Introduction
Like the technology czars, the knowledge czar must ground his or her leadership in the world of business requirements and results. A demonstrated ROI (return on investment) is as important for knowledge management as it is for IT systems. And, like technology for its own sake, knowledge for its own sake is anathema to good business strategy.1 Measuring and documenting the results of KM initiatives provides a powerful way to link the application of KM to bottom-line business outcomes.
Connecting information and people is the primary focus of KM initiatives. But it is essential to understand that KM is not about simply increasing access to information. On the contrary, access to large amounts of information is good when there is ample time to peruse it, but this access does not provide quick answers. KM seeks to provide these answers through a balance between stored succinct and directly pertinent information and links to other people who are likely to know how to help.
KM provides two major benefits to an organization:
- Improving the organization's performance through increased effectiveness, productivity, quality, and innovation.
- Increasing the financial value of the organization by treating people's knowledge as an asset similar to traditional assets like inventory and capital facilities.
Each of these benefits has distinct qualities that can be measured, such as the effectiveness of sharing and the intrinsic value of knowledge assets. Measurements for KM initiatives can be quantitative or qualitative and, in general, a measurement program should include both types of measures. Quantitative measures all use numbers and typically provides hard data to evaluate performance between points (such as last month to this month), or to spot trends. For example, you can collect quantitative data on Web site statistics, the number of hours spent on a particular task, or the percentage of equipment removed from operational status for repairs. Qualitative measures use the situation's context to provide a sense of value and are referred to as soft data. These measures include stories, anecdotes, and future scenarios. When it is difficult to capture meaningful quantitative measures, such as the value to the individual for being a member of a community of practice, a story from a member about how the community helped him solve a critical problem can have as much or more impact on stakeholders. Qualitative measures can augment quantitative measures with additional context and meaning.
A closely related concept to the need for qualitative measures is the notion of tangible and intangible benefits. A tangible benefit is concrete and can have a direct measurement of its value. In contrast, an intangible benefit cannot be definitively described by a quantitative value. For example, the value of a machine can be computed from its production rate compared to its operating costs, while the value of a company's brand image to its profitability cannot be easily computed.
Return on Investment (ROI) is used in Business Case Analyses (BCAs) and other methods to evaluate proposed investments and are not peculiar to IT. The use of a business case to justify any significant investment is common practice in both industry and government and its use in investment decision making for knowledge management is no exception. While a business case incorporates multiple elements, its primary focus is a cost-benefit analysis. A thorough analysis includes a comprehensive investigation of all costs as well as a realistic projection of benefits such as ROI. ROI is a measure for evaluating proposed and actual investments in a project, program, or initiative. ROI provides a quantitative method of demonstrating the value of a project by comparing the costs associated with current business practices, with the cost associated with the new practice. For example, reduction in operating costs or in time spent performing a task can be calculated as cost savings.
Performance measures for KM build on the experience in accounting and management for other types of intangible initiatives such as learning and training. Metrics are particularly important to KM because a ROI for KM often takes significant time to appear. Putting a KM program into effect will impact other business processes as the organization learns to use and leverage the new KM capabilities. Many of the organizational changes will be intangible characteristics such as how quickly people adapt to new situations, morale, camaraderie, and other important factors that cannot easily be quantified. This "acculturation" to KM can take 18 to 36 months in some cases. According to the Gartner Group, "in no case should a KM program (at the enterprise level) be expected to show ROI in less than 12 months."2 Although calculating an ROI for knowledge management tends to be elusive, ROI is a powerful method of demonstrating the value of your KM initiative and how it contributes to mission success.
There are a number of possible techniques and criteria which can be used, such as: present value (the value today of a flow of investments and incomes at start and expected in the future at a given/projected discount or interest rate); internal rate of return (the iteratively calculated rate of return based on the flow of investment and income); pay-back period (the time for the investment to pay back an amount equal to the original investment), etc.
Despite the difficulty of quantifying intangible benefits, many organizations need to evaluate programs and choose strategic directions based on their value. For a KM initiative, people's unspoken "know-how" is one of the largest potential sources of value. This tacit knowledge is an example of an intellectual asset whose value is only realized when it is actually shared and reused effectively. Determining its value and effectiveness is hampered by many unknown factors, such as how people really use knowledge to make decisions, when knowledge sharing is and is not useful to specific tasks, and if people require a prior personal relationship before accepting knowledge as trustworthy. The next section of this CD provides examples of KM Success Stories as a way to document results.
Related Resources
- The Department of the Navy developed and published a Metrics Guide for KM Initiatives — as a practical framework for measuring the value of investments in KM iniatives and is an excellent reference for Agencies attempting to measure the value of their KM iniatives.
Footnotes:
1 Remez, Shereen G. "Who Will Lead the Knowledge Revolution? An Examination of the Differing Roles of CIO and CKO", from Knowledge Management: The Catalyst for Electronic Government, edited by Ramon C. Barquin, PhD, Alex Bennet, and Shereen G. Remez, PhD (Vienna, VA: Management Concepts, INC., 2001), p.288.
2 F. Caldwell. "CEO Update: Measuring the Success of Enterprise Knowledge Management," GartnerGroup. December 13, 2000.
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