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Letting Go of the KM Profit Motive
The difficulty of proving that spending on knowledge management increases profits has plagued KM proponents. Much has been written about this problem, but we have yet to develop a methodology for demonstrating a financial return on investment on knowledge management.
Posted Aug 6, 2001
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Many of my articles for Knowledge Management come to the conclusion that in the case of KM, doing the right thing is much more important than doing the thing right. In other words, trying to implement KM with the best available software and following the best advice from books and consultants while setting up a well-funded program may be doing KM the right way. But it still does not guarantee that KM will bolster the right activities that produce profits.

How do we pick the right things to do where knowledge management is concerned? According to the PIMS research findings, up to three-fourths of the potentially decisive influences on profitability concern strategic choices that KM investments cannot address in isolation. We can illustrate the complexity of strategic interactions needed to balance conflicting economic interests by listing some, but not all, of the opposing influences that PIMS analysts consider in their evaluations, as shown in the table "Influences and Effects."

Table: Influences and Effects

To perform the necessary strategic assessments, the PIMS analytic processes call for measurements and information that are mostly unavailable to people engaged in KM. For example, among the critical indicators for identifying the right things to do is data about real market growth, customer concentration and investment divided by value added, as well as data on relative market share, quality and price as compared with the organization's three closest competitors. A complete analysis of a company's strategic positioning also requires comparing the growth rates of some indicators that portray the dynamics of a business relative to its three top competitors, as shown in "Influences on Growth."


Table: Influences on Growth

From PIMS models regarding the relation of profits to strategic maneuvers, we can now see why spending on KM (or on information technology) is unrelated to profits and will remain that way. Knowledge management has not emerged--and will not emerge--as a directly measurable strategic influence on corporate profitability. KM spending does not and will not exhibit a level of positive correlation with profits comparable to that found in other PIMS strategic variables such as market share, capital intensity and relative customer quality.

Knowledge management has an undeniably important role in profitability--but only as an enabler. Corporate strategists should see KM primarily as an attractive way for companies to quickly respond to rapidly changing competitive circumstances, at low cost and with minimal internal friction. Rather than worry about the KM profit paradox, practitioners should set conditions that would make knowledge management a key ingredient in programs that enhance measurable strategic gains.

If you are lucky enough to plant apple seeds in an orchard whose management makes the right fundamental decisions--such as selecting the right stock, picking the right places to put out the saplings and applying the right fertilizer--make sure that in all of these tasks proper knowledge is applied to nurture the trees. If you plant apples in Antarctica, no amount of knowledge management will yield a bountiful crop.

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