Who Knows?

Once they learn what it is, companies can embrace knowledge management profitably.
Randy MyersDecember 1, 1999

Years after most executives first heard the term, knowledge management remains a fuzzy concept and an elusive corporate goal. No wonder, since few experts can even agree on what it is.

“A lot of people still think of knowledge management as an IT solution to moving information around, and that’s a huge mistake,” says Morten Hansen, assistant professor of business administration at Harvard Business School. “Others think of it as just sharing knowledge, and the more they share, the better. That’s just plain wrong. You can share a lot of mediocre knowledge and get nowhere, just as you can spend an enormous amount of money to build an IT system and not get a benefit equal to the investment.”

What is knowledge management really? To Hansen, it is the leveraging of expertise from one area of the company to another to achieve better performance.

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Even that simple definition, however, leaves questions open. “Getting into the details of what constitutes knowledge is a tricky proposition, and I don’t think anybody’s cracked the code,” says Bain & Co. partner Mark Horwitch, who is based in Chicago and also is chairman of Bain’s knowledge-management steering committee. (Classical finance includes such intangibles as brands, patents, and licenses, and research and development among knowledge assets, of course, but ignores basic operating expertise and employee skills that reside in a corporation.) Combining knowledge and management in one term can create “a false sense of control, comprehensiveness, and accuracy” in the minds of executives, he adds. And finally, there’s the nagging sense that what some call knowledge management is just a fancy name for commonsense problem solving.

All the confusion has kept this particular concept on the periphery of popular management initiatives, even as ideas such as total quality management, reengineering, and value- based metrics have flourished. “There’s good reason to approach this somewhat skeptically and pragmatically,” says Chuck Sieloff, who until his retirement this fall was an in-house knowledge- management consultant for Hewlett- Packard Co. He often encouraged people working on projects in the area “not to even try to sell it as knowledge management, but rather to tie it to other business objectives.” Says Sieloff: “It’s just too soft a concept for a lot of managers to embrace.”

Yet embrace it they must, especially in large, global companies, where failing to harness the collective knowledge of the workforce could represent a shameful squandering of intellectual assets.

How can companies get the most out of the knowledge they have in- house? For starters, say experts in the field, they can make sure all executives agree on just where the repositories of information and skills are in the company, and then begin to develop easy ways for that knowledge to be transferred profitably to other areas of the organization.

Personalize and Codify

Hansen believes that companies manage knowledge through two efforts. In the “codification” approach, they store information in computer databases, where it can be instantaneously accessed by employees throughout the organization. There, companies are collecting, organizing, and disseminating what academics call explicit knowledge: facts, figures, and processes that can easily be recorded. For a plant, that might include valuable information about production runs, machinery operating instructions, or proprietary manufacturing formulas. Hansen calls the second approach personalization– the transferring of knowledge primarily through person-to-person contacts. This is “tacit” knowledge: skills and experience that are embedded in the employees, and thus hard to capture in a database.

The blend of codification and personalization that should be installed depends on the corporation’s competitive strategy, according to Hansen. For a business model built on repeating a common activity many times for different customers, more codifying is likely needed. But if success depends more on highly customized solutions for unique problems, or the churning out of a steady stream of new products, more personalization seems appropriate.

While Hansen recommends that companies focus on one strategy or the other–“You can’t do it all and do it exceedingly well,” he says– companies adept at knowledge management generally pursue both strategies at varying levels.

Whose Job Is It?

Consider Ernst & Young. The Big Five professional-services firm aims to help its accountants and consultants learn and make decisions faster by drawing on the expertise of colleagues around the globe. To that end, it has installed a broad and highly visible codification strategy, conducted through such computer-based applications as Lotus Notes and various Web sites. On these, Ernst & Young professionals document best practices they have developed, as well as work they have done for their clients, including problems they have solved and the method of solution.

The information is easy to access; “power packs” compiled by managers include such information as sales materials and examples of a unit’s best work. But Ernst & Young also makes use of the personalization strategy; the company organizes its professional staff into teams–called community- of-interest networks, or COINs–that are determined by service line, industry, and field of expertise. Within the COINs, Ernst & Young professionals converse formally and informally across divisional lines. “They have regular meetings, and the most successful [COINs] pay a good bit of attention to keeping people informed and making sure they understand our best practices,” says Ralph Poole, director of the firm’s Boston-based Center for Business Knowledge.

HP employs codification and personalization approaches in roughly equal measure. Reflecting the company’s highly decentralized structure, business units maintain their own large databases of technical and problem-solving information for internal help desks and customer response centers, which must frequently respond to the same questions from many different customers.

But HP chooses a personalization approach when the issue involves development of new products, with the rapid innovation that requires. When an engineering team developed an electronic oscilloscope with a Windows operating system and interface, for example, the company flew engineers to a companywide conference and to divisional meetings around the world to explain the device and encourage its adoption in other new products. HP believed that the knowledge was simply too rich and subtle to capture in a written report.

Although Hewlett-Packard doesn’t pursue knowledge management on a corporate level–it has no “chief knowledge officer” title, for example–the company has assigned numerous executives, including Sieloff, to push the concept in HP’s everyday culture.

“I think our feelings with regard to a chief knowledge officer are similar to the feelings many people had about the quality movement 10 years ago,” says Sieloff, who took on his knowledge-management role after serving as HP’s manager of information systems services and technology. (KMC International, a Gaithersburg, Maryland, society of knowledge-management professionals, estimates that 53 companies among the Fortune 500 have a formal CKO post.) “The question then was: Should you have a manager responsible for quality, or should everyone be responsible for quality? When you create an organization that is chartered with knowledge management, funny things start to happen. People start thinking, ‘Well, that’s not my job, that’s their job.’”

Don’t Be A Stifler

Ideally, companies would like to predict with some precision the return on the codification and personalization strategies they use, to help them determine how to blend the two approaches in their regime. Unfortunately, calculating returns, even on formal knowledge-management initiatives, has proved difficult. CFO has published one means of measuring knowledge; using historical and projected earnings, balance-sheet composition, and standard return expectations, New York University finance professor Baruch Lev devised a knowledge- capital scoreboard featured in this magazine. Still, many companies struggle for a firm grasp on valuing the individual components of knowledge.

For each company that has attached dollar figures to its own knowledge-management effort–Chevron Corp. chairman and CEO Kenneth Derr calls managing knowledge a key to his company’s reducing operating costs by more than $2 billion per year–many more concerns have failed. “When you’re dealing with a manufacturing environment, and you’ve been able to save some money, you can always put some numbers to those savings,” observes Sieloff. “But what you don’t get out of that are the positive contributions made by knowledge management to the top line.”

For CFOs, of course, it’s tempting to dismiss any activity that can’t be measured. But almost everybody who has looked at knowledge management agrees this would be a mistake.

“If you look at the value of companies, there is a balance-sheet measure that CFOs basically own,” observes Chicago- based Andersen Consulting partner Richard J. Stuckey, head of the firm’s collaboration and knowledge- management practice. “But, typically, there is a huge gap between what’s on the balance sheet and the stock market’s valuation of the company”–the firm’s intellectual capital. That is what “knowledge management works on increasing.”

Hewlett-Packard’s Sieloff agrees. “One of the contributions a CFO can make is to really advocate and support the use of nonfinancial measures in this area. Because if it comes down to the idea that if you can’t measure it it must not be any good, then it’s going to kill off a lot of valuable activity,” he says. “While I doubt that CFOs are going to be the leaders in this area, they could easily be the stiflers of it, given that they often control the IT systems and the measurement systems.”

Despite the problems with measuring the impact of knowledge management, some experts say it can be done — to a degree. Hansen studied bids by a global consulting firm in 1998, and concluded that when partners selectively accessed critical documents from the firm’s knowledge database and solicited input from other partners, they enjoyed as much as a 40 percent higher chance of winning competitive bids, compared with partners who didn’t. In an analysis of product- development efforts at Hewlett- Packard in 1995 and 1996, Hansen found that engineers soliciting technical advice, software code, and hardware solutions from HP engineers in other divisions could cut time-to- market by 30 percent, from 14 months to 11 months.

In a world in which product life cycles are ever-shorter, such gains are nothing to sneeze at. In fact, knowledge-management practitioners say formal procedures for sharing expertise might be the only way companies can keep employees up to speed. With more workforces now resembling an amalgam of people thrown together by mergers, employees know less than ever who the experts are at the company, and how to reach them.

Of course, every company is engaged in some form of knowledge management, whether it knows it or not. It happens every time an employee feeds information into a database or pulls information out, and any time one employee talks from experience to another. The question for managers is whether the company has created a framework and culture that encourages systematic knowledge management.

At Ernst & Young, which feels it has done this, “we’ve changed the paradigm from an environment in which you really had to work very hard to understand what was done before, to an environment that is very information-rich,” observes Ralph Poole. The next challenge? Getting employees “to bring more understanding and depth to the solutions they create for clients.”

The Two Faces of Knowledge Management

How companies take different approaches to leveraging their expertise.

Codification Personalization
People- to-documents-to-people People- to-people
IT- intensive Seldom IT-intensive
Focused on explicit knowledge (facts, statistics, processes) Focused on tacit knowledge (understanding, insight)
Easy, instantaneous access Often conducted ad hoc as personal schedules permit
Model of information “reuse” drives revenues Customization model drives profit margins

Source: Morten Hansen, Harvard Business School