March 05, 2001 New Thinking:
Measuring knowledge capital

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• “Market-to-book ratios of U.S. companies are now roughly 2-to-1, double the average between 1945 through 1990,” Lowell Bryan wrote in 1997.
• “Roughly 40 percent of market value of the median U.S. public corporation was missing from the balance sheet,” Lester Thurow wrote in 1996.
• AOL exchanged $146 billion in stock to acquire Time Warner, whose net tangible assets were valued at $9 billion.
• In 2000, Business Week added intellectual capital as a new measure to its review of American MBA programs. This reflected a school’s “quality of the scholarship and the ability to influence thinking in the business world at large.”
• Skandia, a pioneer in measuring and promoting intellectual capital, has found that by using intellectual capital techniques, start-up times for its new offices have been reduced by at least one-third. It has also seen major savings in training.

Knowledge capital exists in two ways. Firstly, within the minds of the people who know something useful that will make the organization more productive. Secondly, knowledge capital exists as content. In this sense, content is the formal ‘written-down’ expression of knowledge capital.

The classic way knowledge capital was created and transferred within an industrial economy was through apprenticeship models. Young workers gained their knowledge through working with older ‘knowledge’ workers.

There is no better way to gain knowledge than through learning by asking, watching, doing. However, the apprenticeship model for the transfer of knowledge has been in decline for the last thirty years, due to globalization, downsizing, outsourcing and the development of ‘virtual corporations’.

The result is that while knowledge capital is more important than ever for the success of a modern organization, the old models for creating and passing on knowledge have been in severe decline. The new model that organizations must become proficient at is the content model.

Content is to the information economy as oil is to the industrial economy. It is the key resource, the key way that knowledge capital is expressed. Strangely, the true benefits and costs of content are very poorly understood and measured within most organizations.

The discipline of knowledge management has sought to bring a more scientific view to content; to how knowledge is created and managed. There is little real success so far.

Organizations have a warm fuzzy feeling about content. They know it is important. Many managers recognize that content is critical. Few know how to go about professionally measuring this critical resource.

“Knowledge capital predicts market performance with more accuracy than does either operating cash flow or net earnings,” CFO Magazine wrote in 2000.

“Managing knowledge capital will be critical for organizations to create a sustainable, competitive advantage,” CFO quotes Harvard University accounting professor Robert Kaplan as stating. “Today, the long-term success of organizations comes from their knowledge-based assets--customer relationships; innovative products and services; operationally excellent processes; the skills, capabilities, and motivation of their people; and their databases and information systems.”

A key challenge for the modern organization is to clearly measure the cost versus the benefit of the content it creates. This is not an easy task, but if you can’t measure the key resource that delivers you benefit and costs you money, then you can’t manage.


Gerry McGovern

 

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