How to estimate the size of the KM prize

I blogged last week about the importance of knowing the value KM will deliver. But how do you do this?

As I said in last week’s post; if you understand the value that Knowledge Management can bring, then you understand how much you can justify investing. The larger the scale of the KM prize, the larger the KM budget can be in order to deliver that value.

We know from our Knowledge Management survey that the average KM budget is $950k and the average delivered value is $93 million, but how can you estimate in advance what value Knowledge Management may deliver for you?

Generally KM delivers value by reducing waste, or through eliminating the cost of lost knowledge, and this can be done in a number of ways, as discussed below.

Reduction of the learning curve

Knowledge management can add value through reducing or eliminating learning curves, which equates to removing the cost of re-learning. If you have historic data on learning curves, then you can use this to estimate the value of eliminating that curve. Typically a learning curve represents 10% to 15% of a project expenditure, and with large projects, this can be a large prize.  In other cases, the value comes through learning to do things more quickly – developing new products, for example.

Learning curves apply to any repeat activity; for example setting up a branch office, hiring new staff, conducting an assessment.  You generally eliminate learning curves through effective lesson-learning, and through systematic project pre-learning.

Exchange of effective practice

An alternative value-adding mechanism is the transfer of effective practices across multiple sites, which equates to removing the cost of not knowing, or not sharing, better practices.

Imagine you are working in a business with multiple operating or manufacturing sites. Operations cost, and manufacturing cost, will vary from site to site, Knowledge Management gives you the opportunity to reduce these costs, by sharing learnings and good practice from low cost sites, to improve the performance of high cost sites. In order to estimate the size of the prize, you need

• A good set of benchmark data on current operational costs, broken down as far as possible into the different factors 
• An estimate of how effective KM could be in normalising those costs 
• A desire across the business to improve. The high cost sites need to want to improve. The low cost sites need to want to help them. 

As an example, in the 90s we worked with the refineries in BP to help reduce the costs of Planned Shutdowns. Historical data showed that if all refineries could reach the level of top quartile, there was a prize of £30m available. The business estimated that enhanced KM (i.e. an improvement on the existing level of knowledge sharing) could deliver $5m of this, while no knowledge sharing could lose $10m. This return more than justified an investment of $230,000 in a community of practice, an online knowledge base, and a series of Retrospects and Peer Assists.

More effective innovation

Many organisations struggle with effective innovation, especially those which run a reactive innovation system which waits for individuals to submit ideas which are then passed through an ideas funnel. Bringing in a structured creative innovation process such as Deep Dive is a big investment (a full innovation process make take a team of 6 to 10 for 3 months) but can solve really big business problems in startling ways. The size of the prize here is the value of the business solution, whether it is a new class of product, or an innovative solution to a massive business issue. It is delivered through removing the cost not ineffective innovation.

Reducing duplication

In any siloed enterprise, there is likely to be duplication of effort, because people do not know what the others are doing (again, the cost of not knowing). As well as delivering large value through the means described above, KM will deliver more modest value through elimination of duplication, as the Communities of Practice begin to discuss what they are doing, and so recognise and eliminate duplication.  To estimate the size of this prize you will need to do a survey across a subset of the organisation in order to estimate what work is currently being duplicated.