The fact remains that most value added in most businesses today is in the form of knowledge, not materials. Traditional, industrial precepts of management don’t handle that new reality well. And these new realities are here to stay.

“Intellectual capital is intellectual material -- knowledge, information, intellectual property, experience -- that can be put to use to create wealth,” explains Tom Stewart in his exceptional new book, Intellectual Capital: The New Wealth of Organizations (Currency Doubleday). “It is hard to identify and harder still to deploy effectively. But once you find it and exploit it, you win.” In his role as a columnist and management writer for Fortune magazine, Stewart has continually broken new ground -- delivering a series of insightful articles on the intangibles that now lie at the heart of corporate success. KI Executive Editor Lewis Perelman caught up with him recently in Washington, D.C.

KI: Do CEOs know that they have an “intellectual capital” problem?

STEWART: First, I question the premise that you need to have “a problem” to adopt new technology or to change a business. Really powerful innovations have a strong attraction in themselves, because of the new opportunities or possibilities they create. We didn’t know we would need television until we had it. When the telegraph was first invented, no one knew what to do with it. But one of the first actual uses of the telegraph was by the telegraphers themselves who would play checkers with someone down the line. It wasn’t until Cargill figured out the telegraph could tell you about weather conditions far away, and therefore help you create a grain market, that the telegraph finally found a commercial demand.

KI: Okay, but what evidence do you see that business leaders are seeing “intellectual capital” in terms either of problems or opportunities?

STEWART: In fact, CEOs, like Jack Welch at General Electric, are coming around to seeing some real problems in their management of intangible assets or processes. The interest in TQM and benchmarking is an indicator. Concern about a lack of good competitive intelligence is one example. Or protecting their patents and copyrights from piracy. A lot of managers see those kinds of intellectual capital problems. Major consulting and accounting firms see the need to provide consistent service globally as a knowledge problem. But I would say that fewer are aware that there is an opportunity.

KI: Where is that opportunity?

STEWART: One is the cost or efficiency opportunity. A midwest manufacturer I recently visited believes that SAP will improve demand forecasting and inventory management enough to save it $100 million in working capital. That’s a pretty serious opportunity. GE Lighting has replaced dozens of warehouses with databases. A big saving.
Fernand Braudel in his “History of Capitalism” observed that the power of Amsterdam, when it was the richest city in the world, was in its warehouses. When communication of data was limited by the speed of a sailing ship, Amsterdam’s economy made up for its ignorance of current market conditions with the buffer of huge inventory. Most business continued that form of just-in-case, warehousing management up to a decade or two ago, when the idea of just-in-time began to take hold. You could say that banking is just now breaking free of the warehousing mode.

KI: So the opportunity is driven by information technology.

STEWART: Well, the opportunity may start with the expanded flow of information. But, of course, information glut can become a problem in itself. I was just reading a recent Reuters survey on information access and retrieval and among its findings are that 38% of professionals say they waste time trying to manage information, and 49% say they feel unable to handle all the information input they receive.
The great opportunities are in innovation. Not just benchmarking, which mostly has focused on cutting costs, but also finding new and better ways to do things. The big opportunity in intellectual capital management comes from full-body contact between vendor and customer. That provides the knowledge which increases margins and secures customer loyalty, which is one of the most valuable forms of intangible or intellectual capital.

KI: Most of what we read and hear about intellectual capital, knowledge management, and such seems to focus on big organizations. Is there anything in this for small businesses?

STEWART: Some of the machinery of knowledge management is naturally more valuable, or needed in big companies. Sharing knowledge is obviously much easier in a small organization where everyone may see and interact with everyone else daily. But to the extent information and communications technology lowers barriers to entry, or enables broader and more responsive contact with customers, it can give a great advantage to small, entrepreneurial firms. Like all these new Web ventures.

KI: But Michael Saylor, CEO of MicroStrategy, has argued [see KI, January 1997] that where there is easy entry there is also easy exit. So, he expects that in the end, a Bank of America will be dominant in online banking, a Disney in online entertainment, and so on.

STEWART: Certainly, commodities are hard to profit from. But I think the project management model still offers big opportunities — like you see in Hollywood, where you have small specialists in special effects, makeup, costumes, or whatever, working as contractors on big studio projects.

KI: Several business publications have suggested your work and other recent books on intellectual capital represent just another business “fad.” What do you think about that?

STEWART: I’ve generally thought of a business fad as being driven mainly by the attempt to sell something. So I did not use to think that label would apply to intellectual capital because there was nothing in particular to sell. Now with all this “intranet” stuff, maybe that’s not so true. But still, intellectual capital or knowledge management, whatever we call it, is still a nascent field, hardly a juggernaut yet.
And anyway, there is something to be said for fads. TQM may have become a fad, but quality still is a valuable concern. Reengineering may have gotten bloated and used as an excuse for downsizing. But many of reengineering’s core ideas about value, focus, people, and innovation are important.
The fact remains that most value added in most businesses today is in the form of knowledge, not materials. James Brian Quinn [see KI, January 1997, “Leading Lights”] estimates that knowledge accounts for 75% of the value added even in manufacturing. Traditional, industrial precepts of management don’t handle that new reality well. And these new realities are here to stay. So I don’t see how that rates as a fad.

KI: Your book seems to deal almost entirely with the upside of intellectual capital. You say little if anything about the dark side of the knowledge force: disinformation, deception, infowar, or just plain ignorance and stupidity. How come?

STEWART: I guess at heart I just believe that sunlight is the best disinfectant. The more we create an environment of knowledge sharing, the more I expect those things will be exposed and rooted out. I realize that there are serious threats, but I’m optimistic that things will work out for the better. I like Peter Huber’s book “Orwell’s Revenge,” which shows that most of the popular fears in the 40s or 50s about the supposed threats of information and automation technology turned out a half century later to be not only wrong but backward.

KI: At one point in the book you cite some statistics that seem to equate “knowledge worker” with advanced education and training, but elsewhere you quote experts such as John Seeley Brown of Xerox PARC to the effect that equating human learning or knowledge with formal training or education is a huge mistake. Aren’t you inconsistent?

STEWART: Well, those statements were in different contexts. Certainly learning, communities of practice, tacit knowledge and such processes derive from far broader social experiences than what happens in schools. In my recent visit to Illinois, I was struck to learn that 25% of the community college students have bachelor’s or higher degrees. Clearly the human capital market is demanding kinds of know-how that are not assured by academic degrees. Actually, I would say that most companies make the same mistake of treating training as a one-way process.

KI: What about the movement for what is called the “Learning Organization”?

STEWART: Peter Senge is a smart guy and I liked his book. But I don’t really know what the “learning organization” is. As I’ve looked at it, it seems to have wandered off into very personal, solipsistic stuff. Like, do I love my boss, does my boss love me; spiritual values; that sort of thing. I won’t say those things are not important, but they are an effect not a cause. Every company says “We need better communication,” so they increase from 20 newsletters and 30 videotapes to 29 newsletters and 55 videotapes.
The fact is better communication comes from working together. If you and I are working together, and sharing knowledge, we will in fact communicate. I think the corporate issue is best addressed by focusing on the work, and bringing valuable knowledge to bear on the work, and then the learning will follow; the community, the spirit and all that will follow. I don’t think you can address the culture directly. But I see much of the conversation about the “learning organization” as just flailing around about culture.

KI: Well that is one of the negative aspects of the “learning organization” movement. On the other hand, where is the evidence of bottom-line success, or a payoff?

STEWART: One of the main reasons I wrote the book was to help define some measures or criteria of success in the new economy. You want to be able to take a look at the value of knowledge assets and see that you are doing better with them. We go to meetings where someone says how valuable human capital is. But IBM evidently had a surplus of some 150,000 pretty smart people they could not use effectively. If your doctor gave you a balance sheet after a physical, he wouldn’t count fat as an asset.

KI: In your book, you mentioned that when Gil Amelio, former CEO of Apple, was leading the turnaround of National Semiconductor, he got rid of a lot of fat, letting some people go who did not seem productive for any particular task, but who actually were valuable to the workings of the organization as a whole.

STEWART: There is a difference between fat and lubricant. There are certain people who facilitate the flow and retention of valuable corporate knowledge, regardless of what their job description says. They are hard to find and are vulnerable. One of the hazards of the mechanical as opposed to biological view of organizations is that in the name of eliminating redundancy, it tends to strip out people with intangible roles that actually create value from intangible assets. Today’s organizations need communicator bees as well as worker bees.

KI: Your book, like much of the current literature on business knowledge, doesn’t give much attention to the results of the 3,000-year study of epistemology.

STEWART: I had some references to earlier history in the book, but I’ve been mainly concerned with intellectual capital in today’s business, not the concept of knowledge. The fact is that however old the idea of knowledge as power may be, the portion of today’s economy that is intangible has become so much larger, so much more valuable, and so much more manageable — because we now have the tools to manage it — that we simply have to deal with it. Peter Drucker says that he cannot find any evidence that we have improved the productivity of knowledge work at all. If we want to feed a growing population and take care of our needs, we had better get on with fixing that.

KI: Still, I think epistemology offers many lessons of great practical value. One is that, if knowledge implies truth or validity, then knowledge is a harsh mistress, because the smallest falsehood or error can contaminate everything you think you know. Also, that our common notion of expertise is a myth. As Heisenberg noted, it has always been hard to truly know much about any interesting subject, and with the current explosion of information, expertise has become virtually impossible.

STEWART: Yes, I think that is a key mistake many firms make. Like the 18th-century French encyclopedistes who thought you could put all human knowledge in one book, some companies now think they can put all corporate knowledge on one huge server, a giant hyperlinked encyclopedia. It simply can’t be done. The real value of information systems is connecting people to people, so they can share what expertise and knowledge they have at the moment, given that the cutting edge is always changing.
If you really want to avoid reinventing the wheel, the solution is not to build a warehouse of everything you ever knew about every wheel you ever invented, including all 9,000 wheels you threw out because they were square or triangular. You want to connect questions to answers or to people who can help you find answers.

KI: I’d say maybe both of those things have value, but there is no panacea, no way you can know it all.

STEWART: That’s right. None of it will be perfect, and none will be permanent. It will change.

KI: In the book, you note that schools of fish or flocks of birds demonstrate order without command or control. But then you make the statement that “knowledge management requires knowledge managers.” A contradiction?

STEWART: I don’t necessarily mean a job title. But someone has to have the job of helping people to share; purging the database of error; flagging relevant information or connections. You need validators, garbage disposers. I don’t think you can automate that job, though networks and groupware can help.

KI: You put all the discussion of measurement of corporate knowledge in an appendix. Why?

STEWART: Two reasons. One: I’m an English major with a Mac. But seriously, people want and need measures of how we use knowledge and the value that results. My favorite epigraph in the book is the one from Darwin: “I love fools’ experiments, I’m always making them.” We are still in an experimental stage. A cookbook of recipes is impossible now. Though I would not discourage people from trying. The only experiment I think is bad or dangerous is the idea of putting knowledge assets somewhere on a financial balance sheet. At this stage that is premature and an invitation to all sorts of flimflam. Certainly it is outside my range. There’s too much on balance sheets already.
I was at a seminar and one guy stood up, angry, and shouted at two speakers: “On Monday one of you told us to do such-and-such and on Tuesday the other said do this-and-that. Which is it?!” The truth is there are a lot of bad managers who don’t want to think, they just want to be told the answer. Just give us the numbers and we’ll send in the report on Friday. Whatever knowledge management is, it can’t be that.

Tom Stewart is the author of the international best-seller Intellectual Capital: The New Wealth of Organization and a member of the Board of Editors of Fortune magazine, where his monthly column "The Leading Edge," is read by 870,000 readers. His web site may be accessed at: http://members.aol.com/thosstew/.

 

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