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December 13, 2005

The Value of Being In the Know

Imagine trying to create value without being knowledgeable. Not good. But how do we know what value the knowledge creates?

I.

FIrst let's go to a working definition of "value", to tell us how to consistently recognize when value, instead of something else, has been created.

- value: the significant difference that is made by a distinction.

This generic definition is important because it is portable and unchanging across different kinds of situations. However...

In any particular situation, value might be created in a variety of ways. Its two key parts -- significance, and distinction -- can exist independently of, and prior to, each other. This allows some complexity:

- a single distinction can be significant in multiple ways, but not all of those ways are necessarily relevant to a given stakeholder. And...

- there can be more than one way to get to the given significant difference; not all ways are necessarily tolerable or practical at a given time and place.

Thus, the two parts can have a many-to-many relationship with each other, which means their combinations can vary and thus generate value in many diferent ways.

We'll have to sort through that variety when assessments roll around. We should objectively identify different kinds of values. Then, based on relevance and practicality, we can determine what kind of value might be most within our grasp, but finally we also have to decide how much that kind of value means to us and why. This separation of "value" from "worth" is the precision awareness provided by an assessment. The assessment helps us think through potential values in terms of worth, and ultimately we'll commit to the most worthy values.

As an example of concern about "what value is meaningful", companies considering taking on knowledge management (KM) are commonly concerned about the economic impact of KM's value. If KM is valuable, they want to know how and why, with regard to that specific impact.

In figuring it out, we have to start with "how" the value of knowledge can be recognized.

II.

One approach to identifying what value knowledge creates is to first state the desired type of value and then apply knowledge in situations that logically should drive that type of value creation. If applying knowledge produces a measurable change towards the desired value then we attribute that value to that knowledge. An example situation would be "problem-solving". Here, we know that we want a solution and that getting to a solution is a multi-faceted issue. Measuring the effects of applying knowledge might yield findings such as:
- solution obtained much sooner than otherwise has been the case
- solution obtained with greater efficiency of required resource consumption
- solution obtained where previously there hadn't been one obtainable

In fact, "faster, cheaper, and prettier" are very reasonable terms by which to measure the effects of applying knowledge. They typify agreed notions of value (i.e., significant difference) that people already know what to do with.

This is an approach that is compatible with "accounting" -- at least in the sense that it describes tangible results correlated with the level of effort invested and consumed in the situation.

An approach wholly different from that, however, is from the other direction -- where applying knowledge appears to predictably, and even reliably, cause changes, but the significance of the changes is undetermined. Here, the problem lies in not understanding what to (literally) "make of the change"...

When applying knowledge has effects of indeterminate usefulness, the accounting perspective does not help to identify and manage a recognizable value. Accordingly, we need another view -- one that perhaps introduces previously unseen useful effects to accounting, but at minimum discovers the usefulness of previously unobserved effects.

III.

In the latter case above of knowledge-driven changes, management has a special problem: we need to determine whether applied knowledge has re-organized conditions in a way that provides a different set of opportunities and risks than what had previously been established -- not just a different level of preconceived value. The more important the new opportunities and risks are, the more valuable we can say was the knowledge involved. But as with any change management, we need to determine whether the knowledge-driven changes are the "right" ones -- and whether the value is a kind that we really want.

One practical way to recognize this issue of reorganization is through the idea of "technique". Technique organizes the way things are used in action. In practice, acquiring good technique is the same issue as being "trained" (reorganized) to a point of better functional capability. The two most important aspects of technique, making it a target for adoption and improvement, are that (1) it provides an operational advantage against stress, and (2) the means of that provision are sustainable. These are compelling differences to attribute as value.

Technique organizes the way things are used in action -- but so does a "process". So what's the distinction there?

Technique is to "process" as Policy is to "approvals". Approvals define the selection of permissions, but policy defines the logic of permissions according to prevailing conditions. Likewise, where process defines the selection of connecting actions, technique defines the logic of actions according to prevailing conditions. A process that amounts to bad technique is no more tolerable than approvals that amount to bad policy.

Most oganizations today can think about technique by thinking about "best practices", contrasting that against what might be considered the "best procedures" world of processes and rules.

But if we take the example of best practices and investigate it for its contribution to value, much of what immediately comes to mind is the view from the opposite direction -- that is, practices which are not "best" are inhibitors or liabilities that we want to remove. This helps to focus our attention more on the aspect of protecting "opportunity" and on how opportunity is maximized or minimized under the pressure of demand.

Now, we see that Opportunity can be set alongside Operation as a second critical perspective in assessment. Where assessment of operations deals with progress, assessment of opportunity deals with potential.

- Potential represents the degree of protection provided for an opportunity to obtain the desired impact.
- Progress represents the degree of achievement in realizing the potential.

Accounting typically examines Operations for progress; but value assessment also needs a mechanism that examines Opportunity for potential.

IV.

Before beginning that opportunity examination, we must be careful to furthermore separate "opportunity" from "objective"...

In practice, objectives are usually identified and promoted specifically to represent the perceived or desired endpoints of paths -- paths seen as "opportunities" that describe the potential for reaching a goal. The paths have been conceived for the purpose of meeting the objectives.

Managing operations focuses on moving things along those paths; but covering the known paths is more about performance than it is about value. Meanwhile, accounting is heavily performance-oriented. It wants to discover and explain "progress." It expects knowledge to stage and promote progress by changing operations to realize the potential.

In contrast, managing opportunity means path-finding and path-determination, which comes from strategy. Strategy is heavily value-oriented. It is mainly about finding and validating the paths where potential is first created. It expects knowledge to stage and promote potential by changing opportunities to realize the desired impacts.

Thus, in the defined opportunity produced by the strategy, we see the definition itself as the "significant difference" and therefore attach value to it (separately from any pursuit). Then, we have to weigh the opportunity's significance to the objective, independently of weighing the importance of the objective itself.

For example, we may see the strategy as the map to success. Following the map will still be a critical constraint on achieving the goal, but the requirements for following it (i.e., progress) should not be mistaken as the criteria for weighing the importance of the strategy's value (i.e., potential).
- Instead, the strategic opportunity must be relevant and viable, and considered against alternatives.
- Meanwhile, regardless of the importance of the objective itself, if the opportunity is critical to the objective then by definition the opportunity has great weight.

V.

The map that strategy creates is a highly valuable asset even before we start to actually follow it. We want knowledge to do two things: to make us better map-makers; and, to help us make better maps.

Those differences indicate yet another key to assessing the value of knowledge -- namely, to distinguish "intellectual assets" from intellectual behavior. Knowledge changes both things, so they each are dimensions of knowledge influence, affecting both operaions and opportunity. Additionally, they affect each other.

Managing assets and managing behavior are not the same activity, but with valuable assets such as distinctive ideas (like strategy or procedure), we naturally also want behavior that improves and leverages their value.

For example, we want high performance in compliance to a valuable procedure -- which makes that behavior itself valuable. But that sense of behavior should be understood as "skill".

Intellectual behaviors such as analysis, decision-making, and invention are also coveted skills -- but they make their distinction, and ultimately their value, in their ability to create and modify important circumstances and intellectual assets.

If we say that we can apply intellectual behaviors and intellectual assets to a situation, have we covered the bases for saying that we have applied "knowledge"? Not quite.

Under the pressures of demand, an organization's assets primarily represent its capacity while its behaviors represent its competency. But in our overview of knowledge, a third and final dimension, joining intellectual assets and intellectual behaviors, is what we might call "intellectual predispositions" -- which brings preferences to join capacity and competency.

Now, with those three dimensions of knowledge influence, we can begin to catalog the types of differences that we want assets, behaviors and predispositions to make, and in that way list key terms of assessment. We can cover opportunity comprehensively, and we can also "backfill" issues frequently ignored about operations.

Amongst our catalog of differences, we must also have clarity and confidence about what final impacts we really need, and then about whether the contributions of the assets and behaviors (capacity and competency) are actually supporting both the progress and potential towards the target impact.

If our key objective is maximum positive economic impact, the challenge will be to distinguish how knowledge drives economically significant progress, and how it drives economically significant potentials, related to the desired ultimate impact.

We'll especially want to understand how knowledge helps our progress, potential and desired impact to align with each other. Or else!

The fact is, we could do a bang-up job of executing on differences that don't really matter amongst our goals and priorities, yet still affects our economies -- for example, perfecting compliance to standards that don't solve our problems.

And highly potent value can be created that doesn't have much economic impact -- for example, a well-executed product perfect for only a very tiny market.

What will emerge, though, is that the interrelationship of these issues is not strictly linear but instead is interwoven -- more of a network of influences than of a chain. Managing assets, managing behaviors and managing predispositions each have their own way of affecting progress, potential and desired impacts. But the way that knowledge affects one dimension also affects the others, which changes their alignment. In that way, managing knowledge value is a lot like managing a network.

VI.

To envision the scope of interrelationships in the alignment, consider the following.

This matrix is one way to describe how knowledge influences alignment. Here we see the representations of numerous familiar business instruments that are directly related to knowledge and that in turn are distributed to shape operations, opportunity and objectives. Our familiarity with the items in this view also lets us see more readily that changes in one place can alter the support, status or direction of another place in the picture.

Managing knowledge will include managing the making, certification and purposeful utilization of it at each point in the matrix. But through our familiarity with these instruments, we already recognize that the point-to-point connections are vital to the health of the business effort. Given that, managing knowledge value comes in when we know what difference we want the knowledge to make at each point, and how those differences relate to each other.

With things put that way, it's easy to say that at all points we just want knowledge to make things "better".

But better should mean that they become more reflective of the target impact while improving the way they interrelate. For example, a faster, cheaper or prettier way to do something is better if it keeps or increases the level of support it offers to other factors that depend on it. Otherwise, diminished support can easily make the other factors riskier and likely more costly. The sensitivity to this is typical of taking a portfolio management approach rather than an accounting approach. What we're working with is the "knowledge portfolio"...

VII.
From here we can begin to sum up how knowledge is valuable.

Our matrix has a left-to-right connection of three perspectives: operations, opportunity and objectives. As management modes, what forwards knowledge influences from operations through to objectives and beyond is technique, strategy and purpose. We readily recognize this in certain management artifacts:

- Earlier, Best Practices (through technique) was an example in which the influence of knowledge on operations was directed in support of opportunity.

- In like manner, Planning represents strategy's bringing knowledge influence on opportunity, with which we would likely support objectives.

- To that, we can add that an organization's Positioning represents the knowledge influence that purpose has on objectives, which we use for supporting stakeholders.

Together, the three things illustrate the organization's competency, capacity and preferences systemically establishing themselves -- three characteristics that we already know are criteria in economic justifications. These characteristics are also recognizable thematically as in the examples within the picture below:

Meanwhile, vertical linkage in the matrix connects the three knowledge dimensions. Looking back at the cycle of leveraging knowledge value under demand, we saw a picture that corresponds to these dimensional links: predispositions should direct appropriate behaviors; and in turn, behaviors should produce relevant assets that communicate and transport capacity from one time and place to another in the organization's experience.

In that picture:
- intent is a source of conditions;
- form is a source of content; and
- function is a source of capability.

Knowledge affects the measurable conditions, content and capability of the organization -- characteristics that we already know are monitored for the economic impact of their use. Overall, the cycle addresses the question, "of the things that we want to do, how do we get them done?" This explains why improvement initiatives focus on investment, refinement, and redeployment in those three areas. While those initiatives typically look to business "intelligence" as a primary means of gauging the importance and progress of the efforts, we saw that "knowledge" is more instrumental to shaping the actual changes that the efforts make. In other words, that is why knowledge is valuable.

VIII.

One of the key challenges to working on improving the value of knowledge is to assure visibility of why certain kinds of knowledge is appropriate in given situations. In general this is thought about as "expertise", but in an important way that misses the point. Along with information overload, an organization also has a degree of complexity that often obscures the reasons why knowledge is available or not in given circumstances. Automation certainly tries to address this problem by minimizing it risks. But behind that automation should be a visible logic of knowledge management that corresponds with the assessment matrix and alignment cycle we have now seen.

As a closing explanation, but one that is a work in progress, the following picture identifies that knowledge is more likely manageable when its form and function aspects are more visible. This visibility helps to begin the process of optimizing the current knowledge deployments into a configuration that, as outlined by the discussion above, will more systematically support programs for increasing their value.

Posted by Malcolm Ryder at December 13, 2005 12:18 PM

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