The Economics Institute of Washington, D.C., in its recent study on human intellectual capital, concluded that, "The economic value of the nation's productivity depends more upon employee skills and knowledge and business problem-solving aptitude than it does upon the market value of the firm's commercial output." Most experts agree. In the new millennium, intellectual capital will be the primary resource and driver of our information economy.
While past economies depended on use of land, natural resources, equipment and capital for the creation of value, our information economy will depend on application of knowledge. Our knowledge exists within two frameworks: explicit knowledge and tacit knowledge.
Explicit knowledge is usually recorded in some form, such as a data base, document or other media. It is latent until transformed and applied to support decision making. Then it is considered information, as opposed to raw data.
Tacit knowledge usually is not recorded. It consists of ideals, values, experiences and actions that tend to be more personal. Tacit knowledge is communicated by word of mouth and shared experiences. Common examples include corporate culture, organizational politics and professional experience.
The effort made by organizations to develop, control, apply and leverage explicit and tacit knowledge is called knowledge management. Knowledge management makes use of the organizational structure, personnel and all other resources, including policies, procedures, processes and automated systems.
In very small agencies, explicit and tacit knowledge are relatively easy to manage. Explicit knowledge is usually centralized and readily available. Tacit knowledge is easily communicated. A mentor can communicate with a protege. Small teams communicate among members.
In large agencies, insurance companies or financial institutions, knowledge management is considerably more difficult. Explicit knowledge is usually decentralized and often difficult to access. Channels of communication expand geometrically. For example, there is only one channel between two people. There are 45 channels of communication among 10 people and almost 5,000 channels among 100 people.
A disciplined approach to knowledge management increases the value of knowledge assets and the ability to act on them in pursuit of business goals.
The ability of an agency, insurance company or financial institution to harness and apply its knowledge assets to achieve monetary benefits determines the value of its intellectual capital.
Recently, intellectual capital is being used to explain the tangible difference between the market value of companies and their book value, which has been widening since the early 1980s. MIT economist Jerry Hausman, for example, concludes that 95% percent of Microsoft's market cap consists mostly of intellectual capital.
And this recognition of the value of intellectual capital is in turn beginning to change the way we look at corporate performance--shifting from traditional backward-looking accounting views to new, more forward-looking performance views.
Forward-looking performance views address questions such as:
* "How fast can the organization grow its customer base, or capture market share?"
* "How effectively can the organization achieve total customer relationship management?"
* "How effectively can the organization retain and continually improve its intellectual resources--people and knowledge?"
* "How effectively can the organization develop and penetrate new market opportunities?"
* "How effectively can the organization reduce cycle times and leverage internal efficiencies to drive profits?"
In those agencies, insurance companies and financial institutions where initial answers to these questions suggest problems or concerns, Harbor Capital Advisors normally conducts a knowledge audit using our proprietary assessment methodology.
The knowledge audit usually reveals certain common threads that appear in nearly every problem situation:
--Existence of "gatekeepers" who hoard information, forcing people to go through them for access
--Constant "fire fighting" as a means of dealing with unforeseen problems
--Too much irrelevant data and not enough meaningful information
--Lack of awareness of information within the organization
--Inability to stay current with relevant information
--Constant use of out-dated information
--Constant reinvention of information
-- Not knowing where to go for specific expertise
Harbor Capital Advisors helps organizations address these issues by developing a roadmap for change. Following are some of the guidelines contained in the roadmap by Harbor Capital Advisors to improve overall knowledge management and the value of intellectual capital.
1. Understand what knowledge is valuable to individuals and the organization and why. Don't take anything for granted.
2. Establish a way to capture, retain and make knowledge accessible. Remove barriers to sharing. Create incentives through compensation. Foster open communication.
3. Encourage reuse of knowledge. Discourage the reinvention of anything.
4. Establish a process for assessing new information--recognizing the value of new knowledge--and eliminating old, irrelevant information.
5. Train and educate continuously.
Summary
Agencies, insurance companies and financial institutions should begin addressing forward-looking performance measures as a way to understand and assess the value of their intellectual capital. With intelligent, knowledge-based organizations continually gaining in share value over traditional service organizations, it is imperative for agencies, insurance companies and financial organizations to rethink their performance measures.
The authors
Paul J. Di Stefano, CPA, CPCU, is managing director, and G. Edward Kalbaugh, MBA, is director of management advisory services of Harbor Capital Advisors, Inc., an investment bank and consultant to the insurance industry. They can be reached by e-mail at harborcapitaladvisors@banet.net or by phone at (800) 858-2732. *
©COPYRIGHT: The Rough Notes Magazine, 1999