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. Buddha152 CHAPTER 7EconomicsAfter reading this chapter you will be able toAppreciate the economic value of Knowledge Management"to knowledge workers, managers, customers, and othermajor stakeholdersAppreciate the economic risks associated with a Knowledge"Management initiativeUnderstand the methods of assessing the economic contri-"bution of intangibles to corporate valuenacting change in the corporate environment, while often necessary,is always expensive.Overcoming the inertia of corporate culture,Eespecially in larger corporations, takes time, energy, and money.Forthis reason, any change has to have not only a reasonable return oninvestment (ROI), but excellent odds of succeeding in the corporateenvironment.The business landscape is littered with carcasses of com-panies whose well-meaning management went down the reengineeringpath, only to find that change was more expensive than they anticipatedand the ROI was either insignificant or nonexistent.In considering a Knowledge Management (KM) initiative, a corpo-ration s senior management has to answer several basic questions:Will Knowledge Management save the corporation money?"153 ESSENTI ALS of Knowl edge ManagementWill it generate extra revenue?"If so, how long will it take, and what resources will have to"be invested?What s the downside of a failed initiative?"If, after two or three years, there isn t a real, demonstrable change inthe corporate bottom line, all other considerations are secondary.Oneof the major challenges of working in the intangible world ofKnowledge Management is defining exactly what constitutes the bot-tom line.Traditional measurement tools, such as an ROI calculation, failto adequately consider many of the positive, qualitative contributionsascribed to Knowledge Management.One reason that ROI measurements fail in evaluating the effect ofKnowledge Management on the bottom line is that many of the effectsare qualitative and difficult to measure, such as an increase in the num-ber of communities of practice.For example, consider the potentialbenefits of a KM program listed in Exhibit 7.1.The quantitative bene-fits, such as cost savings, increased stock valuation, and reduced cost ofsales can be evaluated objectively, but the qualitative benefits, such asincreased customer loyalty, positive cultural change, and employeeempowerment, are difficult to assess or apply metrics to, especially in theshort term.Consider the challenge of measuring the potential benefit ofincreased innovation.The first challenge is defining exactly what increased innovation signifies.For example, is the metric an increasedrate of innovation, an increased quality of innovation, or an increasednumber of innovations in a given area? Furthermore, what constitutes aninnovation? In the long-term, increased innovation could be expectedto result in quantifiable outcomes, such as an increased number of patentapplications or patents, more white papers in the company library, more154Team-Fly®YLFMAET Economi csEXHIBIT 7.1Potential Benefits of Knowledge ManagementQuantitative QualitativeCost savings Better management of ideasGreater customer acquisition rate Decreased likelihood employeedefectionImproved bottom lineGreater customer loyaltyImproved profit marginsIncreased collaboration withIncreased corporate valuationcustomersIncreased customer loyalty behaviorIncreased customer satisfactionIncreased customer retentionIncreased innovationIncreased market shareIncreased knowledge workerIncreased repeat purchasesempowermentIncreased stock valuationIncreased knowledge workerproductivityReduced cost of salesIncreased knowledge workersatisfactionIncreased market leadershipIncreased organizational stabilityIncreased shareholder satisfactionIncreased understanding ofcustomer needsPositive cultural changepublished articles in the trade magazines authored by knowledge workersand managers, or more national awards for innovation.A related issue is proving causality instead of mere correlation.Simply because a company produces patent applications at a higher ratetwo or three years following the implementation of a KM program isn tproof of causality.The increased rate of applications could have comefrom a new hire who is particularly innovative, unusually prolific, andvery creative and who doesn t even use the new KM system.155 ESSENTI ALS of Knowl edge ManagementFurthermore, in the short term a year or two into a KM projectthere isn t likely to be any direct measures of increased innovation.Onlyindirect measures, such as an increase in the number of communities ofpractice, may indicate increased innovation in the organization
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