Measuring and Managing Knowledge Based
Assets:
Summary of a Model
‘Knowledge Management’, ‘Intellectual Capital’, ‘Knowledge
Workers’, ‘The Information Organization’, ‘The Information
Economy’, ‘Intangible Assets’, ‘Information Based Assets’,
‘Knowledge Based Assets’.
These
are the buzzwords of our “new” economy. What do they mean? How do
we make sense of them? How do these terms fit with our understanding of
‘managing the information organization’? In 1997, Karl Sveiby authored
a book titled The New Organizational Wealth: Managing and Measuring
Knowledge Based Assets. In summarizing this book, my goal is to contribute
to our discussion of ‘managing the information organization’, and, in particular,
to further our understanding of the concept of intangible (information
or knowledge-based) assets; how they are defined, measured, and managed.
While
this book focuses on managing and measuring knowledge-based assets in the
private sector, Sveiby notes that his model/prescription can be utilized
in the public sector as well, and invites readers to test the model in
that arena. In that light, I will apply the definitions and tools described
in the book to a library setting, and present it during the presentation
of this paper.
The New Organizational Wealth: Managing and Measuring Knowledge Based Assets begins with a series of questions: Why does a company like Microsoft have a stock valuation ten times higher than its “book value”? What is it that is perceived by the markets that isn’t recorded in the company’s accounting? Where and what are the intangibles that make this valuation possible? Why aren’t these intangibles noted in a measured form in an annual report? And how do we define, manage, and measure these intangible assets? The answers are as follows:
Definitions
In
part 1, Sveiby gives a brief historical overview of the foundations of
identifying knowledge as a source of wealth, defines information, knowledge,
competence, “intangible assets”, and “knowledge organization”.
Intangible Assets
Intangible
assets are those assets that are not visible but can be measured and add
to the profitability of the organization.In most companies and organizations,
the intangible assets are greater than the tangibles.There are three types
of intangible assets, all derived from people.(All assets and organizational
structures are the result of human actions). The three types are:
The
external structure includes relationships with customers and suppliers.It
also includes brand names, trademarks, and the company’s reputation or
image.External structures are considered intangible assets because they
also add value to an organization.For example,a customer may provide a
learning situation for a young professional (competence building), who
can then transfer that knowledge in the form of consulting to another customer,
thereby also generating revenue.
Information
and Knowledge
In
defining information and knowledge Sveiby makes an important distinction.Often,
as the list of buzzwords above indicate,information and knowledge are used
synonymously.According to Sveiby, that is a dangerous and misguided approach
(However, he doesn’t seem to make a distinction between data and information
(“information in the form of numbers, symbols, pictures, or words displayed
on a screen…. versus knowledge, which is what information becomes when
it is interpreted” (Sveiby, 1977). He seems to use them synonymously, therefore
this discussion does not cover the whole spectrum of the D-I-K transfer.)He
asserts that information(data) in itself is not valuable.One result of
the increasingly rapid dissemination of information (data) is that sorting
and comprehending information becomes too time consuming , and consequently,
that information can actually be viewed as negative in value (it wastes
time and doesn’t create knowledge).
Alternatively,
what is of value, and what can be considered an intangible asset, is knowledge.
Knowledge is defined as information that is integrated/processed and becomes
“the capacity to act.” (Sveiby, 1997). (“This is not an all encompassing
definition but rather a practical notion for managers to keep in mind as
they read …the book.”, (Sveiby, 1997)).Information is entropic (chaotic)
whereas knowledge is nonentopric .Information can be described in words
fairly effectively, but knowledge cannot because one always knows more
than one can say/write.(For example, I know much more about the concepts
of this book than I can articulate in writing or speech.) Knowledge is
ever-changing, is a process, and is therefore harder to quantify than information.Sveiby
also describes knowledge as either tacit, in that it is used as a tool
to handle what is being focused on, or focal, as the knowledge about the
object or phenomenon that is in focus.Knowledge can be imbedded in both
people and organizational structure.
In
answer to the question about Microsoft’s capital valuation, the markets
perceive abundant levels of all three types of intangible assets within
Microsoft’s organization, even though they are nowhere accounted for in
their ‘books’.They see much competence in the professionals who work they;
they see a mature and diverse external structure in their established market
share, and they see mature internal structure as well.
and their Characteristics:
The
professionals are the specialists in an organization who excel at the organization’s
core competencies. They share three primary characteristics:focus on the
job, professional pride, and dislike of routine.They aren’t usually motivated
by compensation when compensation is in normal range, although there are
exceptions to the rule.The expert professionals are the most valuable employees
in the knowledge organization.Given the opportunity through a lack of strong
leadership, the professionals will determine the course of the knowledge
organization.It is imperative that leaders lead professionals in a direction
that is consistent with the overall goals of the organization.
Managers
are the people appointed by superiors to lead an organization toward a
defined goal within a given frame of reference (department) and specified
resources (departmental budget).They are usually low in the core competencies
of the organization but high in organizational competence, or management
skills (e.g.a divisional manager hired from a toy company to manage a division
of a software company based on management experience).
Support
staff are those hired to assist professionals and managers.The support
staff is made up of bookkeepers, personal assistants, receptionists, etc.A
well motivated and qualified support staff is essential for the success
of the professionals and the organization as a whole.This group tends to
be the least well-informed group, and the most prone to dissatisfaction.
The
optimal leader in a successful knowledge organization is high in both professional
competence and organizational competence.For example, a leader in a law
firm would be a lawyer herself as well as a very competent manager.Leaders
are usually former experts.The task of the leader is to identify the professionals
in an organization, and then find or create the most suitable environment
for them to operate in, and to manage and balance the tension between the
professionals and the other employee groups.
Managing Intangible Assets:
In
part 2 of his book, Sveiby discusses how to manage intangible assets.In
order to manage these assets, managers and leaders must have an understanding
of how employees (especially the professionals) should be recruited, developed,
motivated, and rewarded.Because knowledge organizations are heavily dependent
on the competence of professionals (and experts professionals), one of
the jobs of the leaders and managers is to decrease the company’s dependence
on any one [italics added] expert/professional or small group of
experts/professionals, thereby increasing the stability of the entire organization
if that professional leaves.(see Appendix 1 - PaineWebber article attachment
for example)Efforts to recruit and retain top talent are of utmost importance.
Knowledge organization managers need a strategy for personnel markets just
as much as they need strategy for customer markets.
Sveibytouches
on too many specific management ideas to discuss here, but two of the more
interesting are worth mentioning.Sveiby advocates allowing for the career
development of professionals in ways that are unconventional because he
acknowledges that professionals have some distinct “life-cycle” work characteristics.For
example, he suggests that managers must realize that knowledge professionals
are creative and hardworking and are, therefore, subject to burnout and
anxiety. Providing a sense of security and allowing for an expert career
path instead of forcing professionalstoward amanagerial track (something
that according to Sveiby, they characteristically dislike) will help alleviate
these problems by diminishing turnover, and thereby retain the competence
of the organization.He also suggests giving them a relatively unrestricted,
and self-regulating environment, within the office [italics added],
to conduct their knowledge transfers.He does not suggest virtual (off-site)
work as a managerial remedy for professional’s needs for independence and
less structure.Because talking and showing are more effective means for
transferring knowledge than writing or reading, he suggests that the optimal
environment for knowledge transfer is an open office environment.“Face
to face communication is a multi-channel, constantly reconfigured real-time,
broad-band information channel.” (Sveiby, 1977)
The
leader’s job in managing internal structures is to structure the flow of
knowledge within the organization (the patents, concepts, models (R&D),
computer networks, and administrative systems (staff and managers)) that
support the professionals.In addition to managing the staff, the leader
must manage the inevitable tension between the managers and the professionals.
Managers have organizational competence and tend to focus on efficiency
[italics
added], while professionals have professional core competencies and tend
to focus on core competency effectiveness [italics added].
To
do this, Sveiby suggests developing two career tracks within the organization;
one focusing on managerial and one focusing on professional skills.He suggests
giving comparable compensation for both tracks, and even advocates having
employees switch back and forth from track to track, if possible, over
the course of their careers.The purpose here is to give both groups a common
language for knowledge creation (intellectual diversity training!).
To
enhance the likelihood of accomplishing these tasks, Sveiby suggests keeping
organizations small, even if that means deconstructing large companies
into smaller units.He suggests no unit should be larger than fifty people.
Managing
the external structure requires managing the flow of knowledge to and from
customers and suppliers/vendors.Some of the skills involved are selling,
public relations, marketing, etc.Sveiby defines two strategies: information-focused
and knowledge-focused.He suggests focusing on the knowledge-focused strategy
to manage the flow of information to customers.His reasons are based on
the differences between information and knowledge and on the characteristics
of the markets [italics added] for information and knowledge.
“An
information-focused strategy earns increasing returns primarily by adapting
to the development of information technology: offering a low degree of
customization, aiming at mass markets, and exploiting low production cost
of copying software.People are regarded as costs.” (Sveiby, 1997.)Information-focused
companies spend large amounts on computer technology (IT).Business is usually
done in high volumes.These organizations tend to under utilize intangible
assets.They also tend to produce products that are easy to replicate so
competition eventually becomes fierce.IT can only maximize profit to a
point, but intangible assets imbedded in IT can be replicated, so competitive
advantage under an information-based strategy is often short lived.Microsoft
is an example.While they are still an industry powerhouse, Netscape is
giving them a run for their money, and has forced them to redefine their
strategy in terms of a knowledge focus.They are now trying to sell customized
consulting solutions (knowledge) as well as products (packaged information
in the form of software). They are seeing increased competition from market
sectors that have maximized newer information technologies (the internet).As
Sveiby suggests, they are having to “run faster and faster to stay in the
same place”, and that can only last so long.
“A
knowledge-focused strategy earns increasing returns primarily from intangible
assets, assets that convert invisible revenues from a large number of activities
into tangible revenues.People are regarded as revenues.Most customers bring
intangible revenues by improving customer relations, the internal structure,
or the competence of employees… There is a high degree of customization,
and knowledge is sold as a process” (Sveiby, 1997).Volume is usually smaller
than in information strategy dominated companies.In these companies, large
investments are made in people as compared to IT.Knowledge-focused consulting
firms are an example.Knowledge-focused organizations utilize IT to maximize
knowledge transfer, not define it.They sell their highly customized knowledge
to unique customers to solve unique problems.This means their competition
is less able to copy their ‘product’.
One
point that Sveiby makes here is that it is very important to be clear about
which
strategy you are following, and to know the implications of each.
In
part 3 of his book, Sveiby focuses on measuring intangible assets.However,
before a measurement can be taken, a company must first determine the purpose
of the measurement.The indicators used to measure intangible assets for
the purpose of an annual report will be defined differently than indicators
used for the purpose of educating managers in areas needing improvement.These
two audiences have specific interests and the measures and language used
to describe them must be tailored to their needs.
Second,
the reader of the measures must remember that measurements are relative,
not absolute.In other words, measurements taken can only be viewed in terms
of change (+25% or –10%, etc.)Measurements must be taken over several business
cycles to show improvements or declines, thereby giving value to the numbers.
According
to Sveiby, under each of the three types of intangible assets, the same
set of general indicators apply:Indicators of Growth/Renewal, Indicators
of Efficiency, and Indicators of Stability.Using two or three of the actual
measures per indicator category is sufficient.
Indicators
of Growth/Renewal
Number
of years in the profession – longer indicates higher competence
Level
of education – higher indicates higher competence
Training
and education costs – indicates high level of renewal of competence
Grading
-(during
performance reviews) higher indicates high competence
Turnover
– within a range of 7-12% indicates stable levels of renewal which
Competence
enhancing customers – the more difficult-project-supplying
Proportion
of professionals in the company – higher the better
The
leverage effect – higher percentage of use of competence the better
Value
added per professional – the higher the better
Indicators
of Stability
Average
age of employee – the higher the better up to a point
Seniority
– a general range is desired
Relative
pay position – a general range is desired
Professional
turnover rate – low range desired
Indicators
of Growth/Renewal
Investment
in internal structure – high level desired
Investment
in information processing systems – moderate level desired
Customers
contributing to internal structure – high level desired
Indicators
of Efficiency
Proportion
of support staff – low level desired
Sales
per support person – high level desired
Values
and attitude measures – high level desired
Indicators
of Stability
Age
of the organization – older is desired
Support
staff turnover – low level desired
The
“rookie ratio” – low percentage is desired
Before
you begin measuring for external structure assets, you must first categorize
customers based on the assets they contribute, e.g. size, image, difficulty
of projects, long term customers, etc. This will allows measurements to
provide a more accurate meaning.
Profitability
per customer – the higher the better
Organic
growth – (as compared to acquisitional growth) the higher the better
Indicators
of Efficiency
The
satisfied customer index – the higher the better
Win/Loss
bid index – the higher the better
Sales
per customer – the higher the better
Indicators
of Stability
Proportion
of big customers – moderate range is best
Age
structure – the higher the better
Devoted
customer ratio – the higher the better
Frequency
of repeat orders – the higher the better