posted 17 May 2002 in Volume 5 Issue 8
Investing in knowledge
Achieving and measuring ROI
In most organisations, recent economic conditions have precipitated a clampdown on any corporate activity that is deemed not to add directly to the bottom line. Simon Lelic talks to representatives from Aventis, Centrica, Entopia, Knowledge Management Software and Primus, and asks how KM practitioners should approach the task of demonstrating the returns from an investment in knowledge management.
In times of economic difficulty, any business activity that demands extraordinary levels of financial commitment will come under intense scrutiny. In this sense, knowledge management is no different from any other corporate initiative. What makes matters worse for the knowledge manager desperately trying to protect the funds he has been allocated is that the return on investment generated through KM is notoriously difficult to gauge. In addition to the problems surrounding how to measure what are very often highly intangible benefits, KM practitioners must also overcome the stigma bequeathed to knowledge management through the shortcomings of previous ‘cure-all’ business fads that are still perceived by many to be at the roots of the discipline.
“The budgetary pressures of the current economic situation mean ROI is high on the agenda for all companies implementing new technology,” says Dave Thomson, marketing director (EMEA) for Primus Knowledge Solutions. “A year ago prospects would accept an ROI time of one year; now they’re getting more demanding. The finance department wants quick returns, reduced costs and increased revenue.”
Chris Collison, director of change management and finance strategy at Centrica, agrees, arguing that a focus on ROI has become a natural part of any KM implementation. “In my experience,” he says, “after a year of experimentation, research, piloting, clarifying and defining knowledge management, a sponsor may take the position: ‘OK, we now know what knowledge management is – it’s time to show me the money. Demonstrate to me where this stuff is actually adding value. Oh, and here’s your target for next year.’ As more and more companies go through KM programmes and initiatives, we’re seeing the ROI question asked repeatedly.”
Yet while the issue of return on investment has clearly attracted increased attention recently, there remains no firm consensus as to whether the returns generated by knowledge management can in fact be accurately measured at all. Doug Rush, head of knowledge management at Aventis Pharmaceuticals, nevertheless maintains that Aventis has had success with KM metrics and has been able to quantify value added with a significant degree of precision.
Peter Katz, executive vice president at Entopia, is also convinced that ROI can be effectively calculated. “It is possible to measure productivity benefits accurately, and to make educated guesses on the more intangible benefits,” he says. “Benefits for a KM deployment can be categorised as strategic (increased revenue and shorter time-to-market) and tactical (decreased costs). While it is difficult to measure intangible benefits exactly, approximations of returns in the areas of re-use, time to information, employee retention and tacit knowledge capture are possible, and can be refined based on market data and individual considerations. While the strategic benefits are harder to quantify, by using conservative assumptions for both the tangible and intangible benefits, a powerful and credible business case can usually be constructed.”
Conversely, Andrew Boyd, who is studying for a PhD at City University, argues that it is virtually impossible to determine the exact returns on an investment in knowledge management. “The tools used to measure ROI, from a simple cost/benefit ratio to NPV analysis, are based in finance and accounting principles,” he says. “Often, the true returns from KM are intangible or are not known for many years. Without a way to track and monitor IP and patents, the value may never be known.”
Collison, too, is dubious that any attempt to measure ROI will generate accurate results. “Knowledge management is one of many ways to liberate value in an organisation – it’s a very effective from of ‘self-help’, but it doesn’t exist in isolation,” he says. “There are usually several initiatives occurring simultaneously in an organisation that are all driving change. To attempt to single out the precise contribution that one component makes is not time well spent.” Collison goes on to describe the reaction of a senior manager within BP who, when pressed to identify the contribution that KM had made to his business, responded: “Look, I know this has added value and helped us to significantly exceed our goals, but I can’t put a figure on just KM – it’s in there with the spaghetti.”
Collison nevertheless feels it is important to monitor the impact a KM programme is having, so long as time is not wasted in pursuit of “some arbitrary top-down financial target”. Rather, he emphasises the value of success stories that point to specific instances where value has been created, and of other ‘softer’ measures such as the level of activity in networks and communities, and changes in employee satisfaction scores.
Similarly, Rush points to the success Aventis has had using interviews to elicit anecdotes where an employee has found someone else who could help them solve a specific problem. “We are also using social network analysis to graphically and statistically understand internal networks in our research and development organisation, and are exploring the possibility of constructing a knowledge sharing survey to assess cultural aspects of KM,” he says.
If all else fails, Don Ross, business development director at Knowledge Management Software, recommends assessing what the state of play might be without knowledge management. “Surveys in both Europe and the US have shown that the knowledge deficit – the time lost while workers search for items of information needed to carry out their jobs – ranges from 45 minutes in Europe to over two hours in the States,” he says. “Simple calculations show that a business can be substantially out of pocket simply by doing nothing.”
KM metrics therefore clearly have their place. As Thomson says: “An ongoing evaluation procedure, comparing target ROI to actual ROI, helps keep the initiative on track. Any deviations can be rectified before they become a serious problem, and the process can be realigned to get more benefits.” Boyd agrees, arguing that some attempt to measure returns is paramount to any KM project’s success. “By its very nature, KM is iterative, whereby participants in the system respond to new stimuli, thus developing new directions and further stimuli,” he says. “Very quickly the system can spiral in a direction that its designers hadn’t intended or didn’t anticipate. To make sure that the system is developing according to the desires of the sponsors and designers, an iterative measurement programme is essential.”
This idea is also echoed by Rush, who believes that, by demonstrating the value that KM can bring to an organisation, it becomes much easier to implement future initiatives. To an extent, therefore, and as Collison suggests, identifying the value created should be regarded as a means to an end – the reinforcement of a knowledge sharing culture – rather than as an end in itself.
As many readers will no doubt appreciate, however, it is easy to get too caught up with the idea of metrics and ROI, often to the detriment of your broader KM initiative. “Measures and metrics can overshadow a KM programme,” says Boyd. “A measurement programme should be flexible and iterative in nature. If a system is meant to be fluid, then the measurement programme that tracks that system must also be fluid. There is nothing worse than a measurement programme that is too rigid or does not adapt to capture and provide stakeholders with information to evaluate new directions and stimuli.” And as Ross points out: “The case for ROI is a given, and wasting too much time trying to argue down to a fraction of a decimal point will certainly delay the realisation of the benefits of a KM programme.”
Ultimately, as your KM initiative gathers momentum, the perceived need to continually justify your organisation’s investment may even diminish. “Once there are more and more success stories coming out of KM initiatives, the need to do a full-blown ROI will be reduced,” argues Katz. “It’s like anything else – once it is widely accepted as value-add, it will be easier to justify additional investments. At Entopia, we try to take the best possible route, by measuring productivity gains and dealing with knowledge management as a natural by-product of daily work, and not as a required extra process within it.”
Almost inevitably, however, at least at the outset of a KM initiative, your sponsors will be looking for a bottom-line figure. From an investment in a specific KM-related technology, Thomson feels break-even point can realistically be expected within the first 6-24 months, depending on a company’s existing infrastructure and the project’s ambitions. “Large scale implementations tend to see quicker ROI because of economies of scale,” he adds. “For instance, 3Com now saves between $1.5m and $2m a month in their global support centres, which equates to a 279 per cent return on its investment over the past three years.”
A bottom-line figure for a KM project that extends beyond the realms of technology can be even harder to predict. “In my previous role as part of BP’s KM team, I can say with confidence that the $2m invested in the team paid back in excess of $100m, but large numbers come easily to oil companies, where saving just one day’s drilling can yield huge benefits,” says Collison. “That said, I’d expect a fully successful programme in any organisation to yield a 20 per cent productivity improvement, together with improved strategic decision making. How that 20 per cent manifests itself will be a factor of the organisation’s culture – it might be in cost savings, higher value activities, innovative research or the restoration of a healthier home/work balance. Precisely how much is that worth? I can’t say. Is it worth going after? Absolutely, yes.”
The key to achieving anything like these levels of return, in Rush’s opinion, is to start small and demonstrate early success. “There is a potential danger in focusing on large, expensive projects that could fail,” he says. “It is essential to build momentum and demonstrate value added.” Collison, too, warns against making the assumption that a greater initial outlay will guarantee a higher payback. “I don’t believe there is a law of increasing returns at work here,” he argues. “Ultimately, I see a KM programme as part of a company’s cultural development – the ‘long game’ – with the benefits substantially outliving the original initiative. The initial outlay needs to be tied to a plan that embeds knowledge management into the organisation, rather than sustaining a central team.”
Equally, because of the intensely subjective nature of knowledge management, organisations should avoid falling into the trap of assuming that every KM tool on the market will necessarily work for them. It is therefore crucial that those responsible for implementing a knowledge management programme clearly determine from the outset what is important to their organisation in terms of both functional requirements and investment, and then trade off accordingly, as Boyd suggests. “Every organisation is different, with varying cultures, employees and needs,” he adds. “It is unrealistic to think that out-of-the-box KM software will adequately address those needs without significant customisation.”
ROI – how to achieve it, how to measure it and, above all, what level to expect – is a complex topic, but one that, for obvious reasons, has attracted increased attention in recent months. Precious few KM practitioners are afforded a blank cheque to pursue their goals, while even fewer financial directors succumb to the ‘trust me’-approach to presenting a business case for continued investment in KM. At some point, therefore, the issue of metrics and performance measurement has to tackled, for the sake of determining the future direction of your knowledge management programme if for nothing else. Inevitably, the responsibility for proving the value of KM will fall to those who most understand and accept its potential, and it will be the organisation as a whole that suffers if the chance to invest in its very future is overlooked.
This month’s participants:
Andrew Boyd is studying for a PhD at City University. He can be contacted at: firstname.lastname@example.org
Chris Collison is director of change management and finance strategy at Centrica. He can be contacted at: email@example.com
Peter Katz is executive vice president at Entopia. He can be contacted at: firstname.lastname@example.org
Don Ross is business development manager at Knowledge Management Software. He can be contacted at: email@example.com
Doug Rush is head, knowledge management, US drug innovation and approval, at Aventis Pharmaceuticals. He can be contacted at: firstname.lastname@example.org
Dave Thomson is marketing director (EMEA) at Primus Knowledge Solutions. He can be contacted at: email@example.com