Why Measure Knowledge Assets?: The Benefits for Organizations

Introduction

The primacy of shareholder value dictates that managers need to both operate efficiently today and plan for tomorrow’s growth. Whilst it is true that there has always been some amount of expectation for growth there has recently been a dramatic change in the key value creators of developed economies. Decades ago businesses were generating this future growth through tangible assets, such as buildings and equipment. Currently, businesses are more likely to generate much of their future value through competitively differentiating knowledge assets.

The industrialised world is rapidly moving into a new economic paradigm, where economic growth is increasingly knowledge driven (Leadbeater 2000). The last twenty years have witnessed the advent of ubiquitous commercial globalisation, an exponential growth in the level of international competition, the requirement for continuous innovation to remain competitive, and an unprecedented growth in the services sector (Sullivan Jr & Sullivan Sr, 2000; Carroll & Tansey, 2000; Lev, 2001). Ideas and knowledge are now the sole raw materials of this new economic paradigm, which has become widely referred to as the knowledge economy (Carroll & Tansey, 2000).

The fear of not managing knowledge is driving firms to look for new knowledge asset metrics (Carroll & Tansey, 2000). However, although it has been shown that many companies have good financial and operational measures and even external measures such as market share, it is still rare to find companies who have good measures for their knowledge assets or for how those knowledge assets are deployed (Roos, Bainbridge & Jacobsen, 2001) and it is unclear as to how far companies have progressed in measuring the more intangible of their knowledge assets. Therefore one of the aspects to be investigated in this chapter is the reason why companies are actually measuring their knowledge assets.

In order to help measure knowledge and assess it there has been a focus on the use of non financial indicators and the development of a balanced set of measures to determine company performance (Kaplan & Norton, 1992; Kaplan, 1994). The focus on performance measurement, by organisations, has intensified in recent years due to increasing competition and the necessity to adopt constant renewal and improvement initiatives to maintain a competitive advantage.

However, throughout the literature a number of common assumptions are made. Within the performance measurement and knowledge management literature “measurement is assumed worthwhile” (Guthrie, 2001, p. 30), and knowledge management researchers work on the premise that “its strategic impact is never in question” (Bontis, 1998, p. 63).

The assumption that measurement is worthwhile is further exacerbated by the growing desire of organisations to measure numerous individual dimensions of performance faithfully believing each performance measure to be of importance and to provide insight. However, each performance measure utilised represents a cost to the organisation, and therefore organisations have to be realistic about what they can afford to measure. In order to prioritise expenditure on performance measurement the organisation needs to be able to judge the level of benefit provided by the measure.

However, although there is a richness of literature and research on how to design and implement non financial performance measurement systems, there is a paucity of research demonstrating the benefits of such an approach (Ittner & Larcker, 1998).

Therefore this chapter is designed to challenge the assumption that all measurement is worthwhile by discussing the potential benefits associated with the measurement of knowledge assets. The chapter begins with a discussion of the literature around why companies measure and then puts forward the issues with assessing the benefits of measurement. This chapter also discusses the results of research which shows that the benefits of measuring knowledge assets differ depending on the original driver of the individual performance measure. The main body of the chapter therefore looks at what drives companies to measure their knowledge assets; and explores the insights that are provided by those measures in order for a company to take action to improve organisational effectiveness.