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Knowledge ManagementKnowledge

ManagementDr. Randy M. KaplanDr. Randy M. Kaplan

Assessing the Value of KnowledgeAssessing the Value of Knowledge

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Assessing the Value of Knowledge


If we believe that knowledge represents an asset then we must have a way to assess that asset

This is especially true in the profit-making organizational sense where assets are considered a part of the organization’s value

If we believe that knowledge represents an asset then we must have a way to assess that asset

This is especially true in the profit-making organizational sense where assets are considered a part of the organization’s value

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A long standing problem with the valuation of knowledge is exactly how value is applied to a particular constellation of knowledge

Since knowledge is not tangible it becomes a difficult entity to value and yet …

It is surely the case that without intellectual capital an organization would not be profitable

A long standing problem with the valuation of knowledge is exactly how value is applied to a particular constellation of knowledge

Since knowledge is not tangible it becomes a difficult entity to value and yet …

It is surely the case that without intellectual capital an organization would not be profitable

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Financial Models

Provide a basis for a theory for an organization

Financial statements are the expression of the model

Only deals with the tangible assets of an organization

Financial Models

Provide a basis for a theory for an organization

Financial statements are the expression of the model

Only deals with the tangible assets of an organization

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A key aspect of being able to assess the value of knowledge in an organization is to be able to identify intellectual capital in an organization

One popular approach to improving the performance of an organization is called business process re-engineering (BPR)

BPR was famous for saying “its not the people stupid.”

A key aspect of being able to assess the value of knowledge in an organization is to be able to identify intellectual capital in an organization

One popular approach to improving the performance of an organization is called business process re-engineering (BPR)

BPR was famous for saying “its not the people stupid.”

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The originator of BPR believed that if you could discover the underlying processes of an organization and,

if you could make these processes more efficient (a process like debugging),

then it would result in an organzation with significantly better performance

The originator of BPR believed that if you could discover the underlying processes of an organization and,

if you could make these processes more efficient (a process like debugging),

then it would result in an organzation with significantly better performance

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An important aspect of BPR was that once you had the process, the people in particular roles could be interchanged

In other words, once you had the process the particular person offered no additional value to the process

An important aspect of BPR was that once you had the process, the people in particular roles could be interchanged

In other words, once you had the process the particular person offered no additional value to the process

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At the end of many BPR efforts it was found that organizational performance did not improve but actually became worse

10 years after BPR originated the originator discovered that people were in fact important to the process

At the end of many BPR efforts it was found that organizational performance did not improve but actually became worse

10 years after BPR originated the originator discovered that people were in fact important to the process

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With the general decline of the re-engineered organization their needed to be a new theory of organization that included intangibles

This new theory of organization, one based on Kaplan’s and Norton’s Balanced Score Card gave KM practitioners the opening they needed to bring knowledge into the organizational picture

With the general decline of the re-engineered organization their needed to be a new theory of organization that included intangibles

This new theory of organization, one based on Kaplan’s and Norton’s Balanced Score Card gave KM practitioners the opening they needed to bring knowledge into the organizational picture

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Balanced Score CardBalanced Score Card

www.balancedscorecard.orgwww.balancedscorecard.org

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A response to the weaknesses and vagueness of previous management approaches

A clear prescription of what companies should measure in order to balance the financial perspective

A response to the weaknesses and vagueness of previous management approaches

A clear prescription of what companies should measure in order to balance the financial perspective

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From Kaplan and Norton,

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

From Kaplan and Norton,

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

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Why is it about the Balanced Score Card that supports the idea of the valuation of knowledge?

If you consider the last part of the last sentence,

investment in customers, suppliers, employees, processes, technology, and innovation.

To invest in customers, suppliers and employers means to invest in knowing

Why is it about the Balanced Score Card that supports the idea of the valuation of knowledge?

If you consider the last part of the last sentence,

investment in customers, suppliers, employees, processes, technology, and innovation.

To invest in customers, suppliers and employers means to invest in knowing

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Knowledge-Based AssetsKnowledge-Based Assets

A theory of organization that takes knowledge into account

can focus on the ease with which knowledge can be converted into products and services

provide value to the customers

now, in the future

A theory of organization that takes knowledge into account

can focus on the ease with which knowledge can be converted into products and services

provide value to the customers

now, in the future

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Knowledge-Based AssetsKnowledge-Based Assets

Managing stakeholder relationships

to improve the flow of knowledge

to create knowledge-based assets

to produce new products and services

is a competence organizations must master

Managing stakeholder relationships

to improve the flow of knowledge

to create knowledge-based assets

to produce new products and services

is a competence organizations must master

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DefinitionsDefinitions

A. Asset

1. A useful or valuable quality, person, or thing; an advantage or a resource. 2. A valuable item that is owned. … 4. assets. a. Accounting. The entries on a balance sheet showing all properties tangible and intangible and claims against others that may be applied directly or indirectly to cover liabilities of a person or business

A. Asset

1. A useful or valuable quality, person, or thing; an advantage or a resource. 2. A valuable item that is owned. … 4. assets. a. Accounting. The entries on a balance sheet showing all properties tangible and intangible and claims against others that may be applied directly or indirectly to cover liabilities of a person or business

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Asset (cont.)

such as cash, stock, or goodwill

Asset (cont.)

such as cash, stock, or goodwill

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Intellectual or Knowledge-Based Asset

Anything valued without physical dimensions

Embedded in people

Derived from the processes, systems, and culture associated with an organization


Anything valued without physical dimensions

Embedded in people

Derived from the processes, systems, and culture associated with an organization

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Brands, individual knowledge, intellectual property, licenses, forms of organzational knowledge

databases

process know-how

relationships


Brands, individual knowledge, intellectual property, licenses, forms of organzational knowledge

databases

process know-how

relationships

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(Third Critical Concept) Capital

Wealth

in the form of money or property

used or accumulated in a business by a person, partnership, or corporation

Material wealth used or available for use in the production of more wealth


Wealth

in the form of money or property

used or accumulated in a business by a person, partnership, or corporation

Material wealth used or available for use in the production of more wealth

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Human resources considered in terms of their contributions to an economy

Accounting, the remaining assets of a business after all liabilities have been deducted; net worth


Human resources considered in terms of their contributions to an economy

Accounting, the remaining assets of a business after all liabilities have been deducted; net worth

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MetricsMetrics

In KM

Metrics are in ther experimental stage

here today, gone (or revised) tomorrow

Characteristic can be concerting for measurement traditionalists

Not enough is known to share emerging practices

In KM

Metrics are in ther experimental stage

here today, gone (or revised) tomorrow

Characteristic can be concerting for measurement traditionalists

Not enough is known to share emerging practices

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MetricsMetrics

Distinction between measurement and valuation not well understood by those who approach knowledge management from the human resources or information technology perspective

Distinction between measurement and valuation not well understood by those who approach knowledge management from the human resources or information technology perspective

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MetricsMetrics

Same is not true for -

financial analysts

intellectual property attorneys

economists

accountants

Same is not true for -

financial analysts

intellectual property attorneys

economists

accountants

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MetricsMetrics

For this group -

Measurement monitors activity

Valuation places a monetary value on expected cash flow from an asset or a group of assets or which is expected to exist with some degree of probability

For this group -

Measurement monitors activity

Valuation places a monetary value on expected cash flow from an asset or a group of assets or which is expected to exist with some degree of probability

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MetricsMetrics

Measurement

Seeks to describe a particular organizational state by quantifying its inputs and outputs

Measurement has dominated the knowledge management assessment discussion to date

Measurement

Seeks to describe a particular organizational state by quantifying its inputs and outputs

Measurement has dominated the knowledge management assessment discussion to date

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MetricsMetrics

Valuation has risen

Because executives need to understand how KM translated into value for the organization

(otherwise why should the executive invest in KM?)

Valuation has risen

Because executives need to understand how KM translated into value for the organization

(otherwise why should the executive invest in KM?)

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MetricsMetrics

Measurement

Good at understanding the relationship between activity and operational outcomes

For example, effectiveness and efficiency

It is not as good at relating effectiveness to and efficiency to financial outcomes

Measurement

Good at understanding the relationship between activity and operational outcomes

For example, effectiveness and efficiency

It is not as good at relating effectiveness to and efficiency to financial outcomes

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MetricsMetrics

For a true science of KM measurement to develop the fields of valuation andf measurement must be combined to create a brand new discipline

For a true science of KM measurement to develop the fields of valuation andf measurement must be combined to create a brand new discipline

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KM Metrics TodayKM Metrics Today

Metrics that are in use today -

Attempt to complete the picture of how well an organization builds, replenishes, or depletes its total asset base

Some of these metrics are familiar

% of sales from new products

number of college graduates

Metrics that are in use today -

Attempt to complete the picture of how well an organization builds, replenishes, or depletes its total asset base

Some of these metrics are familiar

% of sales from new products

number of college graduates

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Familiar MetricsFamiliar Metrics

time to market

employee turnover

time to market

employee turnover

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Unfamiliar MetricsUnfamiliar Metrics

Others try to establish a new way to understand how well an organization creates and maintains the right knowledge-based assets

return on people, rookie ratio, loyal customer percentage, number of ideas generated

Others try to establish a new way to understand how well an organization creates and maintains the right knowledge-based assets

return on people, rookie ratio, loyal customer percentage, number of ideas generated

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Metrics collected from data are so-called hard metrics

Qualitative or so-called soft metrics have also begun to creep in as measurement criteria

Soft metrics have precedent in customer and employee satisfaction surveys

Metrics collected from data are so-called hard metrics

Qualitative or so-called soft metrics have also begun to creep in as measurement criteria

Soft metrics have precedent in customer and employee satisfaction surveys

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KM Movement has extended the use of soft measures into such areas as -

organizational capability, including,

innovation potential

knowledge absorption capacity

KM Movement has extended the use of soft measures into such areas as -

organizational capability, including,

innovation potential

knowledge absorption capacity

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KM Movement also pushing limits of hard metrics

For example -

Determine the possibility of evaluating areas such as return on knowledge-based assets

KM Movement also pushing limits of hard metrics

For example -

Determine the possibility of evaluating areas such as return on knowledge-based assets

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Avery DennisonAvery Dennison

US-based adhesives and office supply products manufacturer

Metrics

Cognitive capability

Human capital motivation

Being used to determine the possibility of evaluating areas such as the the return on knowledge-based assets

wledge

US-based adhesives and office supply products manufacturer

Metrics

Cognitive capability

Human capital motivation

Being used to determine the possibility of evaluating areas such as the the return on knowledge-based assets

wledge 37

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Metrics are communicated by combining soft metrics with hard metrics

These are presented visually in the form of spider maps

Mapping each project lets the organization create a comprehensive view of its entire development effort

Metrics are communicated by combining soft metrics with hard metrics

These are presented visually in the form of spider maps

Mapping each project lets the organization create a comprehensive view of its entire development effort

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Spider MapSpider Map

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In viewing projects in this way, overall strategic fit can be maximized

Strengths and weaknesses in its stock of knowledge-based assets can be uncovered

In viewing projects in this way, overall strategic fit can be maximized

Strengths and weaknesses in its stock of knowledge-based assets can be uncovered

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Economist’s ViewEconomist’s View

Knowledge-Based Assets

If you go to a toy store to buy a board game for your child, you will most likely find your eyes glazing over as you scan a toy shelf loaded with similar board games within a fairly narrow price range

Knowledge-Based Assets

If you go to a toy store to buy a board game for your child, you will most likely find your eyes glazing over as you scan a toy shelf loaded with similar board games within a fairly narrow price range

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Comparing Games

Trying to pick a game involves running through a series of questions such as:

How long will my child be interested in this game?

How many other members of this family can play this game too?

Comparing Games

Trying to pick a game involves running through a series of questions such as:

How long will my child be interested in this game?

How many other members of this family can play this game too?

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Comparing Games

Is this game more interesting than the game next to it?

At some pointyou make a decision about this game or the next game

Comparing Games

Is this game more interesting than the game next to it?

At some pointyou make a decision about this game or the next game

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Economist’s ask similar questions

Their perspective is wider

How did the board game get to the shelf in this store?

Why did the company choose to produce this board game?


Their perspective is wider

How did the board game get to the shelf in this store?

Why did the company choose to produce this board game?

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Why did other companies choose to compete by offering other games on the shelf?

Why does it carry this price?

The answers to these questions help economists understand how people make choices


Why did other companies choose to compete by offering other games on the shelf?

Why does it carry this price?

The answers to these questions help economists understand how people make choices

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One of the largest considerations when asking these kinds of questions about knowledge-based assets as opposed to tangible assets is the creativity that must be used to find benchmarks

A computer chip is a kind of knowledge-based asset

If the computer chip reduces the cost of computing ...

One of the largest considerations when asking these kinds of questions about knowledge-based assets as opposed to tangible assets is the creativity that must be used to find benchmarks

A computer chip is a kind of knowledge-based asset

If the computer chip reduces the cost of computing ...

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If the computer chip reduces the cost of computing …

… benchmarks are hard to come by

The market for such an invention is harder to define

Comparables are harder to find

If the computer chip reduces the cost of computing …

… benchmarks are hard to come by

The market for such an invention is harder to define

Comparables are harder to find

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Accountant’s ViewAccountant’s View

Valuation does not present a problem when,

an intellectual asset has been ‘bounded’ by a copyright, trademark, patent, or boundary

Valuation does not present a problem when,

an intellectual asset has been ‘bounded’ by a copyright, trademark, patent, or boundary

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Valuation is more complicated when a boundary has not been as well delineated as in cases like,

workforce

company culture

business process know how

Valuation is more complicated when a boundary has not been as well delineated as in cases like,

workforce

company culture

business process know how

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This is not because we don’t have the valuation techniques

It is because the quality of data for ill-defined assets makes valuation much more suspect

Improving the quality of the input data is a very complex task

This is not because we don’t have the valuation techniques

It is because the quality of data for ill-defined assets makes valuation much more suspect

Improving the quality of the input data is a very complex task

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Robust markets for certain types of intellectual assets do not exist

Lack of a solid foundation for setting a price

Robust markets for certain types of intellectual assets do not exist

Lack of a solid foundation for setting a price

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For intellectual assets, performance metrics that monitor how management actions affect level, direction, and momentum are currently the best way to understand how intellectual assets impact business performance

Making a definitive link to business performance - the value link is challenging

For intellectual assets, performance metrics that monitor how management actions affect level, direction, and momentum are currently the best way to understand how intellectual assets impact business performance

Making a definitive link to business performance - the value link is challenging

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A problem with data collection

Not enough organizations have been collecting sufficient information for

long enough

on a consistent basis

to perform vigorous analysis to determine which measures link to value creation

A problem with data collection

Not enough organizations have been collecting sufficient information for

long enough

on a consistent basis

to perform vigorous analysis to determine which measures link to value creation

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Three basic approaches are used to value assets

cost, either historic or replacement

market price, the price at which an asset is traded

economic benefit, reflecting the revenues, costs and risks associated with commercializing an asset

Three basic approaches are used to value assets

cost, either historic or replacement

market price, the price at which an asset is traded

economic benefit, reflecting the revenues, costs and risks associated with commercializing an asset

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BrandsBrands

Increasingly important part of a company’s asset base

Vital component of the company’s intellectual capital

A brand is a relationship between the company and its stakeholders

Increasingly important part of a company’s asset base

Vital component of the company’s intellectual capital

A brand is a relationship between the company and its stakeholders

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BrandsBrands

The relationship is built on a foundation of -

perceived and actual

value of the company’s goods and services

cemented by effective communications

The relationship is built on a foundation of -

perceived and actual

value of the company’s goods and services

cemented by effective communications

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BrandsBrands

Financial valuation of brands is important

draws linkages between brand performance and its impact on long-term financial results

Without these results -

Decision makers can’t make decisions about brands (decisions about investment)

Financial valuation of brands is important

draws linkages between brand performance and its impact on long-term financial results

Without these results -

Decision makers can’t make decisions about brands (decisions about investment)

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BrandsBrands

Economic Benefit Approach to the valuation of brands

important advantage

offers brand owner a measurement

ongoing management mechanism

consider the brand on a par with other long term assets

Economic Benefit Approach to the valuation of brands

important advantage

offers brand owner a measurement

ongoing management mechanism

consider the brand on a par with other long term assets

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Capital ValueCapital Value

The Capital Value of any business can be represented by the equation -

Cci + Vci = Cvb, where,

Cci -> value of capital currently invested in the business

Vci -> value creation expected from the invested capital

Cvb -> capital value of business

The Capital Value of any business can be represented by the equation -

Cci + Vci = Cvb, where,

Cci -> value of capital currently invested in the business

Vci -> value creation expected from the invested capital

Cvb -> capital value of business

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BrandsBrands

Brands are part of the expected value creation (Vci)

Economic benefit of a brand

Enhanced economic earnings

More secure economic earnings

Both of the above

Brands are part of the expected value creation (Vci)

Economic benefit of a brand

Enhanced economic earnings

More secure economic earnings

Both of the above

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MeasuresMeasures

Examples of Measures to Evaluate Intellectual CapitalExamples of Measures to Evaluate Intellectual Capital

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ExamplesExamples

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ExamplesExamples

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