Avoiding the Measurement Trap

Dr David J. Skyrme

This is a synopisis of a presentation given at the ICM conference Facilitating Corporate Innovation via Knowledge Management, New York, April 1998. An updated presentation From Measurement Myopia to Knowledge Leadership (Access Conference, June 1999) can be viewed or you can download the Powerpoint file. See also the informative Management Insight on the subject.

This presentation is based on further research following a year long study into best practice in knowledge management, published in the report Creating the Knowledge-based Business. One of the critical challenges identified in that report was that of measurement systems for knowledge and intellectual capital. The presentation give a short introduction to knowledge management, then reviews different measurement systems, with a particular focus on those specifically designed for intellectual capital.

Knowledge Management

Knowledge adds value to a firm’s operations and processes. Although some people like Drucker were describing the knowledge-based enterprise several decades ago, it is only during the last few years that knowledge has become a strategic issue for most companies and is now being addressed more explicitly.

Our research found two main thrusts of knowledge management initiatives:

1. Sharing existing knowledge e.g. of best practices
2. Focusing on better conversion from ideas to products i.e. the innovation process.

We have identified seven strategic levers that are places where companies seek a strategic advantage through knowledge. The main three are:

• Knowledge in processes (structural capital)
• Knowledge in people (human capital)
• Knowledge in products (part of customer capital)

Another important perspective is the notion of information and knowledge as an asset to be nurtured and grown. This provides a powerful driver for knowledge-intensive companies, especially those that depend on intellectual property.

The Pressure to Measure

Many commentators have highlighted the shortcomings of traditional financial accounts for knowledge-intensive companies. Critics argue that they:

• grossly undervalue intangible assets such as intellectual capital
• do not give investors a true picture of a company’s value
• therefore lead to inefficient capital markets, with higher cost of capital
• do not focus management attention on important drivers of value.

Therefore, managers are seeking better ways of measuring, and thence managing these intangible assets.

Measurement in Innovation

Innovation is a related area fraught with difficulty of measurement and management. Traditional macro-economic indicators have tended to focus on input measures, such as R&D spend. However, recent work in measuring a countries competitiveness or a region’s innovative capabilities have led to a broadening of the measures used e.g.

• innovation processes
• patent success rates
• technical and support infrastructures
• creation of new industries.

i.e. a combination of input, process, output and outcome measures. We suggest that several of the approaches used by OECD and others provide useful insight for R&D managers.

Innovation in Measurement

The most innovative measures introduced over the last decade or so that help management practice are those based on either adjustments to financial recording systems (such as EVA^TM ) or on more balanced scorecards that introduce non-financial measures, such as innovation and learning measures, alongside financial ones.

However, those most closely investigating knowledge-intensive businesses do not believe they go far enough in helping to identify, manage and grow a firms intellectual assets. There have recently been developed a series of new measures whose focus is the intellectual capital of a business, which includes (using the categories of one well known model):

• Human capital - competencies, know-how etc.
• Structural capital - internal processes, databases, systems etc.
• Customer capital - customer relationships, brands, other IPR.

Several of these models feature in the presentation. The reader is also referred to the briefing note - Management Insight No. 24.

Best Practice Guidelines

Whatever method is used, successful users agree on several points:

• It is important to develop an understanding and language before trying to introduce new and unfamiliar measures
• Develop clear categories appropriate to the business
• Indicators should be relevant, forward looking and provide a good mix of different types e.g. input/ output, stability/growth.
• It is better to have a few simple and proxy measures, rather than lots of more complete measures.
• Measures should be aligned with both business strategy and individual’s personal job and development goals.

Measurement Myopia

What our research has shown is that while the theory "what you can measure you can manage" may be fine for highly understood and systematized processes, this is less true areas of innovation and knowledge management. What we found more important was leadership.

Significantly many of the leaders in innovation and knowledge management had not yet turned their attention to justifying their innovations, nor developing their measuring systems. They did, however, identify business benefits (the value proposition) and used anecdotal stories of success to spread the message.

David Skyrme Associates provides consultancy services and workshops on information and knowledge management that address the topics covered in this article. There is also a report Measuring the Value of Knowledge.

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