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Valuing The Knowledge Management Function

Heather A. Smith School of Business Queen’s University Dr. James D. McKeen School of Business Queen’s University Queen's University at Kingston, Ontario May, 2003

Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

Abstract

Over the last decade, there has been a growing recognition that intangible corporate assets have become the most valuable and fastest growing part of our economy. Today, it is clear that intellectual assets and their effective management may in fact, be the only form of sustainable competitive advantage (CMA, 2000). Thus, many companies want to increase their measurement of non-financial performance because it is considered strategic to overall firm performance (Bontis, 2000). Unfortunately, our awareness of and interest in the measurement of how well organizations are doing in this area far outstrips the practice. Practitioners and academics alike have expressed both frustration and dissatisfaction with the current state of our ability to measure almost any sort of intangible (Bontis, 2000). As a result, today’s knowledge managers are struggling to find ways to help their organizations understand and identify the true contribution of knowledge and other intellectual assets to a firm’s success. To help make sense of the current state of both the theory and the practice of valuing the impact of knowledge management, the authors convened a focus group of knowledge managers from a wide variety of firms including: consulting, telecommunications, finance, healthcare, manufacturing and government. Members were asked to describe their problems with intellectual capital measurement and to discuss what metrics they use in their own organizations to monitor and document the impact of knowledge management. The findings of the focus group have been combined with a thorough review of the current academic and practitioner literature to provide a broad overview of the state of our understanding of knowledge and the knowledge management function in organizations.


While the importance of intellectual capital and its management to the organization is not really a new phenomenon, our awareness of its value has grown substantially in recent years. Over the last decade, there has been a growing recognition that these types of intangible corporate assets have become the most valuable and fastest growing part of our economy. Whereas in 1982, tangible assets represented 62% of a company’s market value, by 1992 this figure had dropped to 38% (Dzinkowski, 2000). Surveys of top US and Canadian firms support this statistic. One showed that between 50 and 90% of the value a firm creates comes not from management of traditional assets, but from the management of intellectual capital (Hope and Hope, 1997). Today, it is clear that intellectual assets and their effective management may in fact, be the only form of sustainable competitive advantage (CMA, 2000). Thus, many companies want to increase their measurement of non-financial performance because it is considered strategic to overall firm performance (Bontis, 2000).

Unfortunately, our awareness of and interest in the measurement of how well organizations are doing in this area far outstrips the practice. Practitioners and academics alike have expressed both frustration and dissatisfaction with the current state of our ability to measure almost any sort of intangible (Bontis, 2000). This is coupled with the fact that there is wide recognition of the limitations of our current cost accounting system to capture actual firm performance (Tanazsi and Duffy, 2000). As a result, today’s knowledge managers are struggling to find ways to help their organizations understand and identify the true contribution of knowledge and other intellectual assets to a firm’s success. Since valuing intellectual capital is a very new field, both the theories and practices involved are still highly experimental (Stewart, 1997). Nevertheless, today’s dynamic business climate means knowledge managers must learn about what is being done in this area so they can begin to help their organizations take advantage of this important form of capital. To help make sense of the current state of both the theory and the practice of valuing the impact of knowledge management, the authors convened a focus group of knowledge managers from a wide variety of firms including: consulting, telecommunications, finance, healthcare, manufacturing and government. Members were asked to describe their problems with intellectual capital measurement and to discuss what metrics they use in their own organizations to monitor and document the impact of knowledge management. They were given the following questions to guide them in their presentations to the group: 1. What initiatives have you undertaken at your organization to value knowledge management and intellectual capital? At what level do they apply? What success have you had with them? Are these initiatives generally applicable anywhere across the organization? 2. How do you use anecdotal information to support the value of knowledge management? Has this been successful? Are there places where this approach does not work very effectively? 3. How would you describe your general approach towards valuing knowledge and its management? Do you see knowledge valuation transactionally -- as part of “doing business” on a project-by-project base? Or, as part of creating a “learning organization”? Are there other views/approaches that you use? Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

4. What experiences have been particularly effective in assessing the value of knowledge? Can they be combined into a more general strategy? 5. How urgent is valuing knowledge within your organization? What kind of pressure is being brought to bear by senior management? 6. What additional skills/competencies are required to measure knowledge effectively? The findings of the focus group have been combined with a thorough review of the current academic and practitioner literature to provide a broad overview of the state of our understanding of how to value knowledge and the knowledge management function in organizations. Many writers on this subject have noted that we are still at a very preliminary stage of maturity with these types of measures (CPRI, 1996; Bontis, 2000). Therefore, rather than review in detail the existing measures which have been proposed for intellectual capital 1, this paper tries to establish a framework of understanding for practising knowledge managers within which they themselves can experiment. It first looks at the current state of our measurement relating to intellectual capital and its management, identifying some of the problems and challenges which exist at present. This is followed by a section which describes how some people are trying to reconceputalize intellectual capital and its value so that better measures can be developed. The remaining portion of the paper looks at measurement as practised by today’s knowledge managers. It examines the challenges they face and the measures which they are currently using. It concludes with what they have learned to date about valuation in knowledge management.

The Value of Intellectual Capital and its Management: The Current Situation As we have noted above, researchers are increasingly recognizing that intellectual capital and its effective management is a growing portion of a company’s overall value. Studies have pointed out, that in service companies especially, market value far outstrips book value (Hope and Hope, 1997). Over the last 40 years, Davis and Meyer (2000) explain that value has been migrating towards intangibles in a series of waves. The most recent wave is the rise of human and intellectual capital. The importance of these forms of capital is not the latest management fad, notes the Canadian Institute of Chartered Accountant (CICA). It s Canadian Performance Reporting Initiative (CPRI) begun in 1994 is actively looking for ways to measure such intangibles as intellectual capital in organizations, recognizing that “the current accounting model does not adequately deal with intellectual ca pital”. In fact, focus group members called the growing portion of value not covered by current accounting measures “the hidden balance sheet”. Like the largest portion of an iceberg, this asset and its impact on financial performance sits hidden from view. Today’s financially-oriented accounting systems therefore present an increasingly distorted picture of a company’s true value. Furthermore, traditional financial and physical capital measures tend to present a picture of performance after it has occurred. This has been called “managing by looking in a rearview 1

There are several good papers which do this, notably Bontis (2000) and Tanaszi And Duffy (2000). Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

mirror” (Davis and Meyer, 2000). Measures of intellectual capital, on the other hand, documenting such things as the knowledge, processes, customers and innovations would (if we had them) measure the potential of a company to perform in the future. Thus, some companies, notably those in Scandinavia, have begun to provide supplementary reports to their regular financial statements which attempt to document how well companies are doing in these areas (e.g., Skandia). However, there is still a long way to go before this becomes an accepted practice in most companies. The CICA believes that, at present there is not a good enough base of understanding to set any kind of standards for reporting on intellectual capital (Anon., 1999). A review of the current situation in measuring intellectual capital reveals a huge amount of variation in current corporate practices and three significant problems. First, the field has a serious problem with terminology. Intellectual capital is frequently confused with knowledge assets, human capital, intellectual property, customer capital, and structural capital, to name just a few types of intangible assets. Similarly, the measures proposed by the major proponents of intellectual capital measurement frequently overlap and this can be highly confusing for anyone trying to get a good grasp of this issue. Second, the available measures cover several levels of analysis. Some specialists propose metrics at a task or individual level. Others focus on organization-wide types of measures. Clearly vastly different types of value will be reflected in such measures. And third, there is a huge selection of measures from which to choose. While some have tried to boil these down into a single index of value, this has not as yet been successful (Bontis, 2000). Because of these difficulties, to create a framework within which companies can develop measures of intellectual capital and its impact, it is first necessary to establish a common foundation of understanding in several areas: •

Terminology. It is generally agreed on by academics that intellectual capital consists of at least three separate forms of organizational assets (Stewart, 1997): 1. Human capital – the skills, tacit knowledge, talents and capabilities of the individuals associated with an organization. 2. Structural capital – the processes and packages which allow human capital to be used effectively to create value. This includes the information systems and the management competencies which leverage human capital. 3. Customer capital – the value of an organization’s relationships with the people with whom it does business. Some people broaden this concept to include all of the firms with which a company does business and call it relationship capital (Vanburen, 1999) However, in organizations, knowledge and knowledge management are usually the terms used to describe what a firm knows in these areas and how stocks of its intellectual capital are managed to produce value for the firm. Thus, this paper uses knowledge and knowledge management to refer to how organizations actually operationalize the aspects of intellectual capital which are most important to them.

•

The value creation proposition. The measurement of intellectual capital rests on three basic propositions about how organizations derive value: Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

1. Value creation comes from people. 2. Ideas are the source of competitiveness 3. Corporate growth is derived from skills transfer (Dzinkowski, 1999). •

Types of Measures. There are essentially two types of measures in use: those that measure the stocks of intellectual capital/ knowledge and those which measure its effectiveness in delivering value (VanBuren, 1999). The first set of measures can range from simple counts of what is available (e.g., the number of professionals) to an assessment of the monetary value of a firm’s intellectual capital (e.g., market to book value ratio). The second set of measures looks at the processes by which intellectual capital is managed – both how stocks increase or decrease and their impact on performance (financial and other). A complete list of current measures of intellectual capital is given in Appendix A.

•

Impact on financial performance. Financial performance measures how much value an organization has realized in the past. Measures of intellectual capital / knowledge management focus on the potential for value creation (CPRI). Given our understanding of where organizational value comes from, there should be a link between these two types of measures. At present this link has not yet been articulated and its lack is a major limiting factor in moving measurement of intellectual capital forward. For example, there has been little connection between Skandia’s efforts to measure intellectual capital and its success. Skandia has consistently underperformed relative to its peers in Europe (Strassmann, 2000). Recently, however, a study by Ernst and Young has found a strong correlation between a company’s fair market value and eleven measures of intellectual capital (see Appendix B). If these results can be validated and replicated, it will be a major breakthrough in our understanding of how intellectual capital measures relate to financial performance.

•

Timeframe. As Figure 2 illustrates, to understand the role of intellectual capital in the organization, we must understand how it flows over time. Financial measures provide an historical focus. Human, customer and process capital measures provide a current day focus on the capabilities of the organization which, it is expected, will lead to future performance. Some practitioners (e.g., Skandia) suggest that companies also need measures which will indicate how well they are renewing and developing their stocks of intellectual capital to provide a picture of future value. Thus, they feel that a focus on measures which capture innovation and change are also required. It is important to recognize that there is no clear time linkage established between these three types of performance. This makes articulation of the value of intellectual capital especially tricky because cause and effect cannot be clearly established.


Figure 1. Intellectual Capital has a Different Temporal Focus than Traditional Forms of Capital (after Edvinsson & Malone, 1997) With these fundamentals in place, it is now possible to look at the work that is currently being done to improve our understanding of how intellectual capital creates value.

Reconceputalizing Intellectual Capital Measurement There are many initiatives underway to explore and rethink our understanding of intellectual capital so that we can better determine how to value it. One of the most prominent is the Canadian Performance Reporting Initiative (CPRI) sponsored by the CICA. This project suggests that intellectual capital really acts as a value creating platform for an organization. As such, it should be measured and reported on separately from traditional financial performance measures which document value realization. Their report suggests that measuring the performance of this platform should consist of four components: 1.

2.

Value stream modeling – in order to realize value, companies need to understand what aspects of intellectual capital contribute to performance and what factors can enhance or improve them. This could be different for different value streams and in different businesses. A value creation realization formula – when a value stream is clearly understood, companies then need to determine what kind of value-creating platform will support each portion of the value stream. This should include a deeper understanding of the Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

3. 4.

structural factors which will create the intellectual capital needed and a plan for how they should be developed and implemented. Value creation capacity -- the organization then needs to develop the ability to deliver a value creation platform. This includes both having the right people in place and having the right processes available to deliver what is needed when it is needed. Value c reation for key stakeholders – the value created must also be evaluated and assessed from the perspective of the different stakeholders of the company, notably its customers and shareholders. The concept of stakeholder value could also include a company’s suppliers, employees and the broader community in which the firm operates. This component of measurement emphasizes that ‘value’ has a perceptual facet as well as an empirical facet.

If these four components of value are taken into account for each value stream, a company will have a much clearer understanding of how and why different measures of intellectual capital are important and the ways in which they contribute to value realization in a firm. The CPRI framework reinforces two points made by members of the focus group about knowledge management in organizations. First, they noted that knowledge management should not be considered an end in itself but rather a means to an end, i.e., value realization. All too often, attempts are made to measure or assess the impact of knowledge management itself, rather than to see it as part of the overall process of value creation and realization. This point is echoed by a GartnerGroup report (2000) which states: “a KM program can rarely be viewed as having its ‘own’ benefits; instead, KM benefits are achieved when linked to a specific business initiative that clearly provides specific benefits or value to the business.” Second, focus group members stated that they had found that value is often perceptual rather than factual. Their experience has been that different measures must be used for different stakeholders. For example, what a customer perceives as value is not necessarily what a supplier or an employee perceives as value, yet each are important. Traditionally, companies looked primarily at market value and secondarily at customer value (i.e., customer satisfaction). Other forms of value were perceived as less important. However, this is changing in a variety of ways. For example, today, a company’s ability to leverage and manage its relationships with suppliers, partners, competitors and even governments is coming to be seen as having an impact on firm performance (Knight, 1999). And the value a company creates for the community in which it operates can be critical for firms wishing to proceed with development and/or expansion plans. This new emphasis on value underscores the fact that managers must work to better understand the linkages between intellectual capital and its management and the value streams of their firm. Making these explicit will go a long way towards demonstrating their value and their impact on performance to senior managers -- even before new measures are developed and put in place. Another perspective is presented by Knight (1999) who looks at the factors contributing to a firm’s overall performance. He suggests using a three level framework for measuring performance in a knowledge-based organization, based on Kaplan and Norton’s balanced scorecard: Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

Level 1: Market Value – the stock price of an organization which represents the stockholders’ implicit belief in the future earnings potential of the firm. Level 2: The Virtuous Cycle – the factors which lead to increased market value (i.e., human, structural, external (relationship) capital and financial performance) which together form a positive feedback loop leading to further organizational value and growth. Level 3: Performance Measurement -- each factor in the virtuous cycle must be measured in a balanced fashion. This includes an evaluation of four sets of contrasting metrics which assess: • • • •

Control and Motivation Short-term and Long-term Goals Internal and External Emphasis Leading and Lagging Indicators

While not as complete as the CICA framework, this perspective makes clear that different measures of performance are appropriate for different levels of scrutiny – the market, senior management, and operational management, and links them in ways that show how they are interconnected. It also reinforces the need for balance in measurement. Focus group members emphasized that “you get what you measure for”. Therefore, a KM measurement program must be designed to address the dynamics at work in organizations even if they appear to be inconsistent. A third approach to valuing knowledge management is presented by VanBuren (1999). He suggests that a firm’s knowledge management function is key to turning its stocks of intellectual capital into value. In other words: INTELLECTUAL CAPITAL STOCKS + KNOWLEDGE MANAGEMENT = IMPROVED FINANCIAL PERFORMANCE + INCREASED INTELLECTUAL CAPITAL STOCKS

This perspective emphasizes the importance of quantifying intellectual capital stocks (i.e., human capital, customer capital and process capital) and understanding whether they are increasing or decreasing. It also presupposes that it is knowledge management which translates these stocks into value. Knowledge management is broken down into processes and enablers. KM processes are activities or initiatives which define, create, capture, share, or use intellectual capital. KM enablers include: leadership; structure; culture; technology and tools; rewards and recognition; measurement; knowledge, skills, abilities and competencies; and management. Together, processes and enablers form a matrix which can help firms identify and locate the specific activities which they need to effectively manage their intellectual capital. While this matrix does not in itself represent a measurement model, it does help articulate the linkages between intellectual capital and its management which is a critical step in measurement.


One of the strengths of the Van Buren model is that it drills down into the factors which translate intellectual capital into performance, i.e., knowledge management enablers. For example, culture is a key enabler which is often ignored in measurement because of its qualitative nature. However, Kotter and Heskett’s (1992) research shows that there is a strong correlation between certain elements of culture and firm performance. This research examined both the strength of a company’s culture, and how it valued stockholders, customers, employees, and leadership and change. It found that companies which are among the “100 Best Companies to Work For” significantly outperform the 3,000 largest companies in the U.S. Similarly, automotive firms which have innovative labor/management relations are significantly more productive than more traditional companies. This research also shows that good performance is strongly correlated with good human relations practices. In short, companies with a performance-enhancing culture significantly outperform those without in such quantitative measures as revenue growth, employment growth, stock price growth and net income growth. This research demonstrates the importance of an innovative culture as well as the need to balance different types of stakeholder value. These differing approaches to assessing intellectual capital and its management show that progress is being made in our understanding of how value is created in organizations. Nevertheless, there is still a long way to go before a complete set of measures and standards is available for practitioners (Anon, 1999; Van Buren, 1999). In fact, as the next section shows, there is a significant gap between our intellectual understanding of intellectual capital and its management and practitioners’ experiences of measuring value. To narrow this gap, more work needs to be done in a number of areas. First, there needs to be standard nomenclature so that when measures are created, they refer to the same things. At present, there is a considerable amount of overlap between many of the terms in use (e.g., knowledge, intellectual capital, human capital) and this hampers the development and diffusion of effective measures. Second, it is clear that there is a need for tools to assist measurement. At present, most of the focus group companies use home grown techniques and methods for measurement. Third, there is a need for more research like Kotter and Heskett’s to clarify the linkages between KM enablers and firm performance and then to develop instruments which organizations can use to assess thmselves in these areas. As a result, KM practitioners are faced with some enormous immediate challenges in articulating the value the KM function brings to their organizations. Most are still “flying by the seat of their pants” in this area and approaching metrics from widely differing points of view as the next section shows.

Knowledge Measurement in Practice 1

Today’s knowledge managers know all about the gaps in current measurement practices because they confront them on a regular basis. In today’s business climate, it is not enough merely to theoretically justify the need for knowledge management; knowledge managers must also be able to demonstrate – in some way – the impact of their function on the organization’s performance. All too often, while senior managers understand conceptually about the importance of intellectual capital, when Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

it comes to making investments in the tools, practices and processes to develop, support and maintain it, knowledge management gets relegated to the dreaded ‘overhead’ category. Thus, knowledge managers are continually under pressure to show, in a meaningful way, how their work contributes to the company’s ability to leverage its assets. 2 While focus group members agreed that standard measures of intellectual capital would be ideal, they also felt that no single metric would work in all circumstances. In practice, the impact of knowledge management must be measured by a combination of qualitative, quantitative and financial measures. Each type has its place and its particular strengths and weaknesses. However, they agreed that to be useful, a knowledge metric should ha ve two general characteristics: •

It should be meaningful. For a KM project to be successful, it must result in change “in some meaningful way” (GartnerGroup, 2000). Abstruse measures, no matter how accurate, will be given short-shrift by busy executives.

•

It should be linked to the goals of the company. As one focus group member explained in an internal memo, a KM program rarely has benefits of its own. Rather, benefits result when “linked to the performance of the business process or operation that is being energized by the knowledge management capabilities.”

The GartnerGroup (2000) points out that KM value is demonstrable at three different levels in the organization: job effectiveness; enterprise effectiveness; and support of strategic direction. Benefits range from tactical (e.g., extending KM to customers) to strategic (e.g., facilitating cross-enterprise collaboration). Initially, most knowledge managers emphasize tactical benefits, such as productivity and cost savings because their programs are aimed at facilitating the effectiveness of individuals. However, as KM programs become more widespread, knowledge managers will have to seek broader benefits demonstrable over longer periods of time (see Figure 2).


Figure 2. Areas and Types of KM Value (after GartnerGroup, 2000) Currently, focus group members use a variety of measures to demonstrate the effectiveness of their KM programs to senior management, although most express some dissatisfaction with the overall quality of their measures. These have been grouped into five categories: 1.

Anecdotal Evidence. Probably the most powerful means of demonstrating the impact of KM according to group members is through stories of how people have benefited from it. As one focus group member put it, “A story of how our KM program made the company more attractive to a new recruit or of how knowledge contributed to the success of a project makes the impact of KM come alive to our senior management.” This manager engages in what she calls “serious anecdote management”. She advertises for success stories and rewards people who send them in. Stories are then categorized so they can be used when needed. The benefits achieved are also quantified and added together. When compared to the overall KM budget, a return on investment can then be calculated.

2.

Perceptual Measures. Many focus group members use both formal and informal means of monitoring the impact of their KM program. Informally, favorable comments are collected and internal client feedback is solicited. More formally, some organizations conduct customer satisfaction surveys. However, they noted that surveys can sometimes be frustrating. Once KM practices are put in place, others tend to take them for-granted and consider knowledge tools, intellectual capital, and data bases as part of the regular environment of the firm. “It’s only when


we ask, ‘if we took KM away would you mind?’ that we get a very strong positive response to what we are doing”, remarked one manager. 3.

Financial Metrics. Several focus group members take a purely financial approach to valuing knowledge management. One company has created a contribution template which asks users to track and record the value they have received from knowledge bases. They are asked to quantify time savings, cost, and cycle time reductions (both how much and in what ways). Other focus group members have tried to ask their internal clients how much they would pay for the value they receive from the KM group. This approach, labeled the “tin cup” method by the focus group, was deemed unsatisfactory because it led to a considerable amount of micro management of the KM group by other powerful groups in the organization. Charging back the cost of some services (e.g., library research) is an effective way of demonstrating some value, but only at a transactional level. As one member stated, “Senior management also needs to accept that KM will demonstrate strategic value over time.”

4.

Usage. Another common way of measuring value is to consider how people are making use of company knowledge bases. For example, one organization counts the number of submissions to its data bases, the number of times users sign on to knowledge systems, and even tracks what users do while in the system. Another tracks how many contributions are downloaded and how users rate the contributions.

5.

Process Improvements. More complex assessments are also used to look at how KM contributes to different processes. Some companies track the impact of KM on improving such things as time to market, innovation, learning agility, client satisfaction and consistency on a particular process. This is how managers are beginning to address the value of knowledge management at higher levels in the organization. By linking KM to specific processes, they find it easier to uncover direct performance impacts. Thus for a particular process, one company has computed such things as savings in administrative expenses, reduction in cycle time, and reduction in the learning curve for new people as a result of KM processes. Other measures, such as a reduction in complaints or happier clients, are also given a dollar figure. Together, these figures are used to compute a conventional ROI for the KM investment.

Advice to Knowledge Managers

Regardless of the measurement approach taken, the focus group had some advice for other managers seeking to value their KM investment: 1.

Measure continuously. Measurement used to be a periodic process, but no longer. In the current business climate, managers need to be constantly aware of how their organizations are doing. Future-oriented measures such as those captured by the Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

KM organizations are especially important since they enable a company to actually act to influence its future financial performance (Davis and Meyer, 2000). Thus, the ideal measurement system builds metrics into its processes. And, wherever possible, metrics for KM should be byproducts of key company processes, not layered on top of them. 2.

Experiment. Since we are still learning what types of measurement are effective and what aren’t, this is a time for trial and error. The more a knowledge manager explores different types of metrics and approaches to them, the more likely it will be that he or she will be able to ultimately address senior management’s concerns about value.

3.

Measure what is strategically important. There are an infinite number of possible metrics which could be used in KM valuation. The trick, say the focus group, is to choose metrics which affect a company’s key strategic objectives thereby demonstrating the impact of KM. For example, if a company is working with strategic partners, managers could focus on how KM is able to facilitate relationships. “When the metrics are thought through and fit our knowledge objectives, they can demonstrate visible impact” stated one manager.

4.

Use conservative numbers. One focus group manager recommends using minimum numbers which no one can argue with for valuing KM. “If the numbers are conservative enough, we can get to someplace larger.” By adding these numbers together, she has discovered that she can more than justify her KM budget with very little argument.

5.

Use different measures for different stakeholders. Metrics must fit with what the stakeholders are trying to accomplish. If a KM manager can find out what each set of stakeholders is most keenly interested in, then metrics for value can be structured in these areas. As one group member stated, “we must find their pain and this drives what to measure.” 3

Conclusion

In many ways, the debate over the value of knowledge management is reminiscent of the debate over the value of IT just ten or fifteen years ago. While today productivity is soaring, and no one doubts it is because of IT, we never did find good measures for the value of IT. At present, KM is still in its infancy and what it will become is hard for many to see. While those who work in this area are convinced that KM value will drive the future performance of most organizations, there are still many skeptics. Thus, many KM managers are left with the difficult task of demonstrating exactly how their budgets contribute to the corporate bottom line. As this paper has shown, this is an especially challenging task right Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

now since there are no accepted metrics to use and no agreed-upon standards. In fact, most experts and organizations are still wrestling with the conceptual changes that will be involved in putting intellectual capital front and centre in the organization. Such changes will not come quickly or easily and they are years away from providing the kind of “in the trenches” guidance needed by today’s KM practitioners. Knowledge managers are therefore left largely on their own to justify their existence in and value to their firms. In the absence of agreedupon measures, knowledge managers are actively trying to discover measures that will work in practice. At present, valuing knowledge and the KM function is very much an individual effort. Those managers who persevere in thinking through how, where and why knowledge will impact performance will be pioneers in laying the foundation of how organizations of the twenty-first century will operate.


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References

Anonymous, “Challenges of measuring minds”, CA Magazine, Toronto, May, 1999. Anonymous, “Report : The Canadian Performance Reporting Initiative”, http://cpri.matrixlinks.ca, July, 2000. Bontis, Nick, “Assessing knowledge assets: a review of the models used to measure intellectual capital”, Queen’s Management Research Centre for Knowledge-Based Enterprises, March, 2000. Davenport, T. and L. Prusak, Working Knowledge: How organizations manage what they know , Harvard Business School Press, Boston, 1998. Davis, Stan and C. Meyer, Future Wealth, Harvard Business School Press, Boston, 2000. Dzinkowski, Ramona,: “The measurement and management of intellectual capital: An introduction”, Management Accounting, London, England, February, 2000, Volume 78, pp. 3236. Dzinkowski, Ramona, “ Managing the brain trust. Managing, measuring and reporting on intellectual capital is becoming recognized as an important management strategy”, CMA Management, October, 1999. Fitz-enz, Jac, The ROI of Human Capital, Amacom, 2000. GartnerGroup, “KM Benefits: from building productivity to creating wealth”, GarnerGroup RAS Services, 2000. Knight, Daniel J., “Performance measures for increasing intellectual capital”, Strategy & Leadership, Chicago, March-April, 1999, Volume 27, pp. 22-27. Kotter, John and James Heskett, Corporate Culture and Performance, Free Press, New York, 1992. Stamps, David, “Measuring minds”, Training, Minneapolis, May, 2000, Volume 37, pp. 76-84. Stewart, Thomas A., Intellectual Capital: The new wealth of organizati ons, Bantam Doubleday, New York, 1997. Stivers, Bonnie and Theresa Joyce, “ Building a balanced performance management system”, S.A.M. Advanced Management Journal, Cincinnati, Spring, 2000, Volume 65, pp. 22-29. Strassmann, Paul, “Opinion: Behind the Hype”, Computerworld, September 4, 2000. Queen’s Centre for Knowledge-Based Enterprises http://www.business.queensu.ca

Tanaszi, Margaret and Jan Duffy, “Measuring knowledge assets”, CMA Canada, 2000. Van Buren, Mark E., “ A yardstick for knowledge management”, Training and Development, Alexandria, May, 1999, Volume 57, pp. 71-78. VanderKaay, Sharon, “ ”, CMA Management, May, 2000.


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Appendix A

Current Measures of Intellectual Capital

Balanced scorecard (Stivers & Joyce, 2000) Intellectual capital ‘vital signs’ scorecard (Vanderkaay 2000) Human capital bridge (Stamps, 2000) Skandia Navigator (Bontis, 2000) IC-Index (Bontis, 2000) Technology Broker (Bontis, 2000) Intangible Asset Monitor (Bontis, 2000) Knowcorp (Bontis, 2000) Tobin’s Q (Bontis, 2000) MVA and EVA (Bontis, 2000) Citation Weighted Patents (Bontis, 2000) Human Resource Accounting (Bontis, 2000) Intellectual Capital Management Model (VanBuren, 1999) Human EVA; Human Capital ROI; Human Capital Market Value (Fitz-enz, 2000) Calculated Intangible Value (CMA, 1999) Innovation (Stewart, 1997) Employee Attitudes (Stewart, 1997) Tenure, turnover, experience, learning (Stewart, 1997) Customer satisfaction (Stewart, 1997)


Appendix B

Ernst and Young’s Value Creation Index A recent, unpublished study by Ernst and Young looked at what types of intellectual property are most important to investors in determining the market value of a company. The study found that eleven measures provided a .9 correlation with fair market value (share price). These measures, in order of importance were: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Innovativeness and agility Quality and breadth of strategic alliances Ability to attract and retain talent Value of brands Execution of business strategies Volume of web traffic Quality of products and processes Environmental performance Stickiness (average visit time) of web traffic Quality of technology infrastructure Customer satisfaction.

The research is continuing to refine measures of these variables and will try to develop a formula which will enable companies to measure the value of their intellectual capital.
