If you keep even half an eye on the management press, chances are you have come across the concept of knowledge management. Emerging at the beginning of the 1990s, knowledge management is now a well-established school of thought with its own dedicated consulting companies, journals and management gurus. Bain and Co., the U.S. consulting firm, rated knowledge management as the 15th-most important management tool used by major corporations in 1999.

The “big idea” with knowledge management is that in a fast-moving, increasingly competitive world, a firm’s only enduring source of advantage is its knowledge—the knowledge of its employees and the knowledge that gets built into the organization. Consulting companies and R&D organizations have known this for years, but increasingly, it is Old Economy firms—in oil, steel and consumer products—that are recognizing that knowledge assets are the source of their success.

I have prepared this article for managers who want to come to grips with the ideas and techniques of knowledge management. My purpose is twofold: First, I wish to offer a quick survey of the landscape—an explanation of what knowledge management is really, a description of the major tools and techniques that are used today, and a discussion of how knowledge management fits the related concepts of intellectual capital and organization learning. Second, I put forward six insights into how knowledge management works, or more accurately, how it often does not work. I don’t want to come across as negative, but there is a certain degree of skepticism in these points, which I believe is healthy. If knowledge management is to mature from fad to enduring management technique, firms need to understand its limitations as well as its potential.

WHAT IS KNOWLEDGE MANAGEMENT?

Let’s take a short detour into theory. At the heart of the knowledge-management movement is the simple concept of the firm as a “social institution.” The firm draws value from the individuals within it, and from its ability to harness their knowledge. But individuals also draw value from the firm they work for, to a far greater extent than a simple contract-based view of the world would suggest. They learn from their colleagues, and are able to accomplish tasks they could not do on their own. And equally important, individuals are innately social animals—they like to share experiences, they like to gossip, and they like the feeling of “belonging” to a department or a firm.

This may not be an organizational philosophy that resonates with everyone, but the fact is that many firms—both small and large—do work this way, so there is potentially a great deal of value in understanding how to make it work. And to do so is essentially about creating structures and systems that enable—rather than constrain—social activity and knowledge sharing. Knowledge management, by this logic, can be seen to be a set of techniques and practices that facilitate the flow of knowledge into and within the firm.

In practical terms, there are two key requisites if knowledge management is to be effective. First, the firm should encourage individuals to interact—to work together on projects or to share their ideas informally. Second, systems are needed to codify the knowledge of individuals so that others can access that knowledge. A key insight from the knowledge-management movement is that a lot of valuable knowledge is tacit—it is held so deeply by the individual that it is hard to express or document. If ways can be found to transfer that knowledge to others in the firm, either through personal interaction or by recording it, then that knowledge essentially becomes the property of the firm and a key source of advantage.

THE TOOLS

There are generally three types of tools that can be applied to manage knowledge.

• Information technology systems. In many firms, knowledge management evolved from information management, for the obvious reason that knowledge and information are closely related. McKinsey and Accenture, for example, both have highly sophisticated databases that provide libraries of information about their proprietary methodologies, clients and previous engagements. These are essentially repositories of codified knowledge. They do not capture the tacit knowledge or expertise of leading partners, but provide a form of collective memory that consultants can tap into quickly and efficiently.
• Formal and informal structures. A large part of knowledge management is simply about facilitating the natural interactions between people. One approach is to design the physical layout of offices so that social interaction is encouraged. Ericsson and GlaxoWellcome, for example, designed their R&D labs using lots of glass, open-plan layouts and hub-and-spoke structures to facilitate informal discussions. A second approach is to design the formal structure around the key knowledge flows. Cross-functional project teams are a case in point—a way of formalizing meetings to ensure that all the individuals involved bring their relevant knowledge to bear on the project. A third approach is to facilitate informal interactions through what are usually called “communities of practice”—groups of individuals with common interests and problems that are dispersed throughout the firm (See article on page 37). These individuals, it is argued, will naturally seek one another out to share their experiences and learn from one another, so the firm can play a subtle role in facilitating their interaction, for example, by creating discussion forums on the intranet.
• Specific knowledge-management tools. Finally, there are a number of specific knowledge management tools that firms use. One is the transfer of best practice—a structured process for taking a practice in one location and transferring it to another. Another is the designation of centres of excellence, which are groups of individuals whose expertise is recognized on a firm level so that it can be picked up and used in other parts of the firm.

It is worth pointing out the existence of two related bodies of thinking—Organization Learning and Intellectual Capital. These overlap, to a great extent, the field of knowledge management. But at the same time, each has its own particular nuances.

Organization Learning was really the forerunner of knowledge management. The underlying premise is similar—that knowledge is a scarce and valuable resource, so if firms are to succeed in a fast-changing world they must become better at learning (i.e., sharing knowledge among individuals). The difference is that organization learning is about managing the processes of learning while knowledge management is more concerned with techniques for building up and applying stocks of knowledge.

The Intellectual Capital movement took shape around the same time as knowledge management. It emerged essentially out of the world of accounting, as an attempt to identify and measure intangible assets. By breaking a firm’s intellectual capital down into such elements as human capital (the capabilities of employees), customer capital (existing relationships) and structural capital (patents, operating systems, practices), its advocates were able to come up with useful measures that could then be monitored and evaluated over time. The best-known example of this was the Navigator model developed by Skandia, a Swedish insurance company, in which the elements of intellectual capital were identified, measured and reported in a supplement to the annual report.

MAKING KNOWLEDGE MANAGEMENT WORK

Knowledge management programs have had mixed success. The Bain and Co. study mentioned earlier found that satisfaction with knowledge management was “below average” when compared to other management tools. Of course there were many firms who rated themselves “extremely satisfied” as well. But clearly, knowledge management is no panacea. Below are my observations on why this is the case, drawn from five years of experience working with firms engaged in knowledge management.

Knowledge management is never a zero-based activity. It is already happening to some extent in every company. While the proponents of knowledge management would like to argue otherwise, the reality is that firms have been managing their knowledge since the dawn of time. For example, formal organization structures are typically designed to ensure that knowledge exchange takes place between those who most need it. Informal social networks—the groups of people who have lunch together or go for a drink after work—are mechanisms for transferring knowledge. And industry associations are vehicles for sharing ideas and discussing common problems. The key challenge, then, is not to ask yourself how you should be managing your knowledge. Rather, you should start with several questions: How are we currently managing our knowledge? What informal systems have emerged over the years to enable people to get their job done? Who are the key figures in the firm, the “gurus” to whom people turn when they have a problem? Where and when do social activities take place? Once you know the answer to these questions, you will be better able to identify the gaps, and the sorts of tools you can put in place to fill those gaps.

An example of this is a new media consulting company I have worked with. In looking at how knowledge was shared between software programmers, it became apparent that these people would often use external discussion groups with people they had never met, rather than the company’s own intranet. This was a real eye-opener for the managers, because they had assumed that the intranet would be a useful tool for sharing ideas and solving problems. Armed with this insight, they were then in a position to rethink the support they gave to their software programmers, and the function of the corporate intranet.

Knowledge management is difficult to do well. While there are plenty of success stories out there, my experience in working with companies that undertake knowledge management initiatives is that most struggle.

Examples of this uphill battle are everywhere:

• Transferring best practices. Everyone recognizes how important this is in principle, but few firms actually do it well. One industrial products company took a management tool that had worked very well in its Canadian headquarters and imported it into its Spanish and German subsidiaries. While moderately successful in Spain, the tool failed miserably in Germany.
• Knowledge databases. These are great when they work, but the reality for most firms is that they do not. There are often problems with the quality and volume of information they contain, so that searching is a slow or useless exercise. And many are simply underused, because people find different ways of getting access to the information they need. One executive called this the “ignorance is bliss” syndrome.
• Centres of excellence. I was following the creation of a centre of excellence program in a diversified European multinational. These were specific individuals or groups who had important skills that could be used throughout the region—a business intelligence group in the U.K., an Internet expert in France (this was back in 1996), and a key account management guru in Sweden. The problem was that the program was never properly funded. These individuals were being asked to work on a pan-European basis, but they were still funded by their local marketing manager. And the program was never communicated effectively to the other countries in Europe, with the result that most of the work was still done locally. The program did not fail as such, but neither did it achieve a high level of visibility or success.

The reason that these and other initiatives often struggle to get going is that they require fundamental changes in the behaviour of employees. Such changes take many years to bring about, and unfortunately, there is no real shortcut. Some firms have experimented with hard incentives, such as giving employees a fee for every piece of work they put into the knowledge database. But as you can imagine, such schemes end up creating the wrong behaviours. As a result, firms typically fall back on “soft” incentive schemes (e.g., as a qualitative element of a performance review) coupled with the realization that for knowledge management to work, it has to be built into the culture of the firm.

Most knowledge management techniques end up looking just like the traditional techniques you have been using for years. The deeper that firms get into these sorts of tools, the more they find that managing knowledge is integral to the working of the entire organization. For example, the Skandia Navigator model I mentioned earlier was built on intellectual capital foundations. However, it ends up functioning exactly like the Balanced Scorecard. The concept of communities of practice is alluring, but essentially it is just about encouraging people to communicate with one other and share their ideas. This idea is as old as the hills. Knowledge databases have an important role to play in sharing knowledge, but the challenge of aligning such tools with user needs is the same one that IT managers have always faced.

These observations are not meant to be cynical. Good management practice always boils down to a few basic challenges, so the fact that knowledge management leads to a certain amount of déjà vu among seasoned managers is actually a reassurance that it is addressing important issues. The acid test is whether these techniques end up being better understood, and better implemented, as a result of the knowledge management “framing.”

Knowledge management is as much about generating new knowledge as it is about recycling existing knowledge. Most of the knowledge management literature is inherently inward-looking. It is concerned with tools such as the transfer of best practice, and knowledge databases that are extremely important, but ultimately focused on what I would call “operational efficiency”—making current activities work in a more streamlined way. Much more important, over the long term, is the ability to bring new knowledge into the organization, and turn it into new products and business models. There are many ways of doing this. The 3M Corporation, for example, has strategic accounts with many leading customers to pursue joint innovation projects. Ericsson and Nokia both have out-posts in Silicon Valley whose job is to tap into the latest thinking there and transfer it back to head office. Cisco Systems aggressively acquires small companies as a way of building its knowledge base (last summer, Cisco bought PixStream Incorporated, the subject of the case study on page 48). All of these approaches to knowledge generation have their own challenges, but they are critically important because they represent a way of renewing the firm’s knowledge, rather than just recycling it.

Information technology is never a substitute for social interaction. The Internet revolution has caused some writers to make absurd claims about how the world of work will change. One popular article by Tom Malone and Robert Laubacher foresaw the emergence of the “e-lance economy” in which individuals would work as freelancers rather than as employees of firms. (Harvard Business Review, August/September 1998.) Another line of thinking talked about the “paperless office.” Many have argued that telecommuting will take over from traditional forms of commuting. Unfortunately, all these arguments are just plain wrong, for the simple reason I noted earlier: Individuals need social interaction—both for its own sake, and because it provides a powerful vehicle for learning.

This insight has very important implications for the management of knowledge. First, it helps to explain why most knowledge databases are so poorly used. Most people would much prefer to talk to a colleague about their latest ideas rather than try to find something he or she wrote. And second, it cautions us to recognize that IT tools and “social” tools such as communities of practice are complementary. Again, this somewhat contradicts received wisdom. A recent article by Morten Hansen and colleagues suggested that firms should focus on either a “codification strategy” which involved putting the firm’s knowledge into IT databases, or on a “personalization strategy” which involved building strong social networks. (Harvard Business Review, January/February 2000.) But my experience suggests that the complementary nature of the two strategies is such that you really need to do both.

Most firms do not know what they know. One of the most widely used knowledge management tools is the transfer of best practice. A lot of research has been done to figure out how to make such transfers work better, in terms of motivating both sender and receiver, and making the process work right. But there is still a basic problem that often goes unrecognized, namely that most firms have no idea where their best practices are. For example, a recent study by Niklas Arvidsson of SMG Sweden (1999) looked at the sales and marketing affiliates of Ericsson, Volvo, Pharmacia, Sandvik and Alfa Laval. The study showed that there was remarkably little shared understanding of where the highest performers were. In these firms there were plenty of knowledge transfers going on, but they often ended up being transfers of “mediocre” or “worst” practices rather than best practices. What was going on, it turned out, was that transfers were simply taking place between subsidiary companies that already knew one another. Others that were either relatively new or geographically isolated were essentially shut out of this knowledge sharing, simply because they were not part of the “in crowd.”

This takes us back to the first point—that knowledge sharing is already taking place, but it is happening in an ad hoc way along the lines of people’s informal networks. Knowledge management can help to make this a more systematic process, for example by monitoring and comparing the performance of different subsidiary companies or R&D units. This at least helps the firm to “know what it knows.” But it still does not guarantee that the flows of knowledge will be diverted from their traditional, well-trodden paths.

A survey of the entire field of knowledge management in a single article is an ambitious undertaking at best. I have summarized many important issues in a single paragraph and have neglected many others altogether. My purpose in preparing this article was not to provide a comprehensive overview. Rather, it was to focus on what I see as the core issues in knowledge management, and to highlight some of the challenges and problems firms typically face as they embark on a knowledge-management program. My tone is, deliberately, somewhat skeptical, but I think that it is appropriate if knowledge management is to move from being yet another interesting “fad” to become an enduring management technique. Many of the ideas in knowledge management are, indeed, old ones with new labels. But at the same time, there are some important and lasting principles that help us better understand how knowledge-based firms work.