Paul Strassman wrote in 1999 “Indiscriminate discarding of knowledge assets, whether in the form of accumulated employee training or legacy software, has origins in ideas proposed over a century ago about the value of capital and labor. These theories claim that only capital assets increased the productivity of labor.
Consequently, the productivity of an enterprise is measured only in terms of the
productivity of its capital, such as Return-on-Assets or Return-on-Investment. The
providers of capital are then entitled to the surplus, called profit or rent. If
knowledge happens to be necessary for labor to make better uses of capital, that
becomes the justification for a higher wage rate for labor. By this reasoning, those
performing the actual labor are not entitled to collect rent from the knowledge they
have accumulated. Labor can receive only fair compensation for the time worked.
The most they are allowed to claim is to be awarded premium wages and a bonus
here or there.
The above reasoning is not only misleading, but results in judging the value of
employees on the basis of their wages, rather than how fast they accumulate useful
knowledge. The productivity of labor is not only a matter of wages. Productivity
comes from knowledge capital aggregated in the employee’s head in the form of
useful training and company-relevant experience.”
Understanding Knowledge Capital and Digital
Coca-cola talks about “Collective genius” in their values. Fidelity says ” Expertise
Amazon built an internal Knowledge Management practice that applies personalization and advanced KM to their workforce in similar way that it does customers.
Practically every company refers to its own ability to “know” how to do something. They talk about it in their mission statements, their vision, values and as they describe who they are.
In some cases companies talk about their heritage which represents a record of delivery. This organizational history or heritage represents culture but it is also meant to prove an organizational body of knowledge. An example could be https://www.jnj.com/about-jnj or http://corporate.exxonmobil.com/en/company/about-us/history/overview
In other cases, new younger companies may disrupt the market with new ideas and knowledge. In the case of Lemonade insurance, they have new ideas to bring to market but they recognize industry knowledge as part of their plan for success ”
A Big Deal: Our Reinsurance Partners Believe In Lemonade
You may ask – will these partners always be around to support us? The good news is they take the really long-term perspective, and we are developing exactly as expected. I’m happy to report that we signed a new reinsurance contract a month ago, and many of the leading insurance and reinsurance companies from across the globe joined in. This includes two of the top three global reinsurers; expert specialists that reinsure and even write homeowners themselves. From New York, Bermuda, and London, these partners are in the hubs of insurance knowledge and capital.”
Tell you something new?
Well.. alright.. sort of..
I am going to go back to an old idea that Paul brought up way back in 1999.
Organizations should report knowledge capital on their balance sheets.
“It seems to me that if companies were allowed to record their knowledge capital in
the valuation of their shareholder equity as a matter of accounting routine, many of
the inconsistencies which currently show up in accounting and tax treatment of
company valuation would vanish. > >Pricing Knowledge Capital
It is the risk-adjusted interest in future earnings, in excess of the cost of capital,
which an investor is willing to pay for as the value of any intangible assets. Since
investors cannot differentiate between the price of capital for financial or knowledge
investments because they are intermingled, I use the identical price for all capital as
a first approximation. This yields a simple equation:
Knowledge Capital = Economic Value-Added / Price of Capital
This relation makes it possible to prepare a revised Balance Sheet for any firm, by
adding a line item Knowledge Capital on the Asset side of the ledger, and by
increasing (or decreasing) the reported valuation of Shareholder Equity by the
identical amount.” – Strassman
If knowledge were recognized as an asset of value with potential revenue as opposed to cost or savings, this would literally flip the model. Currently knowledge assets are looked at as overhead which is charged against the cost center as either single or recurring costs. Single cost with maintenance labor overhead costs don’t show actual value. This is a cost model vs a productivity model. The assertion is information or knowledge in action (productivity) is an investment in knowledge capital. It moves knowledge management from operational to strategic.
Operational to Strategic
Strassman may have been 20 years ahead of his time for Digital. He defined Knowledge Capital as “Knowledge Capital is the value that a customer assigns on top of the cost of sales and cost of capital. It’s the surplus value on top of the traditional value. The people who possess the accumulated knowledge about a company are the carriers of Knowledge Capital. They are the people who leave the workplace every night and may never return. They possess something for which they have spent untold hours listening and talking while delivering nothing of tangible value to paying customers. Their brains have the been the repositories of an accumulation of insights about how “things work here” — something that is often labeled with the vague expression “company culture.” Their heads carry a share of the company’s Knowledge Capital, which makes them a shareholder of the most important asset a firm owns — even though it never shows up on any financial reports. Every such shareholder of knowledge assets in fact becomes a manager, because information acquisition and utilization are the essence of all managerial activities.”
When a company loses a lot of talent how are shareholders to learn of this unless it was an M&A or top of the line news? What are the implications to the company? How are we to understand what it means? (Google and Car AI ) I understand that Google has a lot of other assets but the implication is that they lose first mover advantage. How does this show up in the shareholder report? “Hey shareholders, we umm lost the only person that knows how to make cars drive on their own, but don’t worry as the rest of the car team leaves, we will find someone better and be first in the industry.” #lostknowledge
Knowledge strategies can’t be effective unless they are tied to strategic efforts and financial indicators. Digital Workplace efforts to enable employee productivity and experience from anywhere at anytime are not efforts in cost, they are efforts in investment and strategy.
The only way to see the value of knowledge is to link it to performance. Interestingly enough, this is looked at through M&A.
Dr. Thomas Blumer brings this up through this illustration (look at business outcomes)
The problem is that companies may only look at something like this ONE TIME and they don’t report on it. If we consider the value of lost knowledge and the knowledge capital of an organization (prior to the outcome of losing the knowledge) we can see on-going relative value. Not cost, not loss, but value today and in the future. Think about it this way..
NASA loses the knowledge to get to the moon
NASA Manager confesses – “If we want to go to the moon again, we’ll be starting from scratch because all of that knowledge has disappeared.”
NASA Officials Warn of Aging Workforce, Washington Post, March 7, 2003
BP Loss of Knowledge Contributes to Massive Oil-Pipeline spill
BP learned the hard way why capturing key knowledge from subject matter experts before they leave is critical. When Senior Corrosion Engineer Richard C. Woollam left, BP lost valuable intellectual capital, namely his knowledge, experience, and expertise.
BP realized just how valuable Woollam’s knowledge was on February 25, 2006, when corrosion in the Prudhoe Bay pipeline caused a “small leak” in a quarter-inch hole in the pipe. BP discovered the leak five days later on March 2, after 250,000 gallons of crude oil spilled across 1.93 acres. The spill, the largest ever on Alaska’s North Slope, forced BP to shut down the pipeline and the Prudhoe Bay oilfield, the largest U.S. oilfield. Overnight, 8% of domestic oil production was shut down due to “extensive corrosion”.
Audits showed that by the time this massive oil-pipeline spill was discovered, the job of BP’s senior corrosion engineer had been left unfilled for more than a year. This vacancy, and others, hindered BP’s ability to maintain a ‘strategic view’ of its corrosion prevention activities, the audit found. A BP spokesman said Friday that a replacement for the senior corrosion engineer has yet to be found…”
Analysis: Congress probes BP corrosion –Donna Borak, UPI Energy Correspondent Sep 6, 2006
BP audit: Key job vacant before spill – Brad Foss, AP Business Writer, Fri Sep 8, 2006
Congress Investigates Alaska BP Pipeline Leak – Scott Horsley, NPR Morning Edition, Sep 7, 2006 (source http://www.knowledgecats.aboutpeople.com/KnowledgeLossFactsandFigures.htm)
This is what happens if .. as an outcome. We can’t predict these events but we certainly can prevent them if we understand the current value of knowledge in an organization and assign it a value. This value should be reported to stakeholders as part of corporate and organizational health.
Alright.. enough? I will give you one more … Consider the DoD and the “cost cutting” efforts. In a report concerning the USS Fitzgerald we can say two things at a high level.
- Knowledge and training saved the ship.
- Reduction in crew, knowledge, training and the value of KM contributed to the cause of this disaster.
Why? Because knowledge is a strategic asset but viewed as a cost. When you cut cost you cut knowledge flow. It is that simple.
Companies that use knowledge as a strategic asset and investment perform better. There should be no squabbles about the value of knowledge management or having to explain it to executives. Knowledge capital through digital channels feeding the base of organizational knowledge and competencies should be reported on the balance sheet to shareholders. Corporate leaders should be held accountable for talent management and knowledge management. Even if we consider AI, IA and workforce reduction through robots, where will the automated systems learn from? How will shareholders react to companies telling them “we automated everything we knew about and nothing works, but don’t worry, we are on target.”