The benefits of spending money on research and communication infrastructure and training can be understood more easily by examining intangible values and the roll of early adopters.

Paul Strassmann offers an interesting metric alluding to the ROI of KM (Return on Investment for Knowledge Management) in an article on Baselinemag.com. He argues that the difference between a company’s Financial Value, as determined by its own accountants, and it’s Market Value, as determined by the price its investors are willing to pay for its stock, is of key importance. Investors are willing to pay more for a good company than it’s tangible assets are worth because unlike accountants they recognize the value of intangibles. Strassmann argues that Knowledge Management makes up the bulk of those intangibles.

Why? Accountants don’t know how to explain the worth of employees’ knowledge, trademarks, accumulated software, customer loyalty and other intangibles—underscoring a major difference between the way CFOs and CIOs evaluate technology operations. CFOs look at I.T. strictly in terms of financial accounts; CIOs also look at intangible factors such as the worth of the knowledge held by the company’s workforce.

After eliminating companies with highly volatile stocks, Strassmann comes up with the following formula:

Market Value minus Financial Value equals Knowledge Value.

He goes further and recommends that the Knowledge Value then be divided by Number of Employees. It’s an interesting formula, isn’t it? The article also contains a table illustrating the Knowledge Value of several large corporations, primarily in the pharmaceutical industry. I think this analysis is worth pondering in almost any circumstance, though, even if only as a thinking process.

The ROI of KM is a very important issue, as it could, if quantified, be a key source of leverage in securing funding for things like training, research and communications infrastructure.

I think this could be of particular interest to the Web 2.0 community, as new tools begin to transition from early-adopter ephemera into marketed commodities. Where does a tool like RSS stand in the above equation today? Where will it stand in 6 months or 5 years? RSS may be a good example of an asset that stands in the shadows of even the intangible Market Values. Outside stakeholders are unlikely to place value on your organization’s utilizing a well-constructed suite of RSS feeds. But they are quite likely to place great value on the things that RSS enables. For example:

• Rapid response to any off-site links to your organization’s web site
• Your group-members being consistently informed about breaking news and hot topics in the field without inefficient manual “web surfing”
• Your organization and its members developing longer-term relationships with other key players in the field, many of whom will be early adopters of RSS themselves and will thus be reading your feeds. Non-early adopters may not recognize the importance of Persons A, B and C being subscribed to your outgoing feeds, but they are more likely to recognize the importance of a well developed relationship with any of those people regardless of the technology that enables it.
• A cohesive message from members across the team, as information is more effectively shared internally via RSS than by emails.

Perhaps then this points to the complication of such equations posed by emerging social technologies in general. When your organization makes the transition from having a few early adopters seruptitiously using RSS to magically be on top of the knowledge in their field into a scenario where instead your organization is paying for RSS services to acquire those intangible assets – that’s a shift in Strassmann’s equation that will be helpful to understand. The “investment” part of the ROI equation will really be an upgrade from partial adoption of emerging technolgies in the intangible column (or from being altogether invisible) and into the tangible costs column.

But the impact in the Knowledge Value column will shift from being of unknown causality (“group members are using RSS? what’s that?”) into an amplified impact caused by actual Financial investment. In simpler terms, purchasing emerging research services and tools won’t hopefully be something alltogether new with surprising consequences, but rather a formalization of a previously marginal investment leading to greater intanible assets. Recognizing Strassmann’s three values (Financial, Market and Knowledge Values) could be a helpful way to understand and thus explain the ROI of Web 2.0 enabled KM.

Strassman article found via Gary Price’s Resource Shelf

Technorati Tags: RSS, ROI, KM, Strassman