Thursday, May 27, 2004

Turning knowledge into assets

Turning knowledge into assets
Thursday, May 20, 2004

A central part of knowledge management is to make knowledge manageable and reportable. This requires a tool that can help managers and suppliers of resources (financial, human and technological) to ask the right questions. Is knowledge increasing or decreasing? What knowledge is there? How is knowledge developed? An intellectual capital (IC) statement is such a tool. It can be used internally for management or externally for reporting.

Knowledge resources. Knowledge, as information, insight, or thinking, can be either personal or stored in books and information technology (IT) systems. In business it is used to improve a firm's innovation, processes and performance. But as an intangible it cannot easily be evaluated so it has to be translated into knowledge resources that can be clearly identified.

Knowledge resources can be described, developed, evaluated and combined in new ways. They can also be managed, which means they can be described in an intellectual capital statement.

Typically there are four types of knowledge resources - employees, customers, processes and technologies.

* Employees includes employees' skills and personal competencies, experience, the mix of different types of employees, their motivation, commitment and willingness to adapt.

* Customers includes customer mix, relations to customers and users, their satisfaction and loyalty, their referral of the company, insight into users' and customers' needs and the degree of co-operation with customers and users in product and process development.

* Processes relate to the knowledge content embedded in the company's basic procedures and routines. These can be innovation processes and quality procedures, management and control processes and mechanisms for handling information.

* Technologies refer to the technological support of the other three knowledge resources. IT systems such as the intranet, IT competencies and usage fall into this category.

Knowledge management is all about these four resources and how they interact.

Intellectual capital statement. The IC statement consists of four elements, which together express the company's knowledge management. These elements link users of the company's goods or services with the company's need for knowledge resources. They include the establishment of the need for knowledge management, a set of initiatives to improve knowledge management and a set of indicators to define, measure and follow up initiatives.

The first element is a narrative that expresses the company's ambition to increase value for users. This helps to define what it is that we need to know and thus how knowledge can be best directed towards something - this something being a service or a product that has value to a user. This value can be called the use value, and a set of knowledge resources are needed to create it.

The knowledge narrative shows which types of knowledge resources are required to create the use value the company wants to supply.To identify elements of a knowledge narrative, it is useful to answer the following questions:

* What product or service does the company provide?

* How does it make a difference for the user?

* What knowledge resources are necessary to be able to supply the product or service?

* How does the constellation of knowledge resources produce the service/product?

The second element is a set of knowledge management challenges, which highlight the knowledge resources that need to be strengthened through in- house development or through sourcing them externally. These are long-term challenges that together define the business model of knowledge. They can be, for example, close co-operation with innovative customers, expertise in specific fields or insight into the company's control processes.

The starting point for the management challenges could be to do something about the existing knowledge resources. But it could also be to introduce new types of knowledge resources not found within the company. To get an idea of the firm's management challenges, the following questions should be addressed:

* How are the knowledge resources related?

* Which existing knowledge resources should be strengthened?

* What new knowledge resources are needed?

The third element is a set of initiatives that can do something about the management challenges. The initiatives concern how to compose, develop and procure knowledge resources and how to monitor their size and effects.

This could be, for example, investing in IT, hiring more research and development (R&D) consultants or software engineers or launching training programmes in company processes and procedures. Vocational and social activities can also be introduced to increase employee satisfaction.

Initiatives must be seen to work long-term, even if specific ones are repeated over several years. These may be initiatives that specific players are responsible for - for example, someone hires personnel, another launches training initiatives and someone develops the required procedures and routines. To develop a set of initiatives requires answers to the following questions:

* What initiatives, actual and potential, can be identified?

* What initiatives should be given priority?

The fourth element is a set of indicators that monitors whether the initiatives have been launched or whether the management challenges are being met. Indicators make initiatives visible through measurement, and they make evaluation possible. Some are directly related to specific initiatives such as training days or amounts invested in IT.

Others are related only indirectly to initiatives such as the number of R&D consultants or newly appointed software engineers. Indicators can measure:

* Effects - How do activities work?

* Activities - What does the firm do to upgrade knowledge resources?

* Resource mix - What is the composition of knowledge resources?

These elements together represent the analysis of the company's intellectual capital. The elements are interrelated, and their relevance becomes clear when seen in context. The indicators show how initiatives are launched and put into effect. The initiatives formalise the problems identified as management challenges.

The challenges single out what has to be done if knowledge resources are to be developed. The knowledge narrative sums up, communicates and re- orientates what the company's skills and capacity do or must do for users, and what knowledge resources are needed within the company.

Management tool. IC helps managers and external providers of resources in several ways. It provides indicators that can evaluate knowledge resources.

Second, by focusing on knowledge resources rather than knowledge per se, it can concentrate on creating a structure of knowledge resources and their interrelationships. This leads to a much better understanding of knowledge resources than if knowledge were considered primarily a matter for HR in extracting secret or tacit knowledge from individuals.

The IC statement also helps develop the elements of a company's knowledge strategy. By focusing not only on indicators but on the whole translation between knowledge narrative, management challenges, effort/initiatives and indicators, it knits together a network of relations that together produce valuable forms of knowledge management.

* This article first appeared in CIMA Insight, the e-mail newsletter for professional accountants in business, published by The Chartered Institute of Management Accountants. CIMA Insight is accessible at

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