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Learn how valuable corporate knowledge is
acquired, created, bought, sold and bartered
By Tom Davenport and Larry Prusak
Reprinted by permission of Harvard Business School Press.
Excerpt of Working Knowledge: How Organizations Manage What They Know,
by Thomas H. Davenport and Laurence Prusak. Copyright 2000 by the president
and fellows of Harvard College; all rights reserved.
In His OwnVoice You
can hear Larry Prusak's complete responses to such questions as
Why is this the time
to write about knowledge as an asset?
How would you respond
to a CEO who says, "We've always exchanged knowledge. What's the big
deal?"
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healthy organizations generate and use knowledge. As organizations interact
with their environments, they absorb information, turn it into knowledge
and take action based on it in combination with their experiences, values
and internal rules. Without knowledge, an organization could not organize
itself; it would be unable to maintain itself as a functioning enterprise.
We will consider five modes of knowledge generation: acquisition, dedicated
resources, fusion, adaptation and knowledge networking. In each case, the
conventions of language force us to discuss knowledge as a thing that can
be managed. We want to emphasize, however, that knowledge is as much an
act or process as an artifact or thing.
Acquisition
Acquired knowledge does not have to be newly created,
only new to the organization. British Petroleum gives a Thief of the Year
Award to the person who has "stolen" the best ideas in application
development. The company recognizes that, when it comes to organizational
knowledge, originality is less important than usefulness. Texas Instruments
has created a Not Invented Here, but I Did It Anyway Award for borrowing
a practice from either inside or outside the company. The Spanish proverb
"Well stolen is half-done" sums up this idea succinctly. The
knowledge-focused firm needs to have appropriate knowledge available when
and where it can be applied, not to generate new ideas for their own sake.
The most direct and often most effective way to acquire
knowledge is to buy it-that is, to buy an organization or hire individuals
who have it. Of course, not all corporate purchases are knowledge acquisitions.
Companies buy other companies for various reasons: to generate additional
revenue, to achieve a strategic size or product mix, to get access to new
markets or to gain the skills of a senior management team (this last reason,
however, borders on knowledge acquisition). Increasingly, firms acquire
other companies specifically for their knowledge. They are often willing
to pay a premium over the market value of the company purchased because
of the value they expect to get from adding that new knowledge to their
own knowledge stock. One recent example of this is IBM's 1995 purchase
of Lotus. IBM paid $3.5 billion, which was 14 times Lotus's book valuation
of $250 million. Clearly, IBM did not pay that amount of money for the
current revenue generated by Notes and other Lotus products or for Lotus's
manufacturing and sales capabilities. The $3.25 billion premium IBM paid
represents its appraisal of Lotus's unique knowledge of Notes and other
collaborative software applications. The minds that invented Notes are
more valuable than the software itself.
In addition to being purchased, outside knowledge can
be leased or rented. A common type of leasing is a firm's financial support
of university or institutional research in exchange for the right to first
commercial use of promising results. The drug company Hoechst, for example,
supports research at the Department of Molecular Biology at Massachusetts
General Hospital in hopes that it will lead to the development of profitable
new drugs. R&D efforts are always speculative, and it is not easy to
predict when or if research will pay off. However, it should be possible
over time and in the aggregate to calculate the value of leased knowledge
in terms of the eventual returns that are derived from the funded research.
Renting knowledge really means renting a knowledge source.
Hiring a consultant for a project is an obvious example. Unlike rentals
of equipment or facilities, knowledge rentals are likely to involve some
degree of knowledge transfer. Although the knowledge source is temporary,
some of the knowledge is likely to stay with the firm. Some clients we
have worked with now specify in their consulting contracts that consultants'
knowledge be made available in some structured, codifiable format. And
consultants are beginning to market their services partly on the basis
of transferring knowledge to clients. For example, more than one high-tech
consulting firm now offers technical training in the software package SAP
if the client employs these firms to implement the package.
As with so many investments in knowledge generation,
intentions are important: A firm needs to know what it wants in order to
have a good chance of getting it. High-level consultants are sometimes
surprised at how little clients ask of them in terms of knowledge transfer.
Firms that hire them for a day or a week at considerable expense might
be expected to squeeze as much knowledge out of them as possible. But they
usually do not ask the questions that would help them absorb that expertise
in practical ways.
Dedicated Resources
A customary way to generate knowledge in an organization
is to establish units or groups specifically for that purpose. But since
the financial returns on research take time to materialize and may be difficult
to measure when they do come, a focus on near-term profits may create pressure
to cut costs by cutting R&D. While no part of a business can be funded
indefinitely if it generates no measurable value, a narrow bottom-line
view of that return can lead to "savings" that deplete vital
knowledge-generating resources.
The premise behind separating R&D from other parts
of the firm is to give researchers the freedom to explore ideas without
the constraints imposed by a preoccupation with profits and deadlines.
However, this distance may be difficult to bridge when the time comes to
transfer the results of R&D to the wider organization. Knowledge creators
and users may not even speak the same language.
Probably the most notorious case of a costly transfer
gap occurred at Xerox's Palo Alto Research Center in the mid-1970s. The
knowledge workers at Xerox PARC invented key elements of the graphical
interface computer, including the mouse, graphical icons and menus. Ironically,
the independence that made this breakthrough possible probably contributed
to Xerox's inability to understand its importance and potential value.
They were not close enough to the research to evaluate the newly created
knowledge. Steve Jobs, on the other hand, was prepared for those new ideas
by his work at Apple (as well as by culture and temperament) and quickly
grasped their significance. A brief tour of Xerox PARC was all he needed
to gather the fruits of research funded for years by Xerox. He went back
to Apple and built the Macintosh.
Fusion
Whereas the R&D approach is predicated on reducing
the pressure and distractions that can stifle productive research, knowledge
generation through fusion purposely introduces complexity and even conflict
to create new synergy. It brings together people with different perspectives
to work on a problem or project, forcing them to come up with a joint answer.
In The Knowledge-Creating Company (Oxford University
Press, 1995), [Ikujiro] Nonaka and [Hirotaka] Takeuchi cite Matsushita's
development of the first automatic breadmaking machine as an example of
diversity and creative chaos in action. Matsushita combined three product
divisions with different cultures to develop a successful breadmaking machine,
realizing that it needed the variety of knowledge possessed by groups that
had previously made rice cookers, toasters and coffeemakers, and food processors.
The new product combined the computer-control expertise of the first group,
the second's experience with induction heater technology and the third's
knowledge of rotating motors. The creative chaos came from a breakdown
of old assumptions and ways of working, an intentional shake-up of the
status quo that, as conventionally portrayed, is not innovative. The combined
groups (a total of 1,400 employees) initially almost "spoke different
languages."
Although fusion can lead to powerful results that are
unobtainable in other ways, it is not a shortcut to knowledge generation.
A significant commitment of time and effort is required to give group members
enough shared knowledge and shared language to be able to work together.
Careful management is also necessary to make sure that the collaboration
of different styles and ideas is positive, not merely confrontational.
Here are five knowledge management principles that can
help make fusion work effectively:
Foster awareness of the value of the knowledge sought and a
willingness to invest in the process of generating it.
Identify key knowledge workers who can be effectively brought
together in a fusion effort.
Emphasize the creative potential inherent in the complexity
and diversity of ideas, seeing differences as positive rather than sources
of conflict and avoiding simple answers to complex questions.
Make the need for knowledge generation clear so as to encourage,
reward and direct it toward a common goal.
Introduce measures and milestones of success that reflect the
true value of knowledge more completely than simple balance-sheet accounting.
Adaptation
In "Microcosmic God," a 1941 science fiction
story by Theodore Sturgeon, the main character creates a miniature world
of beings who live and evolve extremely rapidly. He forces them to innovate
by imposing various environmental threats on them. They react to storms,
heat, drought-even a metal plunger moving inexorably down from their "sky"-with
a steady stream of inventions and discoveries, from new insulating materials
to power sources to super-hard aluminum. The crises in their environment
act as catalysts for knowledge generation.
"Adapt or die" is their fate; so they adapt
and advance.
The story provides a vivid metaphor for the way external
(and sometimes internal) changes cause businesses to adapt. New products
from competitors, new technologies, and social and economic changes drive
knowledge generation because firms that don't change in response to changing
conditions will fail. Success is often the enemy of innovation; it has
been called the winner's curse. Lulled by past success, companies sometimes
fail to see that change is happening or to acknowledge that it can affect
them. The appearance of low-cost, high-quality Japanese cars on the U.S.
market changed the automotive world, but decades of dominance blinded American
automakers to the magnitude of the threat. Similarly, Sears ignored the
changes that Wal-Mart was making in the retailing environment until shrinking
sales forced it to face reality.
A firm's ability to adapt is based on two principal
factors: first, having existing internal resources and capabilities that
can be utilized in new ways, and second, being open to change or having
a high "absorptive capacity." The most important adaptive resources
are employees who can acquire new knowledge and skills easily. Since the
best predictor of mental nimbleness is proven experience in taking on new
tasks, firms should seek out employees who have already mastered a variety
of roles and skills. After they've been hired, employees should also be
encouraged to change jobs often, to build and manage their own skill portfolios,
and to take "learning sabbaticals" to master new work-related
disciplines.
Networks
Knowledge is also generated by informal, self-organizing
networks within organizations that may over time become more formalized.
Communities brought together by common interests usually talk in person,
on the telephone, and via e-mail and groupware to share expertise and solve
problems together. When networks of this kind have enough knowledge in
common to be able to communicate and collaborate effectively, their ongoing
conversation often generates new knowledge within firms. Although it may
be difficult to codify, this process can add to the knowledge of the entire
company.
In the absence of formal knowledge policies and processes,
networks act as critical conduits for much innovative thinking. Consider,
for example, a series of events that occurred recently at a U.S. subsidiary
of Hoechst that makes polyester fibers. During a lunch with colleagues,
a Hoechst R&D technician who had recently come back from a conference
on synthetic fiber manufacturing in Europe mentioned a particular presentation
regarding a new material. One of his colleagues passed on some details
of the lunchtime discussion to about 18 global peers via an informal e-mail
network. Three weeks later, one of these networked researchers mentioned
the e-mail message to a company executive during a flight they took together
to visit a client. The executive brought the matter up with a team he was
on whose mandate was to look at new business opportunities. Soon Hoechst
formed a small executive group to look further into this promising material.
This story resonates with readers familiar with how
knowledge gets around in organizations. It shows how extensively an informal
network can generate knowledge when each participant adds an incremental
portion. At the same time, it is obvious how large a role chance played
in getting the knowledge where it could be used in this particular instance.
How easily the knowledge brought back from the conference might never have
reached the group that needed it!
The common denominator for all these efforts is a need
for adequate time and space devoted to knowledge creation or acquisition.
In companies committed to dedicated resources, space not only means the
laboratories and libraries in which discoveries can be made but also the
meeting places where knowledge workers can congregate. In some instances,
the shared space may be electronic, but meeting places of some kind must
exist. Unfortunately, time, not physical space, is the corporate resource
most likely to be begrudged to knowledge activists. It is the scarcest
of all resources, the one impossible to replicate and yet most essential
to genuine knowledge generation.
Tom Davenport is a professor and director of the Information Management
Program at the University of Texas at Austin. He welcomes reader comments
at davenport@mail.utexas.edu.
Larry Prusak is managing principal of the IBM Consulting Group and can
be reached at 617 895-2320.
Management: The
Oral Art If you tell a good story, your assets at the favor bank will soar
Oh sure. Knowledge management. What will they think
of next? Some egghead awakens at midnight and shouts, "Eureka!"
at the brilliant notion that information shared is better than information
hoarded. So what else is new?
Actually, according to Larry Prusak, quite a bit. Prusak,
a managing principal of the IBM Consulting Group in Boston and co-author
with Tom Davenport of Working Knowledge: How Organizations Manage What
They Know (Harvard Business School Press, 1998), has been asking executives
the same question for three or four years: "Where do you get the insight
you need to run your business?" He says the answer is almost always,
"We talk."
"Management has always been an oral art, but perfect
information has never meant perfect decisions," Prusak says. He points
to IBM, a company that in 1987 knew all it needed to know to realize that
desktops indeed posed a threat to the glass-house mainframes on which the
company had built a fortune but which nevertheless flirted with financial
disaster. "What has changed is that technology has made 'distributed
cognition' possible. Space and time have been diminished as inhibitors
to teams, groups and the distribution of collected intelligence."
What's more, in their book, Davenport and Prusak put
forward the proposition that knowledge is subject to the same market forces
as any other asset or commodity. When knowledge is plentiful, like talk,
it gets cheap. When knowledge is scarce, it rises in value. But since knowledge
is, by its nature, usually scarce, a set of players skilled at buying,
selling and even brokering what there is to know have always been around.
Just because there is no exchange that measures value in dollars and cents,
don't make the mistake of believing there is no price. In terms of in-house
knowledge distribution, Prusak likes to point to what Tom Wolfe in Bonfire
of the Vanities, his novel about heavy-hitting Wall Street bond marketeers,
calls "the favor bank," that hypothetical cosmic mechanism that
distributes justice to those who have cast a bit of bread upon the waters.
Prusak expects that knowledge brokers and arbiters-those
people who know who knows and where to find them-will soon be more valued.
While informal arrangements have generally been the modus operandi for
knowledge brokers, such professionals as company librarians may come into
bigger compensation packages soon. They have been marginalized until now
because, Prusak says, they are too democratic. "They're nice people
and treat everyone the same. That's no way to build a balance at the favor
bank," he explains. "Business interaction has always relied on
reciprocity, and people have always calculated their expenditure in time
in terms of a possible future reward."
Indeed, he concedes that a quick calculation was why
he granted CIO the time for an interview.
-Perry Glasser
Reprinted with permission of Harvard Business School Press & special
arrangement with CIO Magazine.