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KM: The ROI Myth

I was recently reading a Harvard Business Review blog into inhibitors of creativity (Three Questions that Will Kill Innovation: http://bit.ly/hsWoFt) and I was struck that we could also be talking about three inhibitors that could kill KM projects.

Two months ago I was mentoring a consultant in the USA when we hit a brick wall, they wanted me to demonstrate ROI from KM future projects designed to innovate, to develop creativity in a search for organisational dynamic capacity.  My question, what is this obsession with ROI?

Technology companies love the ROI conversation and the figures they produce can be quite impressive! Start with process efficiency, the time saved by a given employee by the introduction of a technology enabled process calculated against a portion of the salary cost of that employee – take the figure and multiply if by the number of employees engaging with the process and they can start to calculate daily, weekly, monthly and annual savings.

Hey presto!  KM ROI metrics!  This is great, but is this KM?  Is this developing ROI from KM?  No, it’s not and we should stop fooling ourselves that we are!

Hang on, what about critical incident technique or the lessons learned from previous projects…let’s take that data and use it to forecast the future!   Why not save time and have some fun while you waste your money, call the Psychic Network, it will work just as well! We need to face facts.

Disclaimer:  Some of the following discussion is taken from the upcoming Ark report ‘Redefining KM: New Principles for Better Practice’ (published early April, 2011)


The measurement of knowledge value is difficult. It is specific to time, context and the perception of what it is that constitutes a knowledge asset. This will vary according to organisation and sector. For some they are tangible (objects), such as patents and trademarks. For others they are more discrete or intangible, being deposited in people, processes, culture and structure.  These discrete assets make the development of metrics for the measurement of knowledge value difficult and subjective.

“How can you measure what’s in my head? I know, what I know and the only way I can measure it is by winning contracts. Then, I suppose, I can put a value on what I know. But, if a client asked me to value what one of their employee’s knows, I wouldn’t know where to begin!” TE (Company Director) UK

Human intellect and character are difficult to measure, both individually and socially, which will hinder organisations when attempting to place a value on the knowledge held by their people. Not only this, but the valuation of the existence of a knowledge asset is one thing, but what about the costs of managing that asset? How does the impact of that process effect the valuation of the asset? This makes the task of determining return on investment from KM activity a daunting one.

“In this age the true assets of companies are the knowledge stores in their employee’s minds. They must use it strategically to compete with their rivals” MV (KM practitioner) India

Attempts to predict the value of KM initiatives are often based on guesswork, where historical precedents are projected forward to predict future value. However, how can an organisation predict the impact of outliers that will, perhaps, change strategy and become a new source of competitive advantage and value? For example, when the Internet was initially conceived and developed, who could have predicted the value associated with its commercial application or its omnipotent place in modern society? When it comes to KM practitioners are left to either rely on methods, such as critical incident technique, to measure the consequences of past action or non-action and forecast them into the future, or they speak in terms of gut instinct.  When looking at lessons learned or critical incident processes, will history replicate itself?  Will the perfect storm of internal and external variables realign to create the very same situation in the future and in doing do allow us to predict ROI?  You have a better chance of winning the lottery than this happening!

“We just know what we need and trust that it will be of benefit” (Global training and Development Director) UK Operations of a MNE based in the USA

The value based decision-making process that informs the need to engage with KM can be explained at a macro level within the organisation, using the drivers of the knowledge economy within which the organisation transacts. However, the development of metrics for KM innovation projects are impossible to provide and in many ways are counter productive to the core aims of the project!

How about asking ourselves some pointed questions:  Creativity governed by ROI, is that how we develop dynamic capacity…?  Is that how we stimulate growth…?

We can talk value, there is nothing wrong with that conversation, just not ROI.  If we are talking value, then we can talk about the drivers of the knowledge economy, which require organisation to become dynamic and in doing so acknowledge the synergy between people, knowledge and learning.   This inevitably leads to conversations on the relationship between organisational value and social capital; the value brought about by social processes and culture that bind the organisation’s human resources as they interact with stakeholders inside and outside of the firm.  The diagram below takes a generic intellectual capital model and aligns it with the OECD’s pillars of the knowledge economy. This is designed to show KM leaders how capital structures come together to develop overall market value.  It is hoped that this type of illustration can bring about a clarity of thought when discussing how intangible KM processes can contribute to the market value of an organisation.  A good example of what is being discussed in the development of social capital is “Pfizerpedia”, Pfizer pharmaceutical’s knowledge platform – discussed below.

Pfizerpedia is an integrated wiki, social networking and storage network that enables the sharing of know-who and know-what within the Pfizer organisation.  It enables the networking of employees to maximise the impact of communities of practice and heightens the visibility of individual knowledge artefacts through blogging, Wiki and tagging tools.  It is not within the scope of this report to bring a critical examination of this platform; the only intention is to introduce readers to an example of the application of technology within the workplace.  At the time of going to press an overview of the Pfizerpedia, entitled, “Meet Jessica” was publicly available on the Internet through the following link:  http://www.slideshare.net/bengardner135/meet-jessica

KM is not about developing ROI, it is about answering economic drivers that impact knowledge-centric organisations;  Drivers of creativity and Dynamic capacity.  Knowledge Management emerges out of these needs.  You will not know your ROI until you are deep into the journey, so don’t get fooled by snake oil sales people that promise the cure; sadly they are devaluing our field.

12th June 2011 update – Just found this blog post on the topic that is well worth a read…Measuring Knowledge Management ROI http://drdansdailydose.com/?p=406

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12 comments on “KM: The ROI Myth

  1. ewenlb
    March 25, 2011

    Hi there!

    Great post – with a ver clearly stated argument.

    What I like particularly is the idea that indeed expectations on value and RoI are centred around a conception of a repeated cycle of similar events: in the next week /month / quarter / year we expect the same to happen and thus we can predict RoI.

    It’s still very much a single-loop learning way to look at things.

    Rather, we should indeed convince our clients and partners that we *should* assume a different future as it would reflect an improved capacity for adaptive management and the KM efforts should focus on creating that capacity for adaptive management. All things considered this is the key objective: sticking to reality and coming up with solutions that reflect that reality.

    It’s also a great idea to focus on value but avoid the RoI red herring, it leaves some middle ground to discuss with the metrics-obsessed peeps around.

    Cheers!

    Ewen

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  3. Stephen Bounds
    May 1, 2011

    Actually, I’m increasingly convinced that KM will never successfully make an RoI argument.

    Knowledge Management is best understood as a discipline that substantially overlaps with Risk Management: both minimising downsides and more critically, maximising the opportunity for upsides.

    An RoI for Risk Management can only be made retrospectively in terms of aggregate non-realisation of risks, eg decrease in number of plant accidents. The situation is similar for KM, although here quantitative measures could be beneficial or negative.

  4. Ian Fry
    May 1, 2011

    Although the focus on traditional ROI may not be justified, asking KM to justify itself is a legitimate question. There are ways of testing if knowledge transfer had taken place; there are ways of assessing what part of improved outcomes were due to the KM approach; etc
    These need to be measured within KM and used in justifying an increasing role for KM within the organasation.

    • Stephen Bounds
      May 1, 2011

      Ian,

      I completely agree that KM needs to be able to justify itself somehow. But very rarely do we get to the stage of being able to demonstrate unequivocally that anything is due to a KM program.

      KM works in a non-deterministic space. Unless we can identify lots of discrete events with a large potential for changed outcomes due to KM, random chance will play a large role in “success” even if we do everything right.

      I wrote a paper that uses Monte Carlo simulations as a way to demonstrate the problem.

      There are ways to get around this, but they take dedication, time and a commitment to the scientific method to do things like double-blind experimentation and remove as far as possible things like the Hawthorne effect.

  5. Bill Kaplan
    May 5, 2011

    Hi All

    This topic is always explained in a long and drawn out manner which mostly the academicians read…(yes, I am provoking here 😉 — from a practitioner’s perspective I offer the following.

    It can be explained in a straightforward manner…that is, if we recognize that KM is about improving performance of indiviudals, teams, and organizations, then the measure of KM will not be “KM” itself, rather it will be the improvement in performance from a baseline (process, practice, other) from the application or implementation of KM in that organization.

    The discussion around ROI can now be related to the value obtained in the organization and why investments in time and resources to “do KM” will provide a payback or benefit.

    After all, KM is about solving business or operational challenges where the ability to capture and reuse knowledge quickly can make a difference in the outcome(s).

    This concept has always worked well for me.

    for consideration

    best

    Bill

    • theknowledgecore
      May 6, 2011

      Hi Bill,

      Thank you for the input. As a practitioner myself, and as someone who also lectures, I understand your view on the language and depth of academic debate. However, from a knowledge transfer point of view, a lot of what is put forward is highly valuable and provides understanding of our own practice – That was me taking the bait, wasn’t it 🙂

      Anyway, I see what you are saying. But, isn’t this my point? The straightforward view you put forward is retrospective, “it will be the improvement in performance from a baseline “; this means that the project has to be completed, or close to completion, to determine ROI – this is similar to a post action review. My point is that if you try to do this at the outset of a KM project then you are attempting to predict a complex iterative process and it just cannot be done. Retrospective ROI is somewhat accurate, depending on the complexity of the evaluation process and the experience of the measurement team, but, even then, it can often become a narrow process that misses the true ROI produced by a complex concept.

      Also, you cannot project the ROI of one complex project (knowledge being the complex variable in question) onto another project – it will vary according to variables of time, place, people, history, culture etc. Therefore, my concern is that when you say, “discussion around ROI can now be related to the value obtained in the organization and why investments in time and resources to “do KM” will provide a payback or benefit”, that you are suggesting that this is possible – that would be my only point of serious disagreement, you just cannot predict ROI in KM. But that’s the beauty of our field…the multitude of approaches and opinions

      Really good to hear from you though and thank you again for contributing…

      David

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  7. Dan Kirsch
    June 13, 2011

    Hi David,
    Thanks for the point to your blog – enjoyed it! Agreeing with and adding to your just above response, I always am quick to point out that ROI is not a leading indicator. There is seldom an actual correlation between a “predicted” ROI and what is (supposedly) achieved other than to claim that the ROI was met. And that’s for all the reasons you cite. I think that ROI is a lagging indicator, and we all know just how “effective” those are!

    Regards,

    Dan

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