Emerging Indigo Practices

From previous blogs, I tried to show that major world problems stem from our lack of knowledge in the indigo quadrant (lower left quadrant in the diagram below):

• The $50 trillion global financial crisis resulted from loss of business confidence or trust. Using KM language, it is loss of stakeholder capital, which lies in the indigo quadrant (see “Q22- $8.3 Trillion: Cost to Americans of Disinvestment in Trust” and “A Value Driver behind Relationship Capital”).
• The numerous on-going armed conflicts all over the planet and the threat of a global nuclear war are manifestations in low or negative relationship capital, which belongs to the indigo quadrant (see “War: Consequence of Negative Relationship Capital”).
• Weaknesses in KM initiatives often lie in the indigo quadrant (see “Tacit-Group Processes in KM”). Because organizational cultural and behavioral issues need to be addressed, experienced KM practitioners accompany KM initiatives with change management (click “Change Management must accompany KM” in the CCLFI opening page).

When two long-term societal megatrends are combined, we discover (see “Q27- Combining Megatrends #1 and #2: the next societal innovations”) that the next significant societal innovations are expected in the indigo quadrant. In my contribution to the book “The Future of Innovation” (to be published by Gower in the autumn of 2009), entitled “The Future of Innovation Must Be Sought in Non-Technological Spheres” I wrote, in part:

“Mankind has demonstrated that its ability to technologically innovate is far greater than its ability to anticipate, learn and solve the negative social consequences of those innovations…

Innovation in the future will be driven by common threats confronting mankind. Ironically, most of those threats are man-made. Innovation will proceed in the general direction of preventing and resolving conflicts, governance at all levels, advancing human rights and human security, cross-border agreements in preventing and fighting crime and terrorism, eliminating social exclusions and other social ills that lead to poverty, generating consensus on environmental problems and solutions, and value creation.”

In the specific area of KM, this means that tools, technologies and practices for effectively managing relationship capital would be important. Below is a list of such KM tools (reproduced from a previous blog post: “Practical Hint #17: Tools for Managing Relationship Capital”):

• Social Network Analysis (SNA), sociogram or stakeholder analysis: Maps and analyzes frequencies of communication, teammate preferences, perceived closeness of interpersonal relationships, degree of agreement/disagreement, etc. between people in a group, organization or network
• Team building and team learning exercises
• Setting up a cross-functional KM Team
• Customer relations management, business development, account management, or business partnership management: Management of relationships with customers, suppliers, partners, etc.
• Customer clubs and e-communities: strengthens a company’s communication and relationship with customers, allows customers to participate in product improvement or R&D, makes some customers feel special by receiving advanced news or product prototypes, etc.
• “Customer ba”: Part of the task of some Japanese customer relations managers is to create an affirmative, trusting and creative “relationship space” between himself and the customer.
• MBTI, Belvin types and other psychological profiling tests: Assessing potential for complementarity and good mix of thinking and working styles among prospective team members
• Various tools in brand management and marketing which enhance reputation and credibility of the company
• Various HR/OD tools to enhance employee loyalty and morale: recognitions, honors and awards; policies that allow appropriate decision-making to employees; CEOs that listen e.g. allow direct emails from employees; facilities that show the company cares e.g. day-care facilities within company premises for young children of mother-employees, etc.
• Group exercise in mind mapping: Allows members to see and better understand the assumptions of other fellow members
• Professional and personal profiles of staff, Expertise Directory, company White Pages: Facilitates staff in getting to know each other and each other’s skills, expertise and talents
• Face-to-face meetings and SN functionalities among e-community or e-CoP members: Mutual trust in a virtual CoP or e-community is best nurtured through face-to-face meetings, and through appropriate social network functionalities in the website of the CoP
• Visioning exercise: Co-creating and contributing to an organization’s vision tend to enhance buy-in and engagement of members in programs, projects and activities aimed at the vision of the organization.
• Negotiation: collaborative/integrative negotiation training, skills development (thanks to Peter Spence), and related tools in conflict management
• Leadership (thanks to Peter Spence): one that knows and appreciates many of the above.

Accordingly, I have decided that the next blog series will be on “Indigo Learning Practices.” We will call it the L Series.

Cheers!

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It’s the Knowledge Economy, Stupid!

With apologies to former President Bill Clinton for tweaking his famous 1992 campaign slogan, let us summarize the results shown in the last few blog posts through this diagram (the areas of the circles are proportional to the estimated magnitudes):

From this bird’s eye view, the indicative global agenda are (it is easier said than done and many leaders have been seriously doing or trying to do these; but I will say it anyway):

• Longer-lasting tangible assets (e.g. “planned obsolescence” and heavy “gas guzzler” models in the car industry are stupid);

• Establish new policies and institutions to recover and strengthen business confidence in financial systems (allowing financial carpetbaggers to run loose is stupid);
• Confidence-building processes and more bridging leadership to reduce tensions among nuclear and near-nuclear powers;
• Continue the shift in global wealth creation from industry to services (Colin Clark saw this even before World War II; see “Colin Clark hypothesis”);
• Continue or accelerate shifting the basis of global wealth creation less and less from extraction of non-renewable natural resources (and the stupid destruction of regenerative stocks of renewable natural resources), and more and more from application of human knowledge and creativity;
• Establish more policies and institutions to accelerate value-creating innovation (e.g. military R&D and Internet viruses are value-destroying innovations).

What’s in your mind?

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Towards a Global Balance Sheet

I compiled various estimates of entries in the expanded KM framework towards a global balance sheet.

Negative side (see diagram below):

• Annual cost of corruption = $1 trillion in 2001-2002 according to the World Bank Institute, when GWP = $30 trillion. Now that GWP is 62 trillion, this estimate may be approximately $2 trillion.
• Losses from the global financial crisis had been reported in my previous blog post: $8.3 trillion in Wall Street and $50 trillion worldwide according to the Asian Development Bank
• US federal obligations by end-2008 = $65.5 trillion according to Shadow Government Statistics
• Losses from global climate change = 5-20% of GWP (or at least $3 trillion in 2008) according to a study by the Government Economic Service, U.K. headed by Sir Nicholas Stern
• Annual forest loss = $2-5 trillion according to an EU-commissioned study The Economics of Ecosystems and Biodiversity; the losses from other forms of natural capital are currently being estimated.
• Depletion of oil in Gulf countries up to 2020 = Gulf countries’ cumulative oil earnings up to 2020 = $4.7 trillion according to Ernst & Young
• About $2 trillion worth of minerals are extracted yearly, according to Dr. Philip Brown of the University of Wisconsin
• My estimate of annual cost of risk from global nuclear war = $591 billion per year, or NPV of $11.8 trillion (see my previous blog post)

Positive side (see diagram below):

• US GDP in 2008 = $14.33 trillion according to CIA World Factbook
• China’s GDP in 2008 = $4.4216 trillion, according to its National Bureau of Statistics and China’s forex reserves by end-2008 = $2 trillion according to Christopher Barker
• GWP in 2008 = $62.25 trillion according to the CIA World Factbook
• Human and social capital in US in 2006 = $153 trillion according to Dr. Gary Becker and Kevin Murphy of the University of Chicago. If this is growing at 2.14% per year, then it would be about $163 trillion in 2009.
• Gulf countries’ cumulative oil earnings up to 2020 = $4.7 trillion according to Ernst & Young
• My estimate of global knowledge assets = $871.5 trillion. According to the World Bank’s World Development Report 2009, 69% of GWP is from services which is knowledge-intensive, while 28% is from industry which is technology-intensive. In the US, human and social capital constitute 74% of total assets, while the remaining 26% is financial assets. If we assume that 70% of GWP is contributed by knowledge assets over the next decades, the NPV is $871.5 trillion at 5% discount rate.

What do we notice?

• Total US federal debt exceeds the wealth (GWP) created by the world economy in one year.
• The world is drawing from its natural capital at an annual rate about equal to the 2008 Wall Street meltdown.
• Knowledge is our biggest and growing asset for creating wealth.

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War: Consequence of Negative Relationship Capital

The Achilles heel of humankind is negative relationship capital. In my last blog post, we saw that the more than $50 trillion worldwide financial loss from the global financial crisis is an indicator.

Another consequence of negative relationship capital is war.

Which war after World War II cost the most human lives?

It is not the Korean War. Nor is it the Vietnam War. It is the Congo War which involved eight African nations and 25 armed groups, and cost 5.4 million lives. Its root cause? Some believe that that war was not ethnically motivated but that it was fought to gain control over natural resources worth an estimated $24 trillion!

Ingrid Samset found that resource-based exports is correlated with conflict, and presence of a natural resource is correlated with civil wars that endure (see: “Natural resource wealth, conflict and peacebuilding”)

I will do something foolhardy: estimate the cost of the risk of global nuclear war. It is foolhardy because there will be people who will criticize my assumptions and/or my computations.

I will repeat the Bayesian approach I used in a paper I wrote a long time ago (“Consequences of Nuclear Attack on the Military Bases” in: Foreign Relations Journal 1(2):90-114, June 1986, Philippine Council for Foreign Relations). Basically, the Bayesian Theorem says that the expected cost of an uncertain event is the cost incurred if the event happens multiplied by the probability of the event occurring within a given time period. This is the same principle insurance companies use to compute annual premiums.

I will make the following assumptions:

• A global nuclear war will result in 95% wipe-out of Gross World Product (which is estimated at $71 trillion/year).

• The chance of this occurring is 1 in 100 years.
• The average discount rate over the next decades is about 5% per annum (we cannot use prevailing T-bill rates which have been abnormally brought down by central banks during this global crisis, or else we may overestimate the cost).
• Over 100 years, the NPV is practically that of a perpetuity = annual cost/discount rate.

The loss of GWP entails: annual cost of $590 billion and present value of $11.8 trillion (almost the US GDP of $14 trillion/year!).

Because this is the cost of a risk, we do not actually physically feel it before it actually happens. But that makes it no less real. A ship is insured at Lloyd’s because its owner would rather pay a small annual premium (a real cost) than face the (not yet real) risk of losing the value of the entire ship in case it sinks. Now, if there was a super-Lloyd’s willing to insure the world against the risk of global nuclear war, this super-Lloyd’s would charge us an annual premium not too far from $590 billion.

Yes, a fundamental weakness in planetary relationship capital is the Achilles heel of humankind.

What do you think?

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Q22- $8.3 Trillion: Cost to Americans of Disinvestment in Trust?

My last two blog posts were about the importance of trust. Let me use financial data to further illustrate this.

Below is a graphical way of disaggregating the market value of a corporation.

The average market-to-book ratio has hovered around 5 since 2000 (I use Yahoo Finance data across more than 200 industry groups). This means that book value contributes only about 20% of market value. Or, intangibles (the pink area in the diagram) — which are mostly the scope of knowledge management — account for about 80% of market value. In other words, intangibles (what accountants almost always do not measure) contribute more than tangibles (what accountants measure) to value creation! This fact is one of the powerful arguments for KM. I have stressed this in my previous blogs (for example, check out “F2- Intangibles: More Essential for Value Creation”)

As of yesterday, March 30, 2009, according to Yahoo Finance, the average market-to-book ratio went down to about 2. Contribution of intangibles to market values went down from 80% to about 50%.

What was lost during the last few months of the global financial crisis? Book value or the tangible assets were basically the same. The skills of employees were basically the same. The processes and structures, the vision and strategy, and the leadership in the corporation hardly change in a few months.

What changed was the trust of the public, and specifically of the buyers and sellers of stocks. Their expections of a corporation’s future income had decreased. What was lost was how stockholders and stock buyers perceive a corporation: its reputation, brand, trust (the text in red in the diagram). They have ceased to trust the corporation. In KM language, the corporation lost stakeholder capital.

According to some estimates, Americans and others who own stocks lost $8.3 trillion as a result of the Wall Street meltdown. Its repercussions around the world resulted to total global losses of at least $50 trillion, according to the Asian Development Bank.

And all because people withdrew their trust!

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