Friday, 27 September 2019

What is the limit to KM's value delivery?

Why is knowledge management not infinitely valuable?  It's because the value it delivers cannot exceed the "Cost of not-knowing"

See text for explanation
I was asked a question a few years back by someone challenging stories of KM value. "If Shell could deliver $200m per year through KM" he asked - "why not spend twice as much on KM and deliver $400 million?"

The answer is that there is no linear relationship between KM spend and value delivery, because KM delivers value through removing inefficiencies. Specifically the value of KM comes through reducing "the cost of not-knowing", which is a finite quantity for any organisation. This represents the maximum value KM can deliver.

KM is like Lean - it adds value by eliminating waste; the waste time and money that comes through not knowing, and the results of the bad decisions made through absence of knowledge that should have been available.

The "cost of not knowing" manifests itself in many ways;
  • People using inefficient approaches, when efficient approaches are available elsewhere or have been used before;
  • People repeating studies which others have already completed;
  • People reinventing approaches which have already been perfected elsewhere or in the past;
  • People making mistakes, when the knowledge to avoid those mistakes already exists (or used to exist, but has been lost);
  • People attempting things by means which others have already proven impossible;
  • People being unduly conservative, when others have already discovered how much you can push the envelope.

The cost of not knowing is a finite number, and is the difference between the current cost of operations and the cost of operations assuming everyone had access to the best knowledge. Defining or estimating your own "cost of not knowing" is an important step for any organisation, and most companies are surprised by how large this cost is, and how much value KM can deliver.

Expenditure in KM can never release more value than the cost of not knowing, and the cost of not knowing can probably never be fully eliminated, as shown in the picture here. The relationship between the investment and the value will be something like the red line in the figure. More and more KM spend will get you closer and closer to eliminating this cost, but I suspect you never remove it completely. Increased investment results in decreasing ROI.  If your company has a required ROI for its investments, then the ideal KM spend is when the investment is such that the delivered value just meets this ROI.

The picture of course is an academic exercise - the cost of not knowing, and the ROI from KM, are both poorly defined figures which cannot be estimated on the scale of an organisation beyond an order of magnitude.

Shell's $5m investment in KM reduces the cost of not knowing by $200m, which may be a substantial proportion of their Cost of not-knowing. They would not add another $200m by spending another $5m, and it may be that their $5m spend is the optimal balance. However the recent Shell job advertisement targeting $1 billion in value, suggests there is a lot more value still to come.

The value of KM is not infinite. It cannot exceed the "Cost of not-knowing". However that value can still be very large, and worthy of major investment. 






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