ideas are put forth and you get some conversation
going, but its typically in a synchronous mode – either person to person, via
the phone or in a computing solutions that allow real time conversations
where decisions are made. And then back into the lessons learned repository
for the next time.

(new diagram) Aligning a knowledge management vision with your business

value orientation. What I have on the top of this diagram is the business
value orientation and the business vision of your corporation and stemming
from that there are 3 areas. One if your business objectives, second is your
business processes and the third is the corporate culture. Each one of those
will contribute to your knowledge management vision. Going through the
business objective side, that drives down into the knowledge that is required
to reach your objectives and that is a fairly basic input into your knowledge
management vision. Coming down on the right side your corporate culture
influences the readiness of your company to share information willingly. So
that begins the conversations about what do you have to do to persuade
people to share information and so on. That becomes a contributor to your
knowledge management vision.

Coming down the centre, your business value orientation also influences the
business processes that you use and execute to deliver value. The business
objectives, the processes and the culture all influence your competences
within the company. Your business objectives will determine what type of
competences you need to succeed, your corporate cultural typically influences
what competencies you currently have and sometimes there is a bit of a gap
there, so you can begin to build for the future. Business processes is how you
execute on it, how you map back the competences of what you have within
your company to the processes you use to deliver and create value. All of
those, then, feed into your knowledge management vision.
The 3 boxes on the bottom just say knowledge management, initiative 1,2,3.
That’s where the technology comes into play, so you see you go through quite
a bit before you even start to talk about the technology solution. What we see
far too often as we are a management consultants and systems integration
firm we see a lot of clients come to us and say ‘I’ve just bought Lotus Notes or
I’ve just bought this system – what do I do with it,’ so they’re kind of going
backwards through it and that often becomes a very good indicator of failure
in a knowledge management initiative if you lead with the technology. You
really have to lead at the top with the business value orientation and work
your way down. What we typically do when we do some of our workshops, eg
starting with the alignment of business value orientation down to knowledge
management, we spend about two thirds of the time doing the value
orientation down to the knowledge management vision and only about one
third of the time gets down to technology recommendations and road maps.
That’s our initial phase and then it goes onto actual implication, but I want to
emphasise that you have to start with a business value orientation and see
how all of the business objectives, processes and culture will all influence the
knowledge requirements that you have and how they all influence the
knowledge management vision.

Now lets talk briefly about the business value orientations and what we’ll do in
this section is talk about the three basic orientations and map back some of
the knowledge management applications that fit into the various orientations.
Basically there are 3 value orientations that a company can have, and while
no company will be purely along one avenue, they’ll tend to be predominantly
influenced by one of these. The first is a product orientation, where your
focus is on product development etc, the second is on customer orientation,
more of the customer intimacy view. The third is a cost orientation. This
maps back various competences within an organisation to the value
orientations. For example, if you’re a product orientated company, the types
of competences that you would be looking to reinforce would include areas
such as research expertise, your ability to design and develop new products,
patent management, competitive intelligence and so on.

If you were a customer orientated company you’d be looking more at

customer intimacy, proposal specifications, experience transfer and so on. In
the cost orientation you’re talking more about leveraging standard operating
procedures, efficiency fulfilment, supply chain management and so on. There
are 3 types of knowledge management application buckets (on the diagram).
One is best practices, one is relationship management and the third is product
development. (the rest of this doesn’t make any sense if you can’t see the
diagram).

Measuring the effectiveness of knowledge management. This is a very new

area, a lot of the ROI type analysis doesn’t really fit right now and what we’ll
see over the next few years is more of a maturing of this area. A lot of the
measurements tend to be more relative as opposed to good/bad/little bit
worse/better than before as opposed to down to the second decimal point
which so many financial people are used to . What we have is most
knowledge management initiatives are justified just on the basis that they
increase the capabilities within the organisation through disseminating best
practices and the innovation management and so on. We do have some
financial metrics that are emerging on more of a value creation model,
residual income analysis and so on. So you may not be able to look at a
particular application and say ‘it has a payback time of x years or has an ROI
of x%’ but in aggregate you can look at these initiatives as improving the value
creation of the company and that will show up in terms of the economic value
of the company will increase and you will see an increase in the market
capitalisation of your company. It’s a very different way of measuring
effectiveness, that said many people still have to go back to their
management and provide some sort of ROI analysis or estimates in order to
get justification to move forward. So you see companies like the Meta Group,
Gardiner Group etc will publish information from time to time.

Meta, if you use intranets as a surrogate for knowledge management in

general, estimate that the ROI for an intranet ranges from 21% to 68%
depending on how its used within a company. So if you’re using it for more
administrative types of applications, distributing policies and procedures,
corporate phone books, you’re probably more on the 21%. If you’re
leveraging it more in the product development research and service delivery
side you’re probably higher up in the 68%. This is a composite side from
various consulting organisations on how they would peg average ROI and
average payback. IN the internet you can see a payback time of less than a
year and it varies widely. Having an ROI time of 1500% seems a little
unrealistic but it shows that by putting the right infrastructure in place it allows
people to get the information they need and it improves the effectiveness of
the corporation overall. Groupware solutions, estimates on payback of about
2.4 years, document management about 2 years and process management
and workflow solutions about a year and a half.

With respect to emerging metrics, you will see some industry level metrics
that are emerging, the ratio of market value to book value. If you take market
value and subtract the book value from it you’ll have the intangible asset value
which is a very basic feel for how much value your investors place on your
company that is not attributable to the bricks and mortar of your organisation.
The market value share is just taking the market capitalisation of your
company and all of its peers within the industry and seeing what percentage
of that capitalisation share your company has.

Calculated intangible value – this is more of a benchmark of how well you’re

utilising your assets versus your peers in the industry and basically you’re
taking your return on assets versus the industry level and dividing it by your
cost of capital to put a mark on how much your ability to use your assets is
worth on the open market.

MVA per employee – market value added per employee which is the
difference between the market capitalisation of your company and the capital
that your company has and dividing that by the number of employees and
depending on the industry you’ll see some pretty good correlation between
the market value per employee and how the company is performing within the
industry.

On a firm level you see more analysis coming round about customer equity
which is the net present value of cashflows from customers, information value
added which is just looking at your net income versus cost capital, so your
residual income, dividing that by your managed people, the real knowledge
workers skills and that can either be done by dividing it by your SG&A number
or a combination of SG&A and research and development if you’re in product
development.

Working capital terms – just sales divided by your average working capital just
to see how much cash you need to efficiently run your organisation.

EVA per employee which is related to MVA per employee, this is the residual
income, the real economic profit of your company dividing by the number of
employees. Knowledge capital which is just taking your management value
added or your market value added, divided by the cost of capital just to get a
benchmark of how much it would be worth on the open market.

As I’ve said, this is still a very nascent area. A lot of these metrics may give
some conflicting perspectives. I would predict over the next 5 years, some of
the metrics will iron themselves out and we will have a much better way to
really understand where the value is being created in terms of the knowledge
within an organisation and how it contributes back but these are some of the
leading candidates right now.

What we’re looking at, in terms of perspectives, is shifting from the time value
of money perspective to the money value of time. What is the value of having
an uncontested market day ? What that means is if you can get a product to
market or offer a new service in a shorter time frame and essentially have
more days on the open market, what is that worth to you ? So you can look at
it as what is 100% market share for one day worth to my company. If you
had your average sales per day as $1.6m and you have a 22% market share,
if you take the ratio of that and divide the $1.6m by the 22% market share
then to you, a one day on the open market, uncontested, is worth $7m a day.
This can be used as a means to justify a system to help you get new products
and systems out of the door faster.

Case study – Swissair. We began working with Swissair last year to develop
some knowledge management based intranet solutions over in Europe and
the first two solutions that have come out are a human resource intranet and
an intranet for their sales and marketing organisation. What they have now is
a means to provide access to 130 offices and 7800 employees to access the
HR information and now they can also increase the communication amongst
the sales and marketing organisation to increase the effectiveness of how
they are performing their job. One part of this that’s very interesting is they
put in a sales ticker, which is basically a push mechanism for if there are
available seats they can be broadcast to the sales and marketing personnel
so they can try and fill some of the seats. So as things become open its
broadcast internally and more effort can be put into filling those seats.
Swissair believe that the solutions that they put in place in terms of HR and
sales and marketing intranet will result in a 20-25% decrease in internal
publication costs. A decrease in mailing costs and a decrease of 10-40% in
some of the administrative activities.

They also estimated that the savings for one of the sales and marketing staff
is about half a day a week, so about a 10% increase in productivity of their
sales and marketing organisation, just by allowing them to be effective in what
they do, which is a very dramatic statement.

We did some work with the Islands of the Bahamas, Ministry of Tourism and
that was to develop a sales and marketing combination project for tracking
accounts and basically get more people on the beach. It was really focused in
on getting efficient communication between the Ministry and its various
business partners and to create simple response methods for enquiries from
their internet homepage. The basic benefits that they derived were the
establishment of a technical infrastructure for internal/external
communications, the ability to track accounts more efficiently and simple
access and updating of mission critical information.

The third was Royal Caribbean Cruise Line which was also a tracking system
that was developed. They wanted to eliminate inconsistent delivery of
information to the various travel agents and they also wanted to replace a
very outdated doorspace system that just wasn’t performing. They also
wanted to be able to track sales person productivity on a regional basis. The
solution that we worked to develop with them provided better data on which to
appraise the sales person performance, improve the relationships with their
various travel agents and large corporate accounts and focus their sales effort
for greater marketing efficiency.

Getting started in knowledge management – three basic things to consider.

First, identify leverageable competencies – what is it that your company is
good at/has to be good at to be successful. Could be your service
capabilities, product development capabilities etc. Focus on a discreet
problem or application. Knowledge management projects have a higher
success rate if they are focused in on a discreet problem rather than a global
management solution for an entire corporation. Identify a point of pain and
build the solution in order to eliminate that point of paint and then implement
it, assess it and extend it, put it in place, anticipate some of the cultural
inhibitors within your organisation. That can be the biggest de-railer of your
organisation. You can build the best, most elegant system with cutting edge
technology but if you haven’t anticipated the cultural inhibitors of your
company, no-one will use it and you’ll just be throwing your money away.

Knowledge topology – we have knowledge that you know and knowledge that
you don’t know. Knowledge that you know you know, this is explicit
knowledge that you can put in a database, you can quantify, what you don’t
know you know is tacit knowledge – information that is in peoples heads that
generally gets leverage as you’re working a problem. There is knowledge that
you don’t know – knowledge gaps, when you say – we don’t know the answer
to this and you can build strategies to go out and find this knowledge. The
most dangerous is knowledge you don’t know you don’t know and there is
technology available that can help you with this.

If you look at the knowledge that you know you know, the types of issues that
you’re going to face is navigating through information, mapping of your
knowledge assets, the types of repositories that you have to have in place,
should they be departmental type/divisional type. Knowledge that you don’t
know you know tends to be more the collaborative solution space/groupware
solutions etc. Knowledge that you know you don’t know – these are the
knowledge gaps – this is where a lot of search and retrieval and agent based
technologies come out so that you can go and find the information and pull it
in. This becomes pattern recognition technology, neural networks,
technologies that help recognise when things change so they can proactively
be fed back to you.

There are various vendors playing in these spaces. You can look at
document management companies NovaSoft, Lotus etc.

Finally, why implement a knowledge management solution? We feel that the

success of a knowledge management solution is delivering the ability to
leverage the core competencies of your organisation and use it to increase
the effectiveness of business processes, making more timely and accurate
decisions and so on. Improving the service delivery, as I referred to
Cambridge itself earlier, the ability to deliver consistent service on a global
basis, regardless of what location we’re in, you’ll get consistent delivery of
services that Cambridge provides. Finally, it lowers the costs of discontinuity
because everyone is connected and much more empowered.

ENDS