The growing value of knowing

Tangible assets are not the only basis of a company's value - `knowledge' is the hot topic, says Roger Trapp

As combine harvesters continue their annual crawl across cornfields, those who look beyond the sheer size of these behemoths will realise that they are symbols of an industry that has moved far beyond its simple origins. Though farmers remain in close contact with the land, theirs is a more and more complex business rather than the "way of life" it is still sometimes fondly seen as. And not just because of the sophisticated machinery now used.

According to Thomas A Stewart, author of Intellectual Capital (Nicholas Brealey, pounds 16.99), farmers - particularly those in the United States - increasingly practise "precision agriculture". By making use of global positioning system satellites, they are able to use just the right amounts of irrigation or fertiliser in individual fields to maximise their yields. Optimal production is largely attributable to knowledge.

And it is because businesses in many other sectors are realising that it is what they know that often gives them a edge over their rivals that "knowledge management" is becoming the hot management topic. For example, one of the factors behind recent restructuring in the drugs industry is the desire to make more efficient use of information in individual laboratories with the aim of getting new products to market faster. Commentators, such as Gavin Barrett of the management centre PA Sundridge Park, are increasingly suggesting that management of this area of the business will be vital to companies' survival.

Mr Stewart, a senior editor at the US magazine Fortune, was one of the first to notice this, writing an article called "Brainpower" in 1991. That article was an early attempt to understand what was really behind companies' value. After all, if a company like Microsoft can be valued at billions of dollars despite having little plant or machinery, something must be wrong with the traditional way of weighing up assets.

In the meantime, various organisations have sought to grasp the phenomenon. Business Intelligence, which produces reports and organises conferences, has published a weighty tome, Creating the Knowledge-Based Business, and in October is organising a London event devoted to identifying, measuring and leveraging intellectual capital. Consultancies, such as the brand specialist Interbrand, also see the increasing awareness of intangible assets as an endorsement of their longstanding backing for greater understanding of the concept of goodwill - which accountants have regarded as covering the gap between the price paid for a company and the value of its tangible assets.

By explaining the development of the processes involved in the creation of a single can of beer as well as describing the work of increasingly sophisticated farmers, Mr Stewart explores much of the theory behind "knowledge management" before moving on to the practicalities.

This emphasis on the here and now is also a preoccupation of others. While the very title of Business Intelligence's report indicates its purpose, Karl Erik Sveiby, an academic at Australia's Queensland University of Technology who has linked up with the consultancy Celemi, says putting the theory into practice can be more difficult than it looks. "Companies built on knowledge assets and other intangible assets make up the fastest- growing business sector, yet few achieve their potential performance and profitability because they do not know how to exploit their intangible assets," he says.

Leif Edvinson, director of intellectual capital at the assurance and financial services division of the Scandinavian insurance company Skandia, suggested to a senior executive that the company ought to be managing intellectual capital. The operation now produces an intellectual capital report alongside its regular report and accounts.

But this is not an easy area. Celemi stresses that "it is not enough to just read about a new methodology ... To fully leverage the benefits of your intangible assets, you need the support of the whole organisation behind you".

This idea is supported by Mr Stewart, who says that in many organisations - even consultancies, law firms and other businesses traditionally seen as the home of knowledge workers - the culture and reward systems mitigate against the transfer of knowledge. A firm that pays its partners strictly according to the amount of business they bring in will not necessarily be most effective at ensuring that the right people serve the right clients and so develop the firm's reputation.

Likewise, what will work in one form of organisation will not always work in another. The international professional services firm Arthur Andersen sets great store on the database of best practice it has established - pointing out that this enables staff to draw on the past experience of their colleagues and so avoid "reinventing the wheel". But only in a very cohesive organisation like Andersen will personnel feel obligated to contribute to the database. Equally, many observers point out that, while such a "pipeline" approach suits the sort of projects that Andersen's consulting arm takes on, other types of work may require people to actually meet and tease out the answers to problems.

This is especially true of "tacit" knowledge - often described as "the stuff we don't know that we know". It covers the sort of information a consultant, say, may have picked up about an industry simply by being involved in it for a while. He or she may think that everybody knows what they know and be surprised when a colleague probes them on it. Moreover, adds Mr Stewart, they may be surprised at how much they know once the questioning has stopped

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