T0-2 Starting a New KM Language in Your Organization

Starting KM in your organization also means starting to learn a new KM language among your members. A simple tool towards this end is an FAQ on KM (FAQ=frequently asked questions) which can be circulated among members or placed in the KM webpage in your intranet.

Download CCLFI’s FAQ on KM by pressing “Ctrl” while clicking HERE. The FAQ will appear in a new browser tab.

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Thanks to Wordle for the above “word cloud” of the FAQ

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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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(Note that there are embedded links in this blog post. They show up as colored text. While pressing “Ctrl” click on any link to create a new tab to reach the websites pointed to.)

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Q5- Market Value and/or(?) Development Value?

Kytt Mier mentioned about decisions that can be described as “sub-optimization” (check our lively interchange in the Comments sections under Q1 (What is KM for?) and Q2 (KM is for creating value; whose value?) below). By “sub-optimization” he refers to decisions which seek highest gain but which in fact do not achieve highest gain if viewed from a broader perspective.

Let me give two examples: the private enterprise and the nation-state.

The private enterprise tries to optimize value creation, or more precisely, creation of market value. There is nothing wrong with value creation, which here means creating more wealth. Right? Wait. In Q3 (“The customer is king”: but the king is blind!?) we talked about social costs and what economists call “diseconomies” or “negative externalities.” This diagram illustrates what usually happens:

Social costs such as pollution to the environment do not enter the accounting system of enterprises. They do not factor into corporate decision-making — until a higher authority, the government enacts laws, rules and regulations to force them (such as the Environmental Impact Statement system) or until the negatively-affected public starts to react verbally, legally or violently.

Our corporate, or even individual actions do create side-effects on other people. The side effects are often unintended, unexpected, undesired and/or unknown to the organization or individual performing the action. We are often blind to side-effects, that is why we call them “side-effects”! Side-effects are included in the broader criterion of net welfare = private benefit — private cost + social benefit — social cost [thanks to Ann Lily Uvero for pointing this out].

Something similar happens to nation-states. Their optimization is actually “sub-optimal” if viewed from a planetary perspective. In attacking Gaza areas, Israel was protecting its citizens from Hamas’ rockets; but viewed from a larger perspective, this action may be increasing the distrust, hatred and resolve of Hamas, Hezbollah, Iran, Syria, the Arab and Islamic world, sympathizers in the Western world and — who knows — maybe the Russians and Chinese too? The consequences extend beyond Israel and Gaza.

This diagram illustrates what usually happens. The story and its tragedies are similar, but on an international or planetary scale:

Of course, nation-states want national development and growth. National decisions seek to optimize this form of value creation. There is nothing wrong with pursuing what is valuable, right? Wait. What happens when we take a planetary perspective?

Something seems to be missing in how we structure or configure our decision-making and governance systems, don’t you think so? Market value is good, but not enough. Development values are good, but not enough. What are missing?

We need answers quickly, or before another regional or global conflict erupts. If that happens then all the economic capital, social capital, cultural capital, natural capital, human capital, etc. that we all have built over the past decades and centuries would be at risk of being destroyed.

Quickly then, what are missing?

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F3- KM is for Value Creation

In the private sector, value is measured in terms of how much consumers are willing to pay for a product or service, or how much stock market buyers are willing to pay for stocks of a corporation. The key element is how much a consumer is willing to pay, which in turn depends on her/his satisfaction. KM starts with recognizing what internal and external customers WANT. On these criteria hinge management decisions, including KM.

There is an ugly fly in this ointment: most consumers make decisions with almost zero knowledge of the human, social, environmental and cultural costs inflicted elsewhere while producing what she/he buys. Do you agree that most corporate KM contribute to perpetuating this situation?

In the public and civil society sectors, the mainstream development value is sustainable development — which can be restated in KM language as: development of social, natural and economic capital in ways that are not at the expense of each other. The World Bank proposed a four-pillar model of the Knowledge-Based Economy (KBE). They then developed a widely-used KAM or Knowledge Assessment Methodology for measuring the progress of national economies along the four pillars. The limitation of KBE is that the four pillars pertain only to the economic dimension. The Asian Development Bank subsequently proposed a broader framework, marrying KM with sustainable development, and came up with Knowledge-Based Development (KBD). However, it has not come up with similarly practical indicators.

Communities and social groups are the primary actors in development. KM for development starts with recognition of the needs and values of a community. You will surely agree with me that KM starts with what a community truly WANTS.

There is a messy fly in this ointment: results valued by a social group may be harmful to another social group. Al Qaeda and the US Government want valuable (to each of them) results extremely at odds with each other — and each uses KM along their own definitions of what to them is effective action (both use manuals, mentoring, technology, learning-by-doing, websites, networks, etc. — all KM tools). More, milder situations exist, where the KM framework of the more powerful group prevails (sometimes unwittingly) over that of the less powerful.

In many places in our planet, development can hardly proceed because of conflict — a sign of eroded or damaged social capital. In fact social capital can be double-edged: some social groups achieve unity among insiders (improving “bonding” social capital or exclusive social capital) by cultivating greater enmity against outsiders or enemies (worsening “bridging” social capital or inclusive social capital -from Putnam, Woolcock, Bourdieu,etc.).

It is utterly urgent to, using KM language, cultivate bridging social capital to heal the differences between warring nations, religions and ethnic groups — and failure can be in the form of a global or regional nuclear war that can destroy all other forms of capital in the planet.

This morning, I received an invitation to help the Center for Bridging Societal Divides of the Asian Institute of Management formulate their KM framework. One of their missions is to provide training on Bridging Leadership. I keep experiencing these interesting and seemingly random “connections” in my KM work. Jung called this synchronicity.

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