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.

Ineffective provision of Knowledge to Customers

The most effective and efficient way of getting knowledge top customers is to provide that knowledge to the customer online, making sure it is accurate, findable and easily usable. If this is not the case, and the customer needs to call your support centre, or call out an engineer, than this is additional cost which KM can eliminate. There will also be a cost associated with the loss of customers disgruntled by their lack of access to knowledge.

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. 

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Why it’s important to know the value KM will deliver

Why is it important to understand the business value of Knowledge Management? The answer is a simple one – if you understand the value, you understand how much you can justify investing.

A couple of days ago we discussed KM metrics, including the Impact (or value) metric. But why is this so important? Here is one answer.

Introducing Knowledge Management requires investment. It requires new processes, new technologies, new roles, new governance, and (in particular) investment in an organisation-wide change program. No budget holder will accept that investment if they don’t think there will be value gained in return.

 An illustration of this comes from the Drilling function of an oil company, where a drilling team were planning a campaign on a new field. They studied historical data from learning curves on nearby fields, and worked out that if they could eliminate the learning curve on their new campaign through knowledge management and through access to prior knowledge, this would be worth $100 million in savings.

 They put together an excellent and comprehensive program of learning activities, and employed three full-time learning engineers with Knowledge Management roles to capture and re-use lessons from operations. Almost inevitably, they immediately began to face cost challenge.

How could they justify these extra staff, they were asked, when the whole program was facing cost pressure? As the team leader reported “We were criticized for team size. “Why do you need so many people”? It would have been very easy for our manager to say “you are going to have to conform to the rest of the world out there (and reduce team size) “. However instead, the team leader was able to justify the investment in knowledge management roles and processes, because he understood the scale of the prize. He understood the value of learning and knowledge management. He knew that an investment of 3 extra people was justified if it would deliver a prize of $100 million.

Knowing the Scale of the Prize

Knowledge management programs often struggle to get support and funding because management don’t realise the value of KM. If organisations realised how much value KM can deliver, then KM would be a no-brainer.

 So our advice to clients usually is to form a reliable and justified estimate, as early as you can in your Knowledge Management activity, of the scale of the prize. The prize will come through better decisions, improved process, accelerated or eliminated learning curves, and continually improved performance.  Please note that the scale of the prize from “finding better knowledge and making better decisions” is orders of magnitude greater than the scale of the prize from “finding documents faster”, as discussed here.

Most of the time, the potential value which can be delivered from Knowledge Management is startlingly large.

Then once you and your management understand the scale of that prize, you know how much you can invest to deliver it, and you personally will be better placed to meet challenges to that investment. You will be able to respond, as the drilling team leader did, “We need these three KM roles, because they are busy delivering a $100 million prize”.

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Quantified KM value example number 127

In this job advertisement, found on LinkedIn, we find an example of quantified value delivery from KM.

Image from wikimedia commons

The job advertisement, posted a week ago, is for a “KM Manager” for Shell, based in the Hague, who will run KM for Shell’s Projects and Technology business. It contains the following paragraph.

Over the past 6 years, we have built a comprehensive set of structures, processes and applications supported by Working Out Loud behaviors, and implemented this Solution across Shell’s Technical Functions and C&P. This program has touched approximately 43,000 Shell staff in Technical Functions. A total value of over US$480 million has been delivered through application of key practices in Shell’s business activities. Our ambition is to achieve US$ 1 bln by the end of 2020.

Thats a lot of value in 6 years, and an ambitious target!

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The Knowledge Management "What’s in it for me"

Knowledge Management will work in an organisation when there is something of value in it for the people involved.

This is what we call the “principle of local value” – the WIIFM for the KM user.

If KM is of local value, it will work, and people will adopt it The more they see and feel value, the more avid users they will become. If the value is only for others, then people will not bother.

The value is greatest when people can see and feel themselves as benefiting from Knowledge Management, for example when they find valuable and useful knowledge using Peer Assists for example or  getting answers from a Community of Practice. Their questions are answered, their problems are solved, they work more easily and with less risk, and they are happy.

Let’s look at where the value for the individual comes from, in knowledge seeking and in knowledge sharing.

Local Value from Knowledge seeking

These benefits for knowledge seeking can come through any of the following means

  • Assistance — if people seek for knowledge, and find useful knowledge easily which they can apply to help them in their work, then this is a very powerful incentive to seek again next time.The knowledge can save them time, save them effort, and help them deliver better results.
  • Answers — if people have questions, then the KM framework should provide answers 
  • Curiosity — some people are much more inclined to look for alternative ideas and new approaches than others. Make sure that the KM system satisfies their curiosity
  • Trust — if people trust the knowledge source, and trust the process of asking for help (in other words, they trust that they will not be ridiculed or criticised for needing to ask) they are more likely to seek for knowledge. 
  • Satisfying management expectation – people are very good at sensing (and doing) what is expected of them, and management can explicitly set the expectation that people will look for knowledge before starting something new. 
  • Peer pressure – people follow the example of others. If they see others successfully seeking knowledge, and being recognised for this, they are more likely to follow suit. 

Local value from Knowledge Sharing

The value of sharing knowledge is less clear, because Knowledge Sharing requires an investment of effort on behalf of others (for example holding a Retrospect, or collecting Lessons for others). Here is some of the value for people in sharing what they know

  • Pride, status and recognition — people are more likely to share knowledge when they are proud of what they have accomplished. They are also more likely to share knowledge if the knowledge “travels with their name on it”.  Nobody likes to contribute knowledge which somebody else will claim credit for. Good behaviours in terms of capturing and sharing knowledge can be recognised through awards, through mentions from senior management, or via articles in internal publications
  • Reciprocity — people are more likely to share knowledge with others when they expect to get knowledge back again at some time in the future (or have already benefited from the knowledge of others). 
  • Friendship and Loyalty — people are more likely to share knowledge when they have built relationships within the community of practice, and feel that the knowledge will be used by people they know, respect and like. 
  • Altruism — let’s face it, some people are just naturally more helpful, and more willing to share what they know, than others. Work with these people in the early stages of implementation. 
  • Satisfying management expectation — management can set the expectation that people will capture and share knowledge after a significant piece of work. 
  • Peer pressure – people follow the example of others. If they see others taking time out to capture and share knowledge, especially from projects that may not have gone well and where there may traditionally have been a reluctance to “wash dirty linen”, they are more likely to follow suit. 

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Find out how much difference Knowledge makes to performance

Do you want to know how much difference knowledge makes to performance? Here are some experimental data.

Based on the controlled experiment that we call “Bird Island“, we can tell you that

  • Collecting, discussing and re-using your own team knowledge can make a 40% difference to performance
  • Using knowledge of your current CoP can make an 80% difference to performance
  • Using all available knowledge, including historical knowledge, can make a 220% difference to performance

Let me explain how this works, and where these numbers come from.

In the Bird Island exercise we ask the teams to build a tower, then we measure the height of their tower. We then hold an after action review (AAR) to discuss what they have learned about tower building, and after the AAR we ask them to estimate how much taller they can build, now they have knowledge and experience.

The graph below shows a histogram, or frequency plot, of the percentage increase they recognise. This is somewhere between 0% and 120%, with a mode of 40%. This represents the performance increase a team thinks they could gain, by learning only from themselves.

Then we hold peer assists, where the teams exchange knowledge with the other teams, rather like sharing in a Community of Practice. Now they are sharing knowledge with other teams, instead of just looking at their own learning. Then after the peer assist, we ask them to estimate how tall they could build the tower.

This next graph shows the percentage increase between the first tower and the post-peer assist estimate. Although the mode is still a 40% increase, the mean is now closer to an 80% increase. (The reason why the mode does not shift from 40%, is that the team with the highest tower rarely believes they gain any knowledge from the peer assist. So one team almost always does not improve their estimate. That’s why the frequency distribution in this graph has more than one peak).

Finally we show the teams the current best practice, built from the experience of hundreds of teams over 20 years, and ask them to build the tower again. This gives them access to the current full state of knowledge about tower building, and really gives their performance a boost.

We measure the first tower, built with no knowledge, and we measure the final tower, built with full access to all prior knowledge. The final graph shows the percentage increase between the first and second towers – between a state of no knowledge, and a state of full knowledge. The mean and modal increase they achieve is now in the order of 220% – representing an average trebling of height from the first tower to the second, solely due to the addition of knowledge. They have nothing extra the second time, other than knowledge.

Bird Island is a test of the link between knowledge and performance in a controlled experimental environment, with a simple repeatable task, and with teams that come to the task with no knowledge.

Whether the same performance increases could be made at work, in a more complex environment, I don’t know, and it is sometimes very difficult to measure. However we can certainly see a 67% increase in the speed to drill oil wells, and a 55% increase in the speed to build drilling platforms, so where performance improvements through controlled learning are measurable, they are large.

Therefore the answer has to be – Why not? Why would similar figures not apply at work?

If KM materially impacts performance in the experimental setting why should it not do so in the real world?

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Having the time to halve the time

KM is an investment of time to save even more time.

Image from wikimedia commons

Here is an extract from a conversation last week.

Me: Can you give me any examples where the Community of Practice could add value?
Client: At the last meeting we identified one of these – we found one part of the job where everyone does the task differently, sometimes very inefficiently. It’s very junior work, but still, the CoP said “this is a real mess, we have to fix it”.
Me: Did you fix it?
Client: No, it didn’t go anywhere, because everyone is too busy.

Everyone is too busy to take the time to fix a problem that is wasting lots of time. Huh?

This is a typical situation in any organisation where Knowledge Management is seen as an overhead and not an investment. Knowledge Management is a powerful approach to improving the way we do work, and this client was too busy doing the work, to improve the way they worked. Too busy working inefficiently, to improve efficiency.

In the US, they call this “too busy fighting alligators, to drain the swamp”

In BP, we positioned KM as an investment, by urging people “to have the time to halve the time”. In other words, if you invest time in learning, you can more than recoup that investment through the increase in efficiency it brings.

  • For example, a three day Peer Assist may reduce the elapsed time of a project by three months.
  • A 12 day investment in a lesson capture meeting (10 people for a day, plus facilitator, plus write-up) can save 10 months of rework in future projects
  • In Shell they believed that every hour spent on Community of Practice knowledge-sharing saved you 7 hours if you applied the learning you gained

In order to get your company out of this time-trap, you need three things

  1. KM to be seen as an investment and not a cost
  2. A proof-of-concept demonstration that shows this to be true. For example, in BP we had several video stories of people saying “I had a problem, I went to the CoP and asked for help, the advice I received was fantastic and solved my problem instantly”.
  3. Managers who will not accept inefficient working, if there are ways to work more efficiently. Managers who will say “Why on earth did you not fix this?”

That’s how you start to change the mindset from “KM is an added cost” to “KM is the investment that will save me a huge amount of time.

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Quantified KM value stories 125 and 126

This post contains two more entries in a long series of examples of quantified value delivery from KM.

The two examples below come from the article “Knowledge management in a steel company : a case study of the Gerdau Group” written in 2009 by Marcelo Kuhn, and both refer to value resulting from exchanges of knowledge in communities of practice. 

“Some good results have been reported and improvements in processes have been obtained based on knowledge sharing. In the Reheating Community, for instance, members from the AZA plant in Chile were unsure about a current procedure and posted a question: “Is it economically favorable to turn off the furnace when there are shutdowns in the production line for short periods of time (less than 8 hours)?” Members
from four different plants in Brazil, Chile and U.S. debated the subject for thirteen days and concluded that the best option was to keep the furnace in operation at a temperature around 13300F. Calculation proved that the fuel consumption to reheat the furnace was larger than the fuel saved. Moreover, previous experiences in some plants showed that constant changes in the internal temperature of the furnace damaged the refractory bricks which are the raw material of the internal walls, reducing wall life by 25% which represent losses of  US$ 25,000 by furnace. In December 2008, Gerdau had fifty Rolling Mills that were operating with shutdowns periods and could take advantage of the suggested strategy”

“Another example comes from the Rolling Community. Workers from the Riograndense plant in Brazil were having problems with the operation of the Laying Head (a machine which forms the wire coils in the Rolling Mill process). They asked for help in the community forum and received answers from members of three other plants. The Agominas plant, also in Brazil, showed how they operated the machine with fewer problems. Workers from Riograndense visited Agominas’ plant in order to find out what was being done differently. After observing a day of operation and maintenance procedures, the workers noticed a difference in the shape of one internal component. This change was implemented in Riograndense’s laying head, leading to a better performance of the equipment. Product quality was improved and the shutdowns in the production line were reduced, generating a gain of US$ 70,000 / year.”

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The most expensive part of a project is the mistakes

In any project, the most expensive item is the mistakes. Use KM, modularisation and standardisation to keep mistakes to the minimum.

Arches by Paul Ebbo
Arches, a photo by Paul Ebbo on Flickr.

The title of this blog post comes from a quote by the author Ken Follet in his book “The Pillars of the Earth”.

Follet’s book is a novel set against the background of cathedral-building in the Middle Ages, when cathedrals were the mega-projects of the time. The original quote, attributed to the fictional master-builder, is “The most expensive part of a building is the mistakes”. The cathedral builders knew that any mistake would be massively costly in terms of time, labour and materials, and took great precautions to avoid error.

These precautions included using a modular design, where every bay in the cathedral was square, and each arch was identical. This allowed the design and build process to be perfected on the first bay and arches, and then re-used throughout the whole building project. Building components such as the falsework arches and the templates for the stones could be perfected once and re-applied a hundred times.

The same principle can be applied in other projects, including today’s megaprojects. This blog has already argued for a combination of modularisation, standardisation and Knowledge Management as a way of reducing project mistakes to a minimum, and re-using designs and knowledge throughout. Use KM to perfect your approach on the first use of any module, through “learning while doing“, so the knowledge can be safely re-used thereafter.

If your senior managers are still not convinced of the value of Knowledge Management, help them to see that the most expensive part of a project is the mistakes, and that effective “learning while doing” combined with a modular approach can reduce those mistakes to a minimum.

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A simple picture to link KM and continuous improvement

Knowledge Management is the discipline that drives continuous improvement. Here is a diagram that makes this clear

We are all familiar with the link between Knowledge and continuous improvement in our personal lives, as demonstrated by the familiar saying “Practice Makes Perfect”. The more we do something, the better we become. The more experience we have, the higher our performance.

This can also be true for Organisations, provided we apply KM. Organisations can also find that Practice Makes Perfect, and that the more experience they have the higher their performance.

The diagram here shows how – feel free to use with acknowledgement.

The two crucial elements are as follows.

1) There needs to be a learning loop in operation. Knowledge must be applied to activity and to problems, and must be reviewed and gained from activity, problems and experience. The challenges for an organisation are two-fold – firstly finding a way to gain knowledge from experience (through effective lessons capture for example), and secondly being able to find the knowledge from the past (practices like Peer Assist help here). This is one elements of Knowledge Management already. 

2) The second element is to embed new knowledge into processes, procedures and structures. This is represented by the blue wedge in the diagram marked KM. Without this embedding step, the new knowledge is lost over time as human memory fades, or as lessons become buried within lessons databases, and performance slips back down the hill. The embedding KM wedge makes sure that performance gains are maintained (through the use of Lessons Management Software for example).

This combination of the KM components of learning loop and embedding means that

  • the more experience an organisation has, the more it learns
  • the more it learns, the more it improves its knowledge base
  • the more it improves its knowledge base, the more it improves its processes, procedures and structures
  •  the more it improves its processes, procedures and structures, the more it improves performance.

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How KM gives benchmarking a purpose

KM can add purpose to internal benchmarking, by using it to drive knowledge sharing

Image from wikimedia commons

Many commercial organisations track internal KPIs.  They publish league tables of the different departments, and differentiate the high performers, and the poor performers.

But Why? What’s the point? Surely not just to shame the poor performers, and make the high performers feel smug?

The answer is that by identifying the poor performers, you can also identify what each area of the business needs to focus on, and can give them a measure of how much they could (and need to) improve.

But they won’t make the improvement, if they don’t know how.

Benchmarking on its own is just a labelling exercise. It tells the departments where they need to improve, but it doesn’t help them learn how to improve.

This brings us to the second purpose of benchmark, which is to map out the knowledge transfer that needs to happen within the organisation.

Benchmarking shows where performance of a team or unit is weak compared to other teams or units, and therefore need to learn. It also shows which other teams or units are stronger performers, and so can be sources of knowledge. The strong performers can help the weaker performers, and benchmarking identifies which are which.

Managers can also use benchmarking to set targets and drive the learning –

“the factory in Poland uses 20% less energy than you do – I want you learn from them, and close the gap halfway by year end”.  

“Slough uses 80% of the packaging that you do – learn from them, and close the gap halfway by year end”.

In all of this, Knowledge Management is the enabler.

Target setting creates the driver for knowledge sharing, while measurement and benchmarking define the suppliers of and customers for knowledge. Knowledge Management closes the gap, enabling the production units to learn from Slovenia, from Slough, from Syracuse. The mechanism of learning may be by site learning visits, by Peer Assist, by creating Knowledge Assets or training courses, or through the operation of Communities of Practice. The poor performers will improve, and also the good performers learn a thing or two as well.

Link your internal benchmarking with a Knowledge Management campaign, and you can improve performance across the board.

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