posted 14 Sep 2001 in Volume 5 Issue 2
The value of knowledge doesn’t exist
A framework for valuing the potential of knowledge
A great deal of work has been done in the past that seeks to identify how best to measure the value of knowledge and indeed the added value of knowledge management. Paul Iske and Thijs Boekhoff believe however that the real value of knowledge lies in its potential which is in turn dependent on the context in which that knowledge is used.
In the so-called knowledge economy intellectual assets have become the most important factor in determining the value of an organisation. Many activities nowadays focus on discovering the Holy Grail of knowledge management: the value of knowledge and the added value of knowledge management. Prominent work in this area includes that done by Sveiby and Edvinsson. However so far it has been difficult to develop quantitative measures that relate knowledge to the economic value of an organisation.
In fact the subject of valuing knowledge can be considered from a more general point of view in which the value assigned is not necessarily a financial one. The ‘balanced scorecard’ and the Skandia Navigator are examples of measurement methodologies that could be a starting point for developing non-financial measures that help to determine the value of knowledge.
However one question should be considered: why bother measuring at all? Many of the attempts especially in the US to develop a framework to measure the intellectual assets of an organisation are driven by the need to develop accountancy standards that will be the equivalent of those applicable for tangible assets. Such approaches would lead to the formation of a value for knowledge as being the intrinsic property of the organisation. However in general this cannot be the case.
Consider the process involved in the acquisition of a company for example. An important stage is the valuation of the target to arrive at a fair price. The target might have knowledge that is complementary to that of the buying party and thus of strategic importance. In this case the knowledge has a high value which will be reflected in the take-over price. Yet if the knowledge is already present in the acquirer’s organisation or it is of no strategic importance the same knowledge has little or no value. This example demonstrates that the value of knowledge is context-dependent. We can therefore already formulate the main hypothesis of this paper: the value of knowledge is not an intrinsic property but depends on context.
In the remainder of this article we will attempt to narrow this statement down and indicate how one could come as close as possible to a workable definition of the value of knowledge. The valuation of intellectual assets remains important in the strategic (management) processes of every organisation. Research from Gartner for example revealed that companies that pay explicit attention to the management of intellectual assets achieve anything up to a 30 per cent improvement in bottomline performance.
A framework for valuing knowledge
Knowledge management is a prominent management subject and many books and articles on KM have been published. Some consensus on the basic concepts in the field is evident but in general the discipline lacks an adequate and accepted language that would allow us to formulate the necessary concepts in an unambiguous way and help us establish a link between theory and practice. Our opinion is that – as stated in the title – knowledge does not have value in itself but rather in its potential. Instead of the ‘value of knowledge’ we suggest focusing on valuing knowledge potential.
In this article we first offer you a mathematical drill down with which we hope to provoke a lively discussion among those of you who are struggling – as we are – with the question of measurability and the expectation that surrounds it. In the second part we will attempt to bring the discussion back down to earth by exploring the issue in the context of a well-known tool a PeopleFinder (a yellow pages or expert directory) and a new generation of tools that aim to connect workers with experts. So far the potential of these tools is in our opinion undervalued although this is partly because they are so difficult to implement.
A mathematical formulation for knowledge management
“Whereof one cannot speak one should be silent.” These famous words spoken by Wittgenstein are seldom put into practice. Sometimes however we cannot speak simply because we lack the right words or even the right language. In science we see many examples of words or languages that have had to be invented before further progress in a field could be made. For example in mathematics complex numbers have been introduced as solutions to algebraic equations with some non-real solutions. Complex numbers have proved extremely useful in solving and simplifying various kinds of mathematical and scientific problems.
Though knowledge management is not and should not be quite as theoretical and sophisticated from a conceptual point of view we would probably benefit from the development of a formal language to describe the various stages in the generation distribution (re)usage and evaluation of knowledge.
Obviously we have to start with a definition of knowledge that can be used as a basis for developing the framework. Currently there are probably as many definitions as there are authors lecturers practitioners and so on. For the purpose of this opinion piece we will use the following definition: knowledge is the combination of facts experiences and perceptions that are being used to make a decision or to select an action by which a situation is changed into a more valuable situation.
There is an implicit value statement included in this definition: the value of knowledge is (part of) the difference between the value of the end-state and that of the original state. In the following we will refer to context as being the original situation the transition process and the (desired) end-situation. The context also includes the person(s) systems and organisations that are involved in the related decisions and/or actions. Notice that according to this definition knowledge can only add value within a context in particular in the decision-taking step and/or during the action selection. In other words talking about knowledge is only relevant within a certain context (ie when it is being used).
To be able to discuss the value of knowledge potential it has to be stripped from the context where it was generated or used. This is the opposite to some approaches that consider the replacement costs or the cost of generation to be determinant of the value.
Knowledge can be seen as input in a process context. Often it will be available in the form of information embedded in databases procedures best practices frequently asked questions (FAQs) handbooks personal memory people’s behaviour etc. The added value can only be obtained if the knowledge is actually used in context. For discussion purposes we propose a formula (see figure 1) that captures the essential features of the knowledge value chain. At the end it enables us to categorise and prioritise properties of organisations knowledge management activities and even the value of it all.
Figure 1: formula for the valuation of knowledge potential
The formula in figure 1 thus reads: the total potential value of the knowledge that is stored in the environment equals the sum over all contexts of the probability that this knowledge is related to the context multiplied by the connectivity that indicates how easy it is to transport the knowledge from the environment to the context multiplied by the activation coefficient that indicates how easy it is to activate the knowledge (to use it) in the context multiplied by the added value that is achieved within the context. Furthermore added value is obtained by learning which means generating new knowledge in context (as a consequence of the knowledge that has been used in this context) that can be stored in environment at the expense of an investment.
The total value of all knowledge potential in the organisation is then represented by the equation shown in figure 2.
Figure 2: the value of knowledge potential
We can summarise the elements in the first formula that need to be discussed in more detail as:
- Knowledge relevance indicator – the level to which knowledge is considered relevant for the business (processes) and the level to which business issues lead to new knowledge;
- Knowledge connectivity factor – the level to which it is possible to transport knowledge from an environment (source) to the context (work situation business process);
- Knowledge activation factor – the level to which it is possible to activate knowledge (to use it) in a specific context;
- Added value in context – the level to which knowledge has added value (has been useful) in a specific context;
- Knowledge capturing and learning – the level to which new knowledge is generated in a specific context (as a consequence of the knowledge that has been used in this context) which can be stored in a specific environment at the expense of a specific investment.
Note that it is clear from the first formula that if one of the factors is zero there is no value added irrespective of the value of the other parameters. Quantitative insights into the environmental parameters that determine the value of the factors in the formula will help to optimise the return on investment of knowledge-related projects. In general one should focus on the smallest parameter (the weakest link) to achieve optimal improvement.
For the purposes of this article we will describe our experience in the case of a PeopleFinder  implementation to indicate how these elements can help us to structure discussions as to the value of knowledge and in particular the added value of knowledge management.
The end result in many KM system implementation projects is usually an infrastructure or ICT-environment through which information is pushed to the user. The internal debate is always about the best way to attract the user to the system in order to encourage people-to-machine interaction and thus value to the business.
Knowledge relevance indicator
The great advantage of PeopleFinder-type systems is that the link between knowledge and the originating context is clear. In other words the relevance factor between knowledge and the specific context can be quite large. This will be even more evident in the next generation tools in this area which are expert-locating systems based on questions and answers. A good example of a Q&A-based tool is the website www.askme.com. Currently there are several suppliers of askme-type applications for use within organisations and within networks of organisations and their partners/customers. We believe these tools can add a great deal of value and we have seen some interesting business cases for the implementation of such systems with a reasonably well-justified ROI calculation. Also the use of advanced personalised tools such as portals and applications like Autonomy helps to increase the probability that relevant knowledge is transferred to the context.
Some case examples demonstrate the importance of the knowledge relevance indicator in the past. For instance 3M initially invented glue that could have been dismissed as ‘useless’ but a newly created context allowed the hugely successful Post-It notes to be invented.
Knowledge connectivity factor
Standard KM solutions hardly seem to solve the problem of how to transform information push into information pull through the detailed analysis of people’s preferences and needs in knowledge-based working processes. It is our opinion that this issue directly relates to the connectivity factor: the exchange between two (or more) persons as well as the exchange between these workers and the system. Regarding the former certain fundamental questions need to be answered: what is the organisational (physical) distance? Are there any language barriers or differences? Do they have a relationship (do they know each other? Is there a networking effect)? Are there cultural including time and compensation scheme constraints?
Research result from the Delphi Group has shown that up to 20 per cent of an employee’s time is spent on re-discovering knowledge that was already present somewhere else in the organisation. This is an indication that in most organisations the product of the knowledge relevance indicator and the knowledge connectivity factor is small.
Knowledge activation factor
ICT can be of great value to an organisation in particular web-based technologies. But the main objective of ICT should in our opinion always be to strengthen the interaction between people. The effective and efficient exchange of knowledge depends not only on the ability to transfer exchange and communicate but also on the ability to understand accept and leverage. This latter ability is reflected in the knowledge activation factor.
The effective exchange between two persons must be measured according to the presence of trust communication skills language (barriers) motivation (to send and to receive) the prevalence of Not-Invented-Here syndrome and (shared) mental models. The success of a PeopleFinder depends heavily on these issues. This seems to be an unmanageable set of factors but explicit (peer or management) attention increases the activation factor. Also the effective and efficient interaction between systems and individuals can be measured: the way you develop a user-interface the context-suitable formulation (including language) and the way you introduce the application will lead to measurable increased motivation and usage.
Added value in context
Search results and actions taken upon those results indicate the way knowledge has been of use in the business process. The PeopleFinder allows professionals to locate colleagues with relevant expertise and experience for a given project. The level to which knowledge has had added value (has been useful) in a specific context should be derived from the experiences of these users. The result of the evaluation of the PeopleFinder and its effect on the project team and thus on the business is called added value in context. In practice this means that the added value of a PeopleFinder tool is often measured on an anecdotal basis.
Knowledge capturing and learning
Humans possess a great deal of tacit knowledge – we know more than we can say and share. The organisational challenge is to remove the barriers and train people to tap into this knowledge in order to create stronger more innovative companies. It requires leadership skills to attract train and retain talented and motivated people. It requires vision to guide and coach talent towards collaboration and teamwork. Most learning programmes in companies address content structure and procedures but neglect the context in which these programmes reside. Competence and learning depend on knowing where to find and how to reuse the right resources to get the job done. The PeopleFinder facilitates serendipity and by offering the opportunity to be lucky it is possible to facilitate action learning.
Summary conclusion and next steps
Value does not lie in knowledge itself. The real value lies in the potential of that knowledge and thus in:
- The ability to identify and remove blockages between individuals and in the system that hinder interaction;
- The ability of knowledge workers to find what they are looking for and indeed through serendipity what they do not know they are looking for;
- The ability to reuse the knowledge through smart ‘packaging’;
- The courage and pride of workers to show communicate and sell their knowledge via personal and digital channels;
- The creativity to identify new contexts in which knowledge is relevant together with the ability to realise these contexts in the organisation – these are in fact the essentials in the innovation process.
The main conclusion of this article is that one should speak of the value of knowledge potential rather than the value of knowledge. The value added is dependent on the identification of the transfer to and the activation of knowledge in the various contexts where that knowledge is being used. The value of knowledge therefore is not the intrinsic property of an organisation but is dependent on the environment and the objectives of the measurement.
Most organisations focus their KM (ICT) programmes on knowledge transfer and thus on the knowledge connectivity factor. We believe that more emphasis should be put on the knowledge relevance indicator which is directly related to choosing a ‘pull’ strategy rather than a ‘push’ strategy. Finally the knowledge activation factor deserves closer attention since this determines the actual realisation of the value and is influenced by complicated environmental parameters which are often related to human and cultural influences.
We the authors of this article are working on making the qualitative relationships described above between the elements in the formula and the environmental parameters more quantitative. This will help in the assessment of the key value drivers and the most efficient and effective ways to realise the potential value of knowledge. We hope that this article will spark interaction with our peers so that together we will be able to take the next step in demystifying the true value of knowledge and make more transparent the return on investments knowledge management activities have to offer.
1. A PeopleFinder is an automated system to search for and locate colleagues with expertise and experience relevant to a given project (competency profiles)
Paul Iske is senior vice president and chief knowledge officer at ABN AMRO Corporate Finance. He is also a freelance consultant on KM issues. He can be contacted at: email@example.com
Thijs Boekhoff is co-founder of Squarewise (www.squarewise.com). He can be contacted at: firstname.lastname@example.org