KM, IT and Organizational Capital

Sound business strategies, not information technology, create valuable assets

In addition to intellectual capital, knowledge capital and intangible assets, you may soon need to understand how to value and build on the "organizational capital" in your corporation. According to The Economist (Nov. 11, 2000), MIT professor Eric Brynjolfsson has a new theory of how to rationalize spending on computers, in which hardware and software aren't the only forms of IT that add value. Spending on them actually accounts for only 10 percent of the total typical corporate budget for information systems, which itself amounts to only about one-tenth of average corporate costs for labor and materials. Brynjolfsson claims that U.S. corporations have created $1.5 trillion of organizational capital recently by making new investments in business processes, products and employee training--all of them enabled by computers.

What we have here is a suggestion that we stop searching for economic payoffs directly related to investments in computers (which is a dubious proposition anyway). Rather, it proposes seeking the justification for more spending in benefits achieved elsewhere. Proponents of IT expansion, the theory goes, should now look for profits in the generation of organizational capital to justify high levels of spending.

This notion of organizational capital has implications for the willingness of corporations to deploy knowledge management programs. Icons of computerized sophistication and best practices in knowledge management such as Motorola and Xerox have seen their financial fortunes fall precipitously. Both companies have in the past publicized their investments in business processes, products and employee training. Why then are they in such trouble?

Let's look into what really determines profitability. The soundest evidence can be found in the results of research on the profit impact of market strategies (PIMS). For more than 20 years practitioners of this discipline have been gathering and analyzing data. PIMS findings represent comprehensive, credible insights about the influences on financial results. The chart "Contributors to Profitability" summarizes findings about the sources of differences in financial performance among competitors.

The implications of PIMS conclusions on the practice of knowledge management are far-reaching. Knowledge about a company's business environment and its competitive position are the most valuable insights for executive management; 65 percent of the profit performance of corporations can be attributed to them. The primary task for knowledge management is to collect and assemble relevant intelligence about these strategic areas.

Yet the consumers of corporate intelligence are only a handful of decision-makers, and producing it typically consumes only a small fraction of a company's total spending on information. I personally observed that the failure of Xerox to take advantage of its technological and intellectual superiority was due primarily to mis-managed collecting of unbiased information about customer preferences.

On the other hand, operating efficiency in the form of low overhead costs, effective business processes and employee awareness helps to create value--but not as much as intelligence does, and it is certainly not the decisive factor, affecting only 15 percent of profit results. Most consumers of this kind of knowledge are employees, and instituting programs to reach them is very costly. Neither networked sharing of knowledge nor workflow enhancements did anything to brake Xerox's recent skid to the verge of bankruptcy.

Professionals in knowledge management should be careful not to become identified as refurbished IT people. Linking computerization too closely with the capacity to create organizational capital--or any other such trend--can damage careers when such opportunism goes out of fashion.

The objective of knowledge management should be to increase the non-financial worth of organizations. This requires a thorough understanding of why organizations succeed or fail. Though the PIMS conclusions noted above are generalized, the correction of any knowledge deficiency is always specific to a company and a situation. Careful analysis should precede any purchase of software.

In short, IT does not create organizational capital. Only well-conceived strategies that are well-executed can accomplish that.

Paul A. Strassmann originated the trademarked concepts "information productivity", "return-on-management" and "knowledge capital."