Wednesday, 10 November, 1999

US consultant recommends measurement of 'knowledge capital' before outsourcing

By NICK GENTLE

Real capital it may be, but if you can't measure it, what good is it to you?

Defence chief Admiral Chris Barrie and some of Australia's most powerful bureaucrats, including the Auditor-General, Pat Barrett, met at breakfast yesterday to hear American Paul Strassmann, a consultant to some of the largest corporations on the planet, outline his answer to the above question.

Knowledge capital, also known as intellectual capital, is a term which describes the value of the accumulated information of a firm stored in the minds of its employees.

The fact that a firm can employ a person with no skills in an entry-level position one day and promote that same person to a supervisory role in three years' time is an example of knowledge capital in action. The person is the same, but has accumulated information that raises his or her value to the company.

This knowledge has direct implications for the productivity, and hence profitability of a firm.

According to Mr Strassmann, ' Today's profits [or public-sector productivity] are the investment returns realised from an accumulation of knowledge capital over prior years.'

In an earlier publication he said, ' If that accumulation is ultimately convertible in greater productivity for an enterprise, then the expense was worth it by earning a return on the knowledge capital investment.'

Being able to accurately measure knowledge capital was extremely important to both private and public sectors for a number of reasons.

In the private sector, it could be combined with existing accounting valuations to help determine the fair market price of an enterprise, and could aid in making investment decisions, by tracking the return on investment gained through knowledge creation activities.

' We need an equivalent to the generally accepted accounting principles to apply to knowledge capital,' Mr Strassmann said. ' It's not just about making money. It's about creating worth.'

Applied to the public sector, it could provide a sound basis on which to make outsourcing decisions because it highlighted areas of the business which were not generating positive returns on knowledge investment.

The public sector had lost a quantity of knowledge capital through poor outsourcing decisions because the Federal Government did not have the ' metrics' to accurately measure it.

His solution was relatively simple, and a reasonable estimate of what a firm's knowledge capital was worth could be extrapolated from financial results in much the same way that many standard accounting ratios were calculated.

In the case of public-sector entities, the knowledge capital measurement was dependent on information productivity, and could be compared with results for similar operations in the private sector to weigh up outsourcing decisions.

' Only if you can measure can you understand,' he said.

For more information on measuring knowledge capital, visit his web site at www.strassmann.com

Mr Strassmann believes that, although still in its infancy, an accurate measure of knowledge capital would prove an invaluable tool in meeting budgeted outcomes.