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Knowledge
The twenty-first century is characterized by the
management metrics growth of importance of knowledge in
organizations and its impact on all aspects within
Ranjit Bose an organization. Interest in knowledge
management (KM) has grown along with the
advances in computers, networks, and data
management systems. Sharing and collaboration
among the thousands of people scattered around
the globe depends on the technology of connection
and the organized storage of content, and many
knowledge projects have focused on building
The author systems to connect people and capture knowledge.
Effectively implementing a sound KM strategy
Ranjit Bose is Professor of MIS, Anderson School of
and becoming a knowledge-based company is seen
Management, University of New Mexico, Albuquerque,
New Mexico, USA. as a mandatory condition of success for
organizations as they enter the era of the
Keywords knowledge economy (Davenport and Beck, 2002;
Groves, 2002; Levett and Guenor, 2000). The
Knowledge management, Performance measurement (quality)
purpose of managing and leveraging a companys
Abstract knowledge is to maximize the returns to the
organization. This means being able to measure
Over several years, there have been intensive discussions about
both the principal investment and the yield from
the importance of knowledge management (KM) within the
business community. Effectively implementing a sound KM
that investment at regular intervals. Yet, measuring
strategy and becoming a knowledge-based company is seen as a the business benefits of KM is currently quite
mandatory condition of success for organizations as they enter difficult. Measurement is the least developed
the era of the knowledge economy. However, standardized aspect of KM and best practice transfer efforts
metrics are needed to quantify knowledge and to fully convince because of the inherent difficulty to measure
management and stakeholders as to the value of KM initiatives. something that cannot be seen, such as knowledge.
Development of KM metrics has begun in recent years and these KM systems must demonstrate their value.
metrics are being applied by some organizations, but more Without measurable success, enthusiasm and
research is needed to better define these measures and to make
support for KM is unlikely to continue.
them universal. The purpose of this research is to survey and
report the current measures of knowledge assets or intellectual
Specifically, without measurable success,
capital, as well as the methods that are popularly being followed managers will not be able to tell how the
by organizations to measure the performance of KM strategies. organizational KM system works, where its
The research findings should: assist organizations in identifying bottlenecks are, and how the system could be
the measures that are appropriate and suitable for them, for improved. Managers, therefore, need to be able to
improving the quality of metrics they use for measuring KM measure the impact of KM efforts on their
effectiveness; and assist researchers in identifying future organizations performance (McInerney, 2002).
research needs toward the standardization of KM measurement Standardized metrics are needed to quantify
metrics.
knowledge and to fully convince management and
stakeholders as to the value of KM initiatives.
Electronic access
Development of KM metrics has begun in recent
The Emerald Research Register for this journal is years and these metrics are being applied by some
available at
organizations, but more research is needed to
www.emeraldinsight.com/researchregister
better define these measures and to make them
The current issue and full text archive of this journal is universal (Wagner, 2002). The purpose of this
available at research is to survey and report the current
www.emeraldinsight.com/0263-5577.htm measures of knowledge assets or intellectual
capital (IC), as well as the methods that are
popularly being followed by organizations to
measure the performance of KM strategies. The
research findings should: assist organizations in
identifying the measures that are appropriate and
Industrial Management & Data Systems
Volume 104 Number 6 2004 pp. 457-468 suitable for them, for improving the quality of
q Emerald Group Publishing Limited ISSN 0263-5577 metrics they use for measuring KM effectiveness;
DOI 10.1108/02635570410543771 and assist researchers in identifying future research
457
Knowledge management metrics Industrial Management & Data Systems
Ranjit Bose Volume 104 Number 6 2004 457-468
Figure 1 Knowledge management processes they are managing the companys knowledge so
that it maximizes returns to the organization. The
knowledge embedded in business processes,
corporate culture, best practices, core
competencies, skills, or strategic visions are critical
parts of the total stocks of knowledge in an
organization. Without measurable success,
managers will unlikely be able to tell what works
and what does not and therefore make an informed
judgment regarding what to continue doing, and
what to adjust.
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Knowledge management metrics Industrial Management & Data Systems
Ranjit Bose Volume 104 Number 6 2004 457-468
Figure 2
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Knowledge management metrics Industrial Management & Data Systems
Ranjit Bose Volume 104 Number 6 2004 457-468
Figure 2
Economic value added (EVA) capital charges where capital charges are
In the 1990s, another value-based performance calculated as the weighted average cost of capital
measure, called EVA has gained immense multiplied by the total capital invested (Dillon and
popularity. It is the relatively newest method of Owers, 1997). In practice, EVA is increased if the
evaluating corporate performance, developed and weighted average cost of capital is less than the
trademarked by the Stern Stewart & Company, the return on net assets, and vice versa.
New York consulting firm. It focuses on The EVA methodology is well established and
maximizing the wealth of shareholders (i.e. the increasingly, large firms are adopting it as the base
shareholder value), it calculates a companys true for business planning and performance
economic profit, and it helps managers to create monitoring. There is growing evidence in research
value for shareholders (Ray, 2001). EVA is the literature that EVA, not earnings, determines the
after-tax cash flow generated by a business minus value of a firm. The chairman of AT&T stated that
the cost of the capital it has deployed to generate the firm had found an almost perfect correlation,
that cash flow, thus representing real profit versus over the five-year-study period, between its market
paper profit. value and EVA. Effective use of capital is the key to
EVA is defined as the difference between net value; that message applies to business processes,
sales and the sum of operating expenses, taxes and too. EVA is ideally suited to publicly traded
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companies, not private companies, because it deals business unit managers. Indicators and
with the cost of equity for shareholders, as opposed information on the companys past performance
to debt capital. is the thrust of the financial focus area; on current
An EVA-based system helps managers to make performance is the thrust of the human, customer,
better investment decisions, such as investment in and the process focus areas; and on future
KM systems, identify opportunities for performance is the thrust of the renewal and
improvement and consider short-term as well as development focus area. Skandia started with a
long-term benefits for the company. Furthermore, long list of measures before discovering which were
studies suggest that EVA is an effective measure of most useful. They now use a shorter list, which
the quality of managerial decisions as well as a provide the necessary information.
reliable indicator of a companys value growth in The IC index, developed by Skandia and
the future. EVA is always expressed as a dollar depicted in Figure 3, helps managers visualize
amount. In summary, constant positive EVA growth or decline in capital, and the trade-offs. It is
values over time will increase company value, while
based on an intellectual capital tree, which is
negative EVA implies value depreciation. EVA
also known as the Skandia value scheme, of
does not make it easy to quantify IT benefits but
hierarchical categories. The intellectual capital,
creates clarity so that all the pluses and minuses of
according to this scheme, is composed of two IC
these IT decisions can be considered in ways that
elements: human capital and structural capital.
companies that do not use EVA find difficult to do.
The EVA methodology for performance Human capital is the accumulated value of
measure in a company is carried out in five broads investments in employee training, competence and
steps: step 1: review the companys financial data; future. It might also be described as the employees
step 2: identify the companys capital; step 3: competence, relationship ability and values.
determine the companys capital cost rate; step 4: Structural capital is the value of what is left when
calculate the companys net operating profit after the employees the human capital have gone
tax; step 5: calculate the economic value added by home. Examples include databases, customer lists,
subtracting capital charge from net operating manuals, trademarks and organizational
profit after tax. If the EVA is positive, the company structures.
created value for its owners. If the RVA is negative, A brief description of each IC element (see
owners wealth was reduced. Figure 3), of the Skandia value scheme is provided
below:
.
Human capital. This includes all the individual
Skandia Navigator capabilities, talents, knowledge and
Skandia AFS is a Swedish financial services experience of the companys employees and
company and is well noted for pioneering the managers competence, capabilities,
measurement of its knowledge. Skandia AFS relationships and values of employees.
extensively experimented with many IC tools and .
Structural capital. This consists of the IC that
methods, and eventually developed their own IC remains in the firm when employees retire,
tool, the Skandia Navigator and its associated
such as the supporting infrastructure system.
value creation model (Von Krough et al., 1999).
It encompasses the organizational capability,
The Navigator is a tool for evaluating the soft
including the physical systems used to
assets of an organization, as well as a management
transmit and leverage IC data and
reporting system that helps managers visualize and
knowledge bases.
develop measures that reflect intangible assets, and .
Customer capital. This is value of enterprises
guide them into the future (Malone, 1997). Each
business unit is required to create indicators or IC relationships with customers customer base,
indices that are critical to its future developments. customer relationships and customer
The top management is therefore provided with a potential.
focus for managing development for the future by
.
Organizational capital. This is systematized
asking them to concentrate on each of these indices and packaged competence, plus systems for
individually, as well as collectively. leveraging the companys innovative strength
The Navigator measures IC through the and value-creating organizational capability
analysis of up to 164 metric measures (91 embedded knowledge assets in the process
intellectually based and 73 traditional finance- and innovation areas.
based metrics) that cover five focus areas (which .
Innovation capital. This is the renewal strength
are also known as perspectives): financial; of a company, expressed as intellectual
customer: process; renewal and development; and property, that is, protected commercial rights,
human. Measures to be used for each of these and other intangible assets and values, such as
focus areas are locally defined by the respective knowledge recipes and business secrets.
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. Process capital. This is combined value of rather, they are meant to help initiate the process
value-creating and non value-creating of identifying and defining firm specific KM
processes, such as practices, systems, and metrics.
procedures.
.
Intellectual property. This is patents,
trademarks, copyrights, designs and other Financial focus
specifications. These indicators would capture the financial
. Other intangible assets. This is culture. outcomes of activities in dollar values, but are not
seen as an end in themselves, but as markers of the
Several large companies, including Dow
companys progress over time. These might
Chemicals initiatives in valuing its R&D and
include investment in IT, revenues from new
patent process, have relied extensively on the
customers/total revenue, profits resulting from
Skandias multi-dimensional conceptualization of
new business operations, expenditure on research
organizational value, as described above. In sum,
and development, revenue per employee, and costs
Skandias IC Index, based on its value scheme,
per employee. They might also incorporate an
contains both financial and non-financial building
understanding of the companys financial past, as a
blocks that combine to estimate the companys
means of identifying those activities, which have
market value. This conceptualization achieved a
been most profitable over the long term.
balance for Skandia in trying to represent both
financial and non-financial reporting, uncovering
and visualizing its IC, tying its strategic vision to Customer focus
the companys core competencies reflecting These indicators would capture how well the
knowledge-sharing technology and knowledge organization fills the needs of its customers via
assets beyond intellectual property, and reflecting services and products. The indicators would form
better market value. a set of metrics that define the companys customer
base, and would help to understand the position of
Application of Skandia Navigator the company in the marketplace. These might
Skandia Navigators IC Index helps measure the include the type of customers for each of the
changes (positive or negative) in a firms overall companys products in terms of their duration as
market value based on both financial and customers, the level of satisfaction and
intellectual capitals. Any company that wishes to dissatisfaction (as indicated by, for example,
develop a capacity for IC measures must construct product returns), the support given by the
a set of key indicators that is relevant to their own company to its customers, and methods of
activities. The following provides a guide to help reaching customers; ratio of sales contacts to sales
organizations identify some of their key indicators closed; and ratio of customers gained to customers
based on the five focus areas of the Skandia lost. Indicators that use more aggregate data, such
Navigator. It should be noted that the indicators as overall market share and market coverage, can
listed below are by no means exhaustive, but also provide a broader context.
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given the requirement to create unique standards use to implement and evaluate an effective KM
for each companys metrics, generic standards for strategy in the marketplace.
measuring IC among companies or across
industries would be slow in coming. Research agenda
Managers should, therefore, develop a method The three currently popular KM metrics methods
or process for creating an IC index, which is the were presented here for constructing IC
critical factor for successful application of IC measurement system for knowledge-intensive
measures in their companies. The following steps organizations. A challenge with IC research thus
are suggested for this purpose: far has been that it has been primarily of the
(1) define the business concept the vision and anecdotal variety. Most researchers have
strategy of the organization; conducted case-based reviews of organizations
(2) identify the critical success factors; that have initiated KM. Other researchers have
(3) choose the key performance indicators; documented the metrics without advancing or
(4) apply weightings to the indicators; testing them, see Figure 2 for example. A way to
(5) consolidate the metrics, hierarchical level by overcome this challenge is for researchers to
hierarchical level pursue more empirical research. The three KM
(6) generate the IC index; and metrics methods discussed are both theoretically
(7) use it to focus management action on the key and empirically based, however, they have not
factors. been empirically tested. In order to increase their
managerial value thorough empirical testing
Once a company has a clear idea about its vision
should be conducted.
and strategy, it should use its long-term goals to
IC measurement is an emerging field within
identify: its value-creating path (i.e. those IC
KM, thus many research on IC primarily focused
categories that really drive company value
on definitions and classification. Interestingly,
creation); and the indicators that can act as many IC models have similar constructs and
performance measurements for each critical measures that are merely labeled differently. For
success factors. Like most other measures of example, the learning and growth perspective in
tangible assets, an IC-index does depend on value balanced scorecard method is also called the
judgments, in the choice of weights, indicators, renewal and development focus in the Skandia
and even the assumption that IC is present and Navigator method. However, as this field develops,
important in company operations. Although this it is important to build on each researchers work
charge of subjectivity can also be made of certain so that a common set of definitions can be used to
traditional accounting methods and assumptions, further advance the field.
at least IC measurement and especially a In order to make significant progress in the field
consolidated measure such as the IC-Index, makes of IC measurement, IC researchers must move
a larger part of the organization visible and open to from current perceptual measures in isolated cases
valuation and to comparison of alternatives. to large-scale studies with objective measures. The
Finally, if KM continues to grow as a field, one measurement examples in the research literature
of its main thrusts will be KM metrics thus far have been too firm specific and no set of
development and implementation. The research indicators could hope to be general enough to
literature shows the evolution of the CKO or the encompass the needs of a variety of industry
chief learning officer (CLO), whose main focus is settings. The pursuit of measuring IC assets
to manage the knowledge within the organization objectively is a noble but difficult one. Top
and making it competitive. According to a study, executives of several large organizations worldwide
25 percent of Fortune 500 companies currently agree that new IC measures are required to help
have CKOs and 42 percent of Fortune 500 manage knowledge assets. A goal for this field
companies anticipate appointing a CKO within the should be that practitioners and researchers both
next three years. The main functionality of CKO is continue to share measurement practices across
to create high efficiency in the knowledge value industries in order to take full advantage of the
chain by the sharing of resources and realization of innovations that are already taking place.
synergies. However, this job description had by far
been quite abstract as the area itself is new and
though KM initiatives are popular among Conclusion
organization there is still no standardized
procedures to measure knowledge within KM is still defining itself because the body of
organizations. Therefore, one of the most theoretical literature and research in this area is
important functions of CKO must be to identify small, but growing. Will organizations develop and
and justify the metrics that organizations should maintain KM programs as we proceed further into
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Ranjit Bose Volume 104 Number 6 2004 457-468
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