This blog post is a companion piece to the presentation I gave at the June ICKC Practitioner’s Meeting in which I presented slides and discussed some of the history of the launch of Knowledge Management, and why now is a critical time for firms to have a CKO. The title of the presentation was “Time for a CKO?” and was the second presentation of the meeting after “The New Economics” by Peter Bretscher.
The Big Flop
In the 80’s and 90’s “The Knowledge Age” was the new fancy idea, and was taken up mainly by gurus like Drucker, but also several business academics.
Unfortunately the hype quickly overtook any ability to deliver, and consulting firms and software companies pounded money out of it and it quickly turned into a fad.
The idea was good, but the terrain was unprepared and consulting and software simply wasn’t going to deliver an ROI – Management didn’t know how to “do KM”, nobody was quite sure what the objectives were, and there simply were too few actual KM practitioners to even make a dent in it.
The result was an expensive, highly visible, and embarrassing belly-flop.
Back to Basics
So let’s just revisit two of the big moving parts driving KM and for the moment ignore all the practical reasons for KM like faster on-boarding, reducing waste, increasing quality, etc.
Two major changes have been underway historically – where wealth comes from, and the proportion of corporate value that is due to intangibles.
Firstly, wealth has changed in principle source from real-estate during feudal times, to being able to command labour and capital, to a current situation in which knowledge is the primary source of wealth.
Over the last hundred years, the measurement of corporate wealth has shown an increasing shift from property to ability. At the turn of the last century a firm’s wealth was made up primarily from its ownership of tangible assets – real estate, equipment, stock, and cash, but by the arrival of the early Knowledge Era, this had already been shifting
The current era is marked by a shift in the balance between the contribution to EBITDA and Market Capitalization in favor of Intangible Assets, and this is deemed likely to continue for several decades.
Secondly, the share of Intangible Capital as a share of the market value of firms has changed from a historical norm of <20% in the 1970’s to a current situation in which IC accounts for over 80% of a firm’s value.
illustration of the split between tangible and intangible value in the S&P 500 rising from 20/80 in the late 70’s to 80/20 in 2005
Knowledge was seen by Drucker, Senge, and others as being the only remaining way that firms can stay competitive in the Knowledge Era, and the major source of differentiation amongst competitors. These days every firm has more or less the same access to capital, raw materials, basic labor, and equipment as every other, and competitive advantage is no longer a matter of merely securing access to resources or materials.
The thing that separates Apple or 3M from the lower-order players is not physical assets but knowledge and acumen.
At the same time the people that track market valuation have been noticing an increase in the “Q” value that Tobin derived by comparing the market value of a firm with its physical assets and cash.
What has been increasingly obvious since the mid eighties is that the gap has been rapidly widening and that it seems to be stabilizing at around 80% of a firm’s market cap being attributable to intangible assets.
Source Adams & Oleksak (2010)
As per the International Association of IC Practitioners (IAICP), these include:
- Relationship Capital such as customer goodwill, reputation, and referrals
- Human Capital such as skills, knowhow, and expertise
- Structural Capital such as processes, patents, and trade secrets
They also add a fourth component, “Strategic Capital”, which I take as being the overlap of the first three that are individually necessary and collectively sufficient to achieve organizational strategic objectives.
Where Are We Now?
“Intellectual property has become one of the most important resources in the 21st century. It’s now an accepted fact that, just like financial capital or commodities or labor, IP is more than an economic asset – it also forms the basis of a global market”
Manny Schecter, chief patent counsel at IBM. (Forbes 2012)
Nonaka provides a model that distinguishes between knowledge that people can turn into documents (Explicit) and knowledge that either can’t be expressed or is locked away in their heads and practices and maybe even something they were unaware that they knew (Tacit). His model provides ways to move explicit knowledge into tacit knowledge (like studying and practicing the cello), tacit into tacit (like an apprenticeship), tacit into explicit, and explicit into explicit.
In support of this much has matured since his model was devised:
- Many colleges and universities now offer master’s and doctoral programs for KM, and several institutes such as the Knowledge Management Institute and KM Pro offer certification courses for practitioners.
- Several KM journals are published, amongst which the Journal of Knowledge Management Research & Practice has a rated impact factor.
- KM interlocks with several other fields – at one end with the TQM, Lean/6Sigma movements, Applied Psychology, and Operational Research, and at the other end with Finance & Economics through Intellectual Asset Management and Intangible Asset Management
In addition, many large and innovative firms employ KM – from 3M to Xerox, including Deloitte, Dow Jones , Forrester, Fujitsu, Gartner, Google, HP, IBM, Lexis-Nexis, Pratt & Whitney, PWC, Siemens, World Bank , etc.
The primary areas of activity for KM are in workplace collaboration, management of innovation, the development of occupational communities in which standards of practice are refined, and corporate valuation through increased discovery and accounting of intellectual assets.
So where are we compared to the 80’s and 90’s?
The reasons for the lack of mainstreaming of institutionalized Knowledge Management have all fallen away, but the reluctance is still dwelling because of that memory in the minds of many executives. At the same time we have several emergent and increased pressures for institutionalizing Knowledge Management.
- Technological changes and adoption rates continue to climb
- You cannot simply put 80% of an organization’s worth under “goodwill”
- The trade in IC has increased sharply over the last decade both for defensive and product development uses.
Simply put, IC is becoming fungible.
… and even being considered as collateral for loans by banks.
Return of the CKO
The CKO is not a new role, but one which holds increasing relevance in an age where knowledge and other intangible assets form such a large proportion of value, and in a time when retirement rate reaches 10,000 people per day in the US.
The CKO should be the structural keystone that brings IC and knowledge in particular under a single umbrella of scrutiny, management, and governance.
The days in which a firm’s knowledge could be left to the day to day operational dynamics are long gone, and it amounts to corporate suicide to leave knowledge management to chance.
To be sure, everyone “does” Knowledge Management, just like every firm “does finance”, but leaving it to chance implies that it is not likely to be done well, nor done in a fashion that enhances the likelihood of achieving organizational objectives. In much the same way that a CFO does not personally own all the money in the organization but provides governance, guidance, and a framework under which money and physical assets are managed and accounted for, the CKO should do the same for knowledge and IC.
Knowledge Management straddles all operations of an organization, and at its heart asks a simple duo of questions: how does a person know what they are meant to do, and how do they know how to do it?
In this sense KM overlaps on one side with HR/Recruitment in terms of what skills and experience a person needs to have prior to joining the organization in order to execute the assigned activities in their role.
KM also interfaces with Learning and Development in order to make good on knowledge that must be taught in addition to those “just-in time” job aids that must be presented to a worker at the time of execution in the form of knowledgebase articles.
On the valuation side, KM interfaces with Finance to establish value of knowledge artifacts and the abilities of staff.
KM provides both tactical and strategic support for the organizational mission as far as knowledge is concerned – from operational knowledge-bases, to Communities of Practice, to valuation of Intangible Capital such as trade secrets, methods, procedures, copyright, patents, etc.
In addition KM provides the framework and basis upon which those could be bundled or commoditized to make them available for franchising, leasing/licensing, or sale.
Is it For You?
The CKO role, and in fact organized and institutionalized Knowledge Management, is not for everyone, and the research shows consistently that there are several factors that are indicators that institutionalized KM and a CKO role would deliver a strong ROI.
The higher a firm rates on these items, the more likely there is to be a positive ROI for institutionalized Knowledge Management.
Here we deal with the three broad areas.
- The Business Model
- The Organizational Culture and Environment
- Volatility & Variability in the business terrain
Variability and Volatility deserve special attention since the more fluid and volatile the market, products, and labor pool are, the higher the need to be able to learn quickly and adapt fast and be able to lower the risks of volatility by having on-hand knowledge that represents the best and most current available.
To find out for yourself, try two surveys that I have built
The time to institutionalize Knowledge Management is now – the game has changed and all the old obstacles are either solved or no longer significant hurdles to implementing a formal process to gain control of IC.
There has never been a time in which pure knowledge in the form of know-how and know-who determine the value of a firm, and ongoing survival is going to depend on gaining a high degree of management capability over intangible assets.
Matthew Loxton is a Knowledge Management professional and holds a Master’s degree in Knowledge Management from the University of Canberra. Mr. Loxton has extensive international experience and is currently available as a Knowledge Management consultant or as a permanent employee at an organization that wishes to put knowledge to work.