Knowledge Management: An Unnatural Act?

Getting workers to buy into knowledge management can be tough going, but benefits abound, particularly for CFOs.
Karen WintonOctober 1, 2002

Wanchai, a crowded inner-city area on Hong Kong island. Huddled around two formica-topped tables in a jam-packed local restaurant sits a group of young men dressed in ubiquitous, Giordano-style clothes: short sleeved shirts, jeans or chinos, and running shoes. They look like students, but the papers and manuals on the tables belie their profession: service engineers, listening in informal surroundings to their team leader, exchanging comments as they slurp ngai cha and bowls of congee for breakfast.

No, these are not members of an organization that is saving costs by making its employees work for their breakfast. Rather, meeting over breakfast is just one example of a concerted effort to spread information, an attempt to adhere to an organizationwide knowledge management strategy to better use employees’ capabilities and experiences, create efficiencies in business practices, and, if possible, generate more revenue and greater customer satisfaction.

The organization in question is Fuji Xerox in Hong Kong. It has roughly 200 service engineers working throughout the territory, and they are split into what it calls “empowered work groups.” Each group comprises up to ten service engineers. None of them has office space, and they move freely around their “patch” — a group of about 200 customers to whom they are responsible for servicing certain machines. The engineers receive calls from the Fuji Xerox call center during the day and, when they meet next morning, together decide when and how they will respond. As they deal with different customers, they build up a pattern of customer profiles and preferences. The more they meet, the more they share their individual knowledge of customers and the quirks of the machines they are responsible for fixing.

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The advantages to the organization may not be immediately obvious but there are three to note. First, Fuji Xerox has avoided the higher overheads associated with a traditional organizational pyramid that includes submanagers, assistant managers, managers, group heads, and so on. Second, it has bypassed that same hierarchy that slows down the transmission of decisions and decision making. Third, it is persuading — cynics might say coercing — its engineers to work together for the greater good of the work group and, ultimately, the entire organization.

Says Ramagopal Rao, managing director of Fuji Xerox in Hong Kong: “The engineers have a level of trust in each other because they are targeted, assessed, measured, and evaluated as a group. They have no choice but to rely on each other. That fosters an enormous amount of interaction, and it makes them share what they know,” he says. It also frees up the service managers to handle three or four such work groups. Under the more traditional structuring of Fuji Xerox’s sales force in Hong Kong, once a team reaches eight people it has to have a manager. In the service engineering division, there is one manager for every 30 people “without having an impact on the quality of what they do and how they do it,” says Rao.

Since the early 1990s, when companies began to question how to leverage one of their biggest assets — employees — knowledge management (KM) has developed from a theory preached by management consultants into a formalized discipline taught in university and practiced by thousands of companies worldwide. It has many definitions. Karl-Erik Sveiby, often described as one of KM’s founding fathers, says KM is the art of creating value from intangible assets. Cindy Johnson, director of the Office of Best Practices at U.S. digital manufacturer Texas Instruments, says it is about recognizing that companies compete based on the knowledge of their employees. Geoff Trotter, Ernst & Young Hong Kong’s director of knowledge, says simply in a client presentation that it is “the process of identifying and using knowledge to gain competitive advantage.”

However you define it, KM is booming. In a report published by U.S. technology research group IDC in 2000, KM services revenue was forecast to grow at a compound annual growth rate (CAGR) of 41 percent from 2000, resulting in a global market worth almost $13 billion by 2005. More staggering was the 129 percent CAGR report forecast for Asia, which was just getting to grips with KM solutions. Western Europe is now the leading market for KM outside the United States, but take-up in Taiwan and Korea, and now Hong Kong and Singapore, is continuing to drive KM’s growth in Asia. According to the IDC report, a move away from hierarchical business structures toward flatter organizations has pre-empted more knowledge sharing within Asian companies that are required to manage relationships worldwide.

One certain driver for continued growth is the fallout from corporate fraud in the United States. Calls for a new way of standardized accounting are giving rise to a demand for KM from managers looking at organizational strengths and values in terms of intangible assets, not just financial indicators. “Companies that perform well financially are likely also strong in the management of their intangible assets,” says Waltraut Ritter, director of research at advisory company Knowledge Enterprises in Hong Kong and Singapore, and chairperson of the Hong Kong Knowledge Management Society. “Normally, financially strong companies have a good company culture, good people, good management, and corporate governance. But it’s difficult for finance people to prove the link,” says Ritter.

And herein lies the problem for CFOs. As an intangible asset, knowledge is difficult to assess, and investing in it perhaps even more difficult to justify because no KM strategy comes with a cost-benefit analysis attached. If ROI is the first phrase a CFO starts to utter upon contemplating KM, then he or she is going to be disappointed. Better, perhaps, to repeat under the breath one of the principles for KM espoused by Tom Davenport, director of Accenture’s U.S.-based Institute for Strategic Change: “Knowledge management is expensive but then so is stupidity.”

Take professional services company Ernst & Young (E&Y) for example. Its KM business accounts for roughly 1 percent of the company’s global annual $9.8 billion revenue (for the year ending June 2001), according to Trotter in Hong Kong. This $98 million investment is not measurable. But he maintains that it has had a definitive impact on the company’s business performance worldwide: E&Y won 22 of the 26 Fortune 500 companies’ auditing contracts up for grabs in the United States in the 18 months up to June 2001, for example

Trotter brandishes a graph showing an index of the average total head count versus net fees earned in E&Y’s British audit business from 1996 to 2000; the gap between the two increased substantially. “We’ve increased head count steadily because we’re winning more and more business,” he says. “But the value of the business we’re winning is not in direct correlation with the increase in head count.” A graph of the same indices for E&Y’s U.S. operations shows a similar trend between head count growth and revenue growth. “We need more people onboard to fulfill the obligations to our clients. But we’re also generating more money,” says Trotter, with just a touch of self-satisfaction in his smile.

E&Y has a large and well-organized KM strategy operating under the formal umbrella of the Center for Business Knowledge (CBK), which launched in the U.S. in 1993, the U.K. in 1995, and Asia in 2001. The centers provide support for partners and auditors within the company’s global network. Employees can access help through a Lotus Notes platform that has everything from diary schedulers and E-mail through to databases, which hold human resources bulletins, policy manuals, and industry/client/account-specific content. The company also has a global intranet — the K Web — containing content related to the company as well as external content and research bought from providers such as Thomson Financial, Reuters Business Briefing, Standard & Poor’s, and The Economist Group. The databases are all searchable, just like any regular search engine.

The CBK in Hong Kong has a 16-strong team, and regionally there are 32 people working to embed knowledge principles in E&Y’s Asian operations. They work in general support roles like maintenance of the K Web and databases, and in more proactive positions, talking to people within E&Y, evangelizing and promulgating KM activity. They are part trainer, coaching personnel in knowledge sharing activities, and part researcher, responding to requests for intelligence about particular industries or countries and generating analysis for auditors pitching for a particular business or client.

Trotter says that where KM has made a big difference to E&Y is in the time it takes to put proposals together. Whereas four people used to spend one week producing a pursuit document (a “show-and-tell” credentials document to put in front of a target client), it now takes one person less than half a day to do the same thing. In a charge-by-the-hour environment, four people at 40 hours a week equals 160 hours, compared with one person at four hours — leaving three employees free to work on something else of revenue value to the firm.

The Works

The physical sharing of knowledge is enabled by technology. Without databases from which to extract information, and E-mail, an intranet, a portal, or a Web site to disseminate it widely, effective knowledge sharing, either between employees in the same office or managers of business units on opposite sides of the Pacific, would be virtually impossible.

The key is to set up an information infrastructure — a database and the ability to extract the right information to meet users’ needs — to enable what Tony Banham, marketing director for Oracle Systems in Hong Kong, describes as a “frictionless flow of information.” Most companies have this kind of technology platform in place, available to all competent users, even technophobic ones. But access may not be as fast or as good as it could be because it isn’t packaged in the relevant business context. Banham is on a mission to show senior executives in Hong Kong how to achieve this — to get the best business knowledge at their fingertips the moment they log on to their desktops each morning, wherever they are.

His solutions are based on what Oracle has to offer in the KM space: database and server applications like Financial Analyzer or the E-Business Suite, both of which incorporate different modules according to existing software infrastructure, implementation complexity, and the level of support required. “It doesn’t matter what organization you’re in, it needs the same things: the ability to store data, represent that data in a business manner, and mine that data,” says Banham, “and that’s covered by the database. You then need to extract the intelligence, analyze it, and get it out to the users, and that’s where application servers fit in. Together with the database they form the bottom line in data mining and interpretation.”

The idea is that strategy, operational intelligence, analysis, and the tools being used daily are presented in one single, controlled format personalized for the needs of particular users. Banham uses a simplistic example to illustrate how the knowledge and the technology come together. A CEO logs into his portal one morning and sees highlighted in red the fact that net monthly income is below target. With the stack of information built up on the database and application server architecture beneath the portal, the CEO knows about the shortfall immediately and doesn’t have to wait for a report to come in. The application allows him to drill down into the data by mouse-clicking on it to find out why.

The information coming up onscreen indicates that revenues are below target and margins lower than expected. The CEO calls the CFO. The CFO goes to his customized version of the portal, drills down into the available data, and finds that sales for product X are disappointing and distribution costs for product Y are high. He asks the vice president of sales to sort out the sales issue and the distribution manager to reduce distribution costs. “It’s a simplistic example, but with the right basis in fact, you can address and analyze the issues, take them up with the appropriate person, quickly come to actionable decisions to address the problems, and in so doing, generate quantifiable business improvements,” explains Banham.

This is what is happening at Pacific Century CyberWorks (PCCW), Hong Kong’s largest fixed-line telecommunication services provider. Following its US$38 billion purchase of Hongkong Telecom in 2000 and subsequent debt burden, PCCW has become notorious for business restructuring. So it’s not surprising to learn that one of the major reasons the company implemented Oracle Financial Analyzer (OFA) in June 2002 was because of the package’s ability to forecast scenarios in the event of a restructure.

The package has several large-scale benefits — it’s compatible with PCCW’s existing Oracle architecture, for example — but its real beauty is in its flexibility to work with a company in motion and extract different dimensions from the data stored in the database. PCCW comprises 300 companies and ten business units, big and small. Let’s say a director requests information on a potential restructure that involves ten companies within one business unit. In the past, to generate a forecast scenario, the data concerning these companies had to be extracted manually from the financial system on the Oracle mainframe. Now, all the relevant and up-to-date financial data for the companies is automatically extracted from the main platform into OFA, where finance teams get to analyze it.

Benson Tsang, group manager of PCCW’s Group Financial Accounts, says that because of the way OFA is set up, it allows greater financial analysis, enabling combined P&L and balance-sheet numbers for the companies in the forecast scenario. Tsang is delighted that commitments made to PCCW senior management when its approval was sought to implement OFA have been met, with the time taken to deliver monthly reports dropping from ten to seven days and the financial analysis becoming more detailed. At group finance level, Tsang and his finance colleagues in the business units have access to the reporting via a company intranet on their desktops. He expects electronic copies of the monthly reports to be available to senior management by mid-2002 following an upgrade to the completely E-based Oracle 11i, which is now under review.

At a cost of $1,495 per application user, OFA is not cheap. But Tsang says the amount saved by implementing the package is equal to three years’ worth of savings in monthly computer operations maintenance and hardware costs. And the 200 analysts and financial colleagues of Tsang’s who were trained to use OFA succumbed to the lure of being able to drill down into data to reveal specific cost centers rather than just the overview P&L and balance-sheet data. Tsang says that at first it was difficult for users to believe that OFA could provide such depth of data. “But we spent more time in planning and preparation to get key users to understand the power of this package. Our idea was that if they believed in it and were happily involved in its implementation, then they would use it. We prefer to make sure our people are comfortable before expecting them to share knowledge,” he says.

The Buy-In

Hubert Saint-Onge, a strategic capabilities practitioner and CEO of the Canada-based KM consultancy Konverge and Know, says that in sharing knowledge people are committing an unnatural act. But he agrees that altering work practices and environments or introducing relevant technology can infect even the most luddite employees with the enthusiasm to unload whatever is in their heads. “People can be driven to share knowledge by transforming the way they work,” he says. “They need to be able to use the available technology and expertise in the organization … and work in a way that allows what they are doing to be recorded for future use.”

Parkway Group Healthcare (PGH) in Singapore is undergoing an ambitious program to transform the way its employees work, by persuading them to share their enterprise knowledge between its three private hospitals. Users of the Brio Intelligence technology behind this process come from all aspects of the group’s operations: finance, marketing, management, nursing, and medical staff. The ultimate aim is to improve health care for the patients while also running the hospitals more efficiently.

Getting staff to buy in to sharing knowledge is proving the biggest challenge, says Troy Strike, health information manager of Casemix, the department within PGH that looks into funding allocation on the back of detailed information about patients and operational costs. The 15 current users of the software include several “knowledge champions,” some of them senior level IT-savvy doctors, whose buy-in was crucial for KM to be accepted within the medical community in the hospitals and not just seen as an arcane management tool. The champions’ job was to understand the information they received via the application so that they could then use it, and ultimately persuade others to use the same data interpretation tool.

The response has been mixed, says Strike. Management, fully aware of KM theory, understood the reasons and benefits of a strategic KM implementation, and doctors understood the cost benefits of being able to better manage patients and order perhaps generic and more cost-efficient drugs than they had in the past. But it’s been a slow road to get to that point. The first push of the KM program, a data warehouse, was implemented last year, and 18 months on, the second push to get people to extract data for themselves is taking a little longer than Strike would like. “We’ve had a pretty good response, but at the moment staff are happy just getting information from the champion users, the doctors, or me. They’re not so keen on what we have to offer for each of them to use,” he says.

The benefits of this KM strategy are, to say the least, intangible. Strike says there is more sharing of ideas between medical and administrative staff in areas where traditionally the twain never met — drug administration, for instance. His department’s hours spent attending to varied requests for information have been reduced by as much as 50 percent, and he is spending time on other revenue-generating projects rather than trying to extract information out of an unwieldy system. He remains vague on actual cost savings derived from the strategy, saying only that they would be an added benefit, if he could identify them.

At Jebsen & Co, one of Hong Kong’s oldest trading companies, managing director Helmuth Hennig and his management colleagues decided to implement a backbone enterprise resource planning (ERP) and database tool in January 2002. The core Oracle database replaces ten legacy systems, and all the data to be mined and interpreted sits on that database. Hennig identifies several positive indicators resulting from the company’s first steps towards KM. First, Jebsen has become faster and more accurate, a result borne out by a reduction in the number of credit notes being issued to customers. Second, there has been an improvement in accounts receivable. And third, staff morale and the ability of the organization to act cohesively have improved. In addition, accounting procedures for the company’s five divisions and 19 businesses within them have been standardized, and managers are now able to find real-time information regarding customers, stocks, and pricing via a company intranet, accessible to all.

“In the past every business was quite distinct. The group dealing with cars was one part of the business, the consumer people dealing with beverages was separate again,” says Hennig. “But when we decided to implement the ERP system, staff had to sit in rooms together and think about what colleagues did, ask themselves what they themselves did, could they bring that into one matrix, and if so, what would it look like? Would it work for everyone? All of a sudden the cross-company communication improved,” he says.

Like Strike in Singapore, Hennig’s biggest problem in Hong Kong was getting staff to buy into the system, and he admits that management underestimated the requirement, not only to explain to staff what was wanted but also what the system would do to them. Would it make them redundant? Would their job scope change? Would they lose the business they were responsible for? Consequently, more time than anticipated was spent in educating and training staff. As a result, the company’s internal training programs underwent a transition, targeting for the first time clerical staff as well as sales executives and managers. Teaching them what they needed to know to be proficient on the system and how they could further their expertise, and instilling knowledge in them, made them valuable — and loyal — to Jebsen.

“It did take convincing that there was a benefit for them personally, but now clerical staff see themselves on a path rather than in a dead-end job that could be done anywhere,” says Hennig.

KM may not offer CFOs an obvious path to ROI, but it probably offers an opportunity to transform or change an organization, which means it is better set up to operate in the 21st century’s so-called knowledge economy. Dee Hock, the founder and CEO of Visa USA and Visa International, believes that in five to ten years some organizations will disappear because they are not equipped to deal with the knowledge economy, in which everything is highly networked to technology and where business processes move ever faster. Knowledge management, however, could prove an effective strategy for CFOs bent on transforming and equipping their organizations to be more effective in this environment. Shame about the ROI.

Karen Winton is executive editor of eCFO and a senior writer at CFO Asia based in Hong Kong.

A Golden Argot

Like many business practices in the “knowledge economy,” knowledge management has its share of jargon. Here are the major terms and their simple interpretations.

  • Community of practice: organized groups of people who share common practices, interests or aims, irrespective of job titles and hierarchy.
  • Customer capital: the value of an organization’s relationships with its customers.
  • Data mining: a software application to analyze data in databases. Analysis can reveal trends and patterns and can be used to improve vital business processes.
  • Drilling down: being able to access increasingly detailed data, starting from a high level of a data hierarchy and working down through the data to the lowest level.
  • Explicit knowledge: knowledge expressed in words and numbers and shared in the form of data, scientific formulae, specifications, manuals, etc. The opposite of tacit knowledge.
  • Gatekeeper: individuals, units, or even objects that act as accepted channels used in the information seeking process. They often contribute to bridging cultures and value systems.
  • Intellectual capital: the sum of everything the people of an organization know — the human, structural and customer capital — which can be converted into value or captured and leveraged.
  • Knowledge base: an organized information structure, which aids the storage of intelligence in order to retrieve it to support a knowledge management strategy.
  • Knowledge repositories: collections of knowledge, the contents of which are characterized by best practice and have been organized in some way to aid their visualization, manipulation and navigation.
  • Knowledge worker: a participant in an economy where information and its manipulation are the commodity and the activity.
  • Structural capital: assets not directly related to the presence of employees, including databases, customer lists, manuals, trademarks and organizational structures.
  • Tacit knowledge: knowledge that is highly personal, not easily visible or expressible, and usually requires joint, shared activities in order to transmit it. It is the opposite of explicit knowledge.