Putting a price tag on knowledge was once as unthinkable or implausible as the idea of managing knowledge. Today, however, it is unthinkable that an organization can claim to be managing knowledge effectively without having a pricing regime in place. These others state a strong case for pricing knowledge and offer three different options for putting a dollar value on it.
Just about every organization today realizes that it must manage the knowledge in its midst. To achieve this goal, organizations have taken different paths. Some have taken the technical path, developing large repositories such as intranet portals. Others have embarked on a more humanistic journey, where the management of knowledge has been handled mostly through person-to-person interactions such as job rotations, training, informal communications, and other social mechanisms. Many organizations use a combination of the two. While both roads will lead an organization on the path to managing their knowledge better, they are not sufficient.
One of the critical problems of knowledge management efforts in organizations is getting people to share their most valuable insights and know-how. Without knowledge sharing by employees, there will nothing to store in a knowledge repository or to discuss in a social setting. Many employees will be glad to share what they know on a superficial level. However, probes into questions such as how they know what they know or why they know what they know, i.e. getting to the details of the matter, is difficult, if not impossible. The crucial reason is that their knowledge is a source of power, and power, to a certain degree, guarantees them a paycheck and a job. If they do share what they know, what will stop an organization from either automating their task or outsourcing it to the lowest bidder? As simple economics will tell you – no pain no gain, or, you get what you paid for. If you want employees to share their valuable know-how, reward them, pay them, and provide incentives. If not, they will only share what they feel is customary or polite.
In this article, we will explain why pricing knowledge in organizations is necessary for managing knowledge. This is one aspect of a road less traveled, but one that is garnering significant interest – the market road. The market road proposes to create an environment where knowledge can be produced and sold at a price in the organization. (Desouza, K.C., and Awazu, Y. International Journal of Information Management, 23 (4), 2003, 345-353). “Constructing Internal Knowledge Markets: Considerations from Mini-Cases.”)
Both types of knowledge (explicit and tacit) can be traded. Explicit knowledge is easier to trade then tacit. In traditional markets we buy goods and services. Goods are akin to explicit knowledge; they are the outcomes of knowledge application. Services are like tacit knowledge. For example, we pay specialists, such as consultants, fees for rendering their insights. In the next section, we will discuss three mechanisms for pricing knowledge – the centralized, buyer, and seller regimes. Next, we will explore in detail some aspects of the seller regime. It is our contention, based on the derivation of mathematical models, that the seller regime is most suitable for the pricing of knowledge. Based on our mathematical modeling exercises we will also share some practical guidelines as to how a seller should price knowledge objects. Lastly, we look at research agendas that must be developed in order for the potential of knowledge markets to be realized.
Knowledge pricing schemes
In most organizations today, knowledge is not priced. Most exchanges of knowledge can be seen as an implicit barter form. An employee will exchange his/her insights with peers in the hopes that they will return the favor when needed. No explicit price is set for the knowledge or know-how exchanged. This behavior creates several problems. First, producers of knowledge do not get the recognition they deserve. In most organizations, we see the prevalence of the 80/20 rule. Twenty percent of the employees provide 80 percent of the knowledge needed to run the organization. Yet they are seldom rewarded. Second, the lack of incentives leads to a system of disincentives. The folks, who contribute their knowledge and share it, do so under the assumption that the rest of organization will follow suit and share knowledge. However, because not everyone participates in knowledge management, the original producers do not get the return on their investment of the time and energy spent codifying their insights. After all, they spend effort codifying knowledge for its consumption by peers not by themselves. Third, the lack of a pricing scheme makes the valuation of knowledge a difficult and cumbersome feat. This, in turn, makes the act of managing organizational knowledge a daunting challenge. The first step to managing a phenomenon is the ability to measure the phenomena in question. Devising metrics to gauge an organization’s knowledge assets must begin with pricing individual knowledge pieces. Last, the lack of pricing schemes makes version control a problem. Since no rewards are attached to the production of knowledge objects, we will find multiple pieces of the same knowledge object which makes search-and-seek times for requisite knowledge unbearable.
Centralized, buyer, seller: Three options for pricing
If one was to examine pricing schemes found in traditional markets, it will be found that there are three options for governance – centralized, buyer, or seller regimes. The centralized regime can be seen in governments, consortiums, and unions. For instance, for certain products and services, the government is the price-setting authority. These include the levying of taxes, charges for administrative services, and even in some cases, in the setting of price floors and ceilings. Buyer regimes are popular in auction mechanisms. In both formats of auctions, English and Dutch, prices are determined mainly by buyers. Their willingness to pay for a product will determine its ultimate selling price. Sellers here are passive price takers. Seller regimes are the opposite of buyer regimes. Here, the seller sets the price, after adjusting for the cost of production and a markup. Buyers are forced to take the price or find a substitute for the good or services.
All three regimes can be applied to the design of organizational knowledge markets. Such markets are usually facilitated by an Intranet portal site. The knowledge management group in the company can act as a central clearing house for knowledge. Under this centralized regime they would be responsible for setting the evaluating knowledge goods submitted for trading and setting prices. Auction-based markets for knowledge goods are also a possibility. Here, a knowledge producer can offer licenses for his/her know-how to the highest bidder. Seller-based regimes are the most popular today. Here, a seller sets the price of his/her knowledge product. The price set for a knowledge object can be determined by the time it has taken for creation multiplied by the agent’s pay per unit of time. Hence, if it took a software engineer 2 hours to create a piece of code documentation, and the engineer is renumerated at the rate of $150/hr, the cost of the knowledge object could be $300. Hence, an agent must have the necessary allowance points or monetary proxies to purchase a knowledge object. Each agent gets their purchase allotment by selling knowledge objects they created. This limits the “free-riding problem” knowledge generated by few and consumed by many. Moreover, it enables the organization to identify just who is generating knowledge, and more importantly, whose knowledge objects are being sold.
Fujitsu, in fact, developed a knowledge-management market system for engineers in Japan where producers of knowledge set prices for their registered knowledge, in which users pay for the information when they download it. When system engineers (SE) “knowledge providers” register their information in the system, they set the price of the knowledge registered. When a SE “knowledge seeker” chooses the SE library where knowledge stored from the FIND2 menu and clicks on a specific knowledge, its price appears. If the SE knowledge seeker decides to purchase the knowledge, the sum of the knowledge price, plus a shipping and handling fee, is charged to the knowledge seeker’s department. If the knowledge is available in an electronic format, it is sent as a floppy disk or e-mail. If not, a copy fee is charged, as well. Finally, the department where the SE knowledge provider belongs receives the sales generated from the knowledge exchanged. Software developer Infosys has also implemented a similar knowledge market called K-Shop. Employees can submit research papers, project experiences, and other types of knowledge goods to a Web site. When a document is submitted to the K-Shop, experts review the document; if it is found to be suitable, it is published. The reviewer and author are compensated in knowledge currency units (KCU). Each reader of the document must pay a certain number of KCUs for using the document. KCUs can be redeemed for cash and other gifts. These KCUs thus act as an incentive and also rate the quality of knowledge provided.
Pricing Knowledge – Seller Regime
Extrapolating from our mathematical and game theoretic exercises in pricing knowledge, let us explain why pricing knowledge is important. Consider a simplified scenario. There are two potential knowledge suppliers and multiple knowledge consumers [see figure 1]. Suppliers are assumed to be rational and profit seeking, in the same vein our consumers are assumed to be rational and will acquire relevant knowledge at their desired quality for the minimum price.
Each supplier of a knowledge object must go through a two-stage decision process. Firstly, the supplier must evaluate whether he/she wants to enter the market. This will be based on how one evaluates his/her competitive position in the market. If the supplier feels that there are others in the market that can provide the same knowledge object in a more economical fashion, then one should not enter the market. On the other hand, if one has a competitive edge, then entering the market will be the best response. This is akin to the decision a traditional producer of a good or service will make. If there are others that can produce the same quality good or service for a lower price, it is not in the best interest of the new supplier to enter the market.
Once the decision is made to enter the market, the supplier must calibrate how to price the knowledge object. Pricing must be fair and equitable, so as to be higher than the cost of producing of knowledge object, but lower or equal to the utility that one will attain from consuming it. Put another way, the selling price set must be higher than the cost of production, but lower than the expected benefit a consumer will get from its consumption. Moreover, the pricing scheme must also be competitive, so as to prevent other suppliers from entering the market and contributing the same knowledge object. The price, hence, cannot be ridiculously high, as this will entice a new supplier to enter the market and offer the knowledge object at a lower price.
Hence, the pricing scheme guarantees that only one supplier will enter the market. Hence, we do not have the issue of version control. Moreover, we can be assured that the supplier who enters the market is going to provide the best available knowledge (as it is his/her competitive edge) and that it is being delivered at the ideal price (the supplier gets a profit and the consumer gets a higher utility from its consumption). The supplier of a knowledge object can either be a price taker or price setter. A new seller would probably enter the market as a price taker. He/she would then build a reputation for know-how produced and eventually be in a position to command higher prices – a price setter. However, the move from price taker to price setter can occur in reverse fashion. An experienced and well-known supplier could move to the position of a price taker if he/she does not have the capability to sustain the quality of knowledge produced.
Once the knowledge object is in the market, the question of update becomes relevant. It is common to find outdated knowledge stored in corporate repositories. These have either not been updated from currency or have not been deleted or purged. Why? Under the no-pricing schemes pervasive in organizations today, there is no incentive for the producer to go back to the knowledge repository and keep the knowledge current. However, under the pricing regime, things are a little different. Let us consider a simple case. Let us assume that the value of a knowledge nugget depreciates over time. Hence, in our example, let us assume that supplier 1, was the competitive person who entered the market. Three months from the date of entry, the knowledge object has now depreciated. Hence, the value a consumer will get from its consumption will be lower than the original price; as a result, the knowledge object will not be attractive to buyers.
The supplier is hence left with three options. One, leave the price as is and don’t do anything. This is not a wise option as he/she will not earn any profit (no sales will occur as consumers are economically rational). Second, keep the same price and update the knowledge object to make it current. This will ensure that consumers will get an updated product and maintain or increase their level of utility at the given price. This curtails the issue of outdated knowledge being stored in repositories, a cost that is expensive not in real terms (the cost of computing storage is getting cheaper by the day) but is so in terms of opportunity cost i.e., the cost of executing knowledge searches. Moreover, over time, the lower-priced objects will leave the market as there will be no takers or the price will be greater that the cost of production. Third, the supplier could lower the price and leave the knowledge object unchanged. This would ensure that the consumers would get a higher utility than the cost and also would entice a new competitive supplier from entering the market and producing an updated version of the knowledge object.
Knowledge markets: The Future
Knowledge markets are going to be the future of knowledge engagements in organizations. Dealing with the pricing imperative is critical in order to get over the traditional hurdles blocking the implementation the knowledge-management agenda. We have demonstrated some simplistic, yet realistic, situations as to how the pricing of knowledge helps in alleviating concerns such as outdated knowledge and version control. In addition to the mechanisms described in this article, we can also have another one, the trading of customized or readymade knowledge. This is kind of like going to a department store to buy a pair of trousers or going to a tailor. In the first case, the knowledge object can be generalized to meet the need of different interest groups whereas in the latter case it can be made to order. The latter is kind of like a request-for-proposals, where a consumer can solicit the best offer from a set of knowledge producers and choose the best specification for a given price.
The future of knowledge markets will be determined based on several current research and development efforts. The first is in the area of digital rights management. Knowledge is expensive to produce but cheap to reproduce; like all information goods it can be duplicated with ease. Digital rights management provides the producer of knowledge mechanisms that control; the dissemination and usage of the knowledge. Hence, illegal duplication or usage without a license can be curtailed. This will be critical in order to prevent black markets from developing in organizations. The second avenue of research is in marketing. Unlike the sale of physical goods such as clothes and shoes, which can be inspected prior to purchase without loss of value, knowledge objects are “experience goods.” Consumers must experience it to gauge its value. Moreover, putting knowledge objects on display reduces its value close to zero. For example, if one is allowed to view a working paper, then what is the need to purchase it? There is probably no need to do so, as the value has already been received through its being on display. Hence, how does one advertise knowledge objects without killing their value? To complicate this problem further, there are not only hundreds, but thousands of knowledge objects being offered in successful and thriving knowledge markets. In the words of the renowned information scientist Herbert A. Simon, “A wealth of information creates a poverty of attention.” Hence, the question becomes – How does one successfully advertise knowledge objects without killing their value? The final avenue of research is one for managers, who must change the mentality of knowledge sharing in organizations. The move must be made from an environment in which knowledge is free to one that puts a price on it. Pricing knowledge puts a sense of worth on the know-how, insights, and ideas of people in the organization, and enables for it to be measured. This change of mentality will be critical to establishing a knowledge market in organizations. Unless this occurs, effective knowledge management will continue to elude most organizations.