How much should a company invest in Knowledge Management and how to scale this value?

To answer this question, we must first conceptualize the word knowledge, its management and use. Knowledge is the most valuable asset that a company may have. Please, notice that I have used the word knowledge and not information, that I related it to an asset and also wrote “may have”, instead of “has”, because knowledge is totally different from information and, in order to have it, the company must prepare and organize itself to it.

One has never had such an easy access to information as we have in our current time (every search tool on the Internet usually responds to a search with thousands of documents, in a time that is hardly longer than one second), but this does not mean that the companies are more efficient or productive than they used to be 10 years ago because of that. So, what is the purpose of so many pieces of information?

The precise identification of the relevant information and, mainly, its practical use incorporated to the company’s products and services are the ones that will boost it in the market. The information will only be useful if they are selected, addressed, organized, internally distributed and with its practical use being stimulated. The information so selected represents the knowledge of the companies and the process encompassed between its identification and its practical use is the management of this knowledge.

By making an analogy with the tangible assets of a company, the investment decision on those assets usually aims at the  increase/ optimization of production; the decrease of production costs; the manufacturing of new products; the incorporation of technological innovations, that is,  the creation of a competitive advantage of its products in relation to its competitors.

The “asset” that we are referring to is the following: to know the market better than the others and promptly respond to it; to quickly get to know the weak and strong aspects of the competitors; to get to know and quickly incorporate the technological innovations in their products; to know exactly where and how the data and information that belong to the company are located and, finally, to get to know the persons who hold the relevant knowledge to the company.

This is the knowledge that represents our asset!

In today’s market, the products are increasingly made “homogenous” and, at the same time, specialized due to the needs of the different segments and stratifications of the society. Due to this, their differences are becoming more and more subtle, and the agility in the identification of those specific needs and the quickness in the incorporation of those small competitive differentials in their products (and services) is what positions the company in the forefront of the market. It is in this context that knowledge and its management is inserted.

One of the most classical examples of the practical use of the knowledge management is that one presented by one of the biggest supermarket global chains, where all the purchases of their consumers are tabulated, organized in several ways, and this knowledge is used as a base for all the company’s decisions, from purchases to inventories, stratification and distribution of the products in its branches, including sales promotions.

The investment decision in assets is normally made due to the return on investment (ROI) in a given period, calculated based on the expectation of the revenue increase caused by that investment. Also, in the knowledge management there is the expectation of the revenue increase, but the process is inverted, that is, what is calculated is the investment due to a return rate (maximum amount to be invested).

In other words: in the first situation, the investment is known (new machines, plants, systems), the revenue increase a one expectation, the ROI, calculated. Then, the decision occurs. In the second situation, what is calculated is the amount of the investment due to the same variables.

Simple as that? Absolutely not!

Just to have an idea about the difficulty, consider that the knowledge management:

(i) involves all the company’s processes (from market surveys, and going though purchases, materials used, constructive processes, storage, distribution and even marketing and sales);

(ii) mainly involves people and their knowledge;

(iii) its use affects the company’s results as a whole; and

(iv) is a work philosophy and that is why it should be incorporated with the way of thinking  and attitude of all the people from the company and, finally, the investment decision in it is mixed with the  investment decision in other assets.

The decision to “invest” and “how much to invest” in knowledge management, in fact, is not an unusual situation that one takes from time to time as the investment decisions in other assets. It is a constant and an ongoing process in which all the daily decisions always consider the use of processes that contribute to the strengthening of the main company’s asset: knowledge.  As it is ongoing, this decision process in fact becomes a concept or a philosophy about where and how to invest the (usually) limited funds of a company. It is an ongoing “refining process”, where the previous learning is used to base the future decisions.

The support by an outsourced and experienced consultancy firm which is also exempt from internal political interactions may indeed help in the working out of this challenge as well as in the definition  of the KM model and the future strategy.

José Paulo Graciotti, is consultant and founding Partner of GRACIOTTI ASSESSORIA EMPRESARIAL, engeneer by Escola Politécnica Universidade de São Paulo, with Financial MBA at FGV and specialized in Knowledge Mnagement by FGV. ILTA Member since 1998 (International Legal Technology Association) and ALA (Association of Legal Administrators), with more than 27 years managing Law Firms in Brazil –