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Making sense out of KM costs:

Open Standards Benchmarking Collaborative Research

Despite the widespread popularity of knowledge management principles and initiatives among organizationsæand the abundance of guidance in literatureæorganizations still struggle to find meaningful KM benchmarks that can help determine costs, technology investments and an appropriate overall structure for their own circumstances. What is the initial investment for KM at other organizations? Does the creation of a business case impact investment? What are the yearly costs of KM per employee?

APQC , a nonprofit organization that has researched KM for more than a decade at more than 350 organizations, is working to provide comprehensive answers to those questions in an ongoing benchmarking effort called the Open Standards Benchmarking Collaborative (OSBC) Research. By analyzing data from survey respondents (43 organizations to date), the OSBC research provides useful data pertaining to investment and ongoing costs associated with KM efforts.

This article details the initial results of the OSBC research, focusing on KM costs and the impact of developing a business case for KM within an organization. In addition, the article summarizes best-practice KM activities and methods across participating organizations.

The OSBC research

Open standards refers to people working with common standards to develop solutions that address common goals. The OSBC research is a global effort to standardize processes, measures and benchmarks that all organizations use to improve performance. With a universal process framework and standard performance metrics, organizations can make meaningful and valid comparisons with their peers.

The OSBC research uses an online data collection tool to obtain metrics across a variety of functions, including supply chain, finance and accounting, facilities management, human resources, information technology and KM. Benchmarking KM in particular is a major objective of the OSBC research; the survey collects data from six key areas:

  • structure and roles,

  • stages of implementation,

  • costs and budgets,

  • program measures and outcomes,

  • knowledge-sharing processes, and

  • content and technology.

In order to obtain relevant results from those responses, APQC normalizes the OSBC research data (i.e., breaks it down on a common basis such as per unit). That mitigates issues of organizational scale. For example, if an organization is benchmarking cost per knowledge worker, the number of knowledge workers is clearly linked to total KM expenditures. That enables an accurate comparison across organizations that vary in size. In addition, APQC validates and aggregates results. Validation ensures that responses are consistent with the scope and definitions contained in the survey. Data is aggregated in a group format to ensure confidentiality.

All organizations are invited to participate in the effort and receive a detailed benchmarking report specific to their organization. Each respondent answers 54 KM-specific questions with clearly defined descriptions and examples to ensure consistency in responses.

Survey participants, to date, reflect a wide range of industries. The median company revenue ranges from $4.1 billion for responses from single business units to $10.5 billion for government agencies. The number of employees for each respondent, so far, ranges from 3 to 60,000, with a median of 4,400 for government agencies and 2,000 for nongovernmental organizations.

Table 1: Initial Investment Levels for Formal and Informal KM Programs

(A) Initial Investment • (B) Formal KM Program • (C) Informal KM Program

(A) Less than $100,000 (B) 23.1% (C) 28.6%

(A) $101,000-$250,000 (B) 7.7% (C) —

(A) $251,000-$500,000 (B) 5.1% (C) 28.6%

(A) $501,000-$750,000 (B) 2.6% (C) —

(A) $751,000-$1 million (B) 2.6% (C) —

(A) $1.001 mil-$1.5 mil (B) 2.6% (C) —

(A) $1.501 mil-$2 mil (B) 10.3% (C) —

(A) $2.001 mil-$3 mil (B) 7.7% (C) —

(A) $3.001 mil-$4 mil (B) 2.6% (C) — (A) $4.001 mil-$5 mil (B) 5.1% (C) —

(A) Greater than $5 mil (B)17.9% (C)14.3%

(A)Don't know/unable to answer (B)12.8% (C) 28.6%

(A) Total (B) 100.0% (C) 100.0%

The costs of KM

The majority of organizations (83 percent) that have completed the survey have established a formal KM program (others primarily have informal efforts only). But what is involved in a formal KM program? For survey purposes, a formal KM program must provide an explicit structure with defined roles and responsibilities. At least one full-time employee, or the equivalent, must support KM activities. In addition, in order to be considered a formal program, KM must be fully recognized by the organization as an initiative.

The fact that so many organizations report the existence of a formal KM approach supports the common assumption that the KM arena is quickly maturing. Whereas grassroots and ad hoc KM programs are still prevalent in many organizations, it appears that formal recognition of KM programs is increasingly common, and more organizations are creating supporting infrastructures and providing resources to support KM efforts.

Interestingly, of those respondents that have a formal KM effort, an overwhelming 91.7 percent also created an initial business case with defined goals, a vision and, most importantly, a budget with allocated resources attached to KM activities. Of the 14.9 percent that report using an informal KM approach, a surprising 76 percent also created a business case. So far, data suggests that defining a business case may be an important element to a KM strategy.

As might be expected, initial and subsequent KM costs are higher in organizations with a formal KM approach. Whereas 23.1 percent of respondents initially invested less than $100,000 on a formal KM approach, 46.2 percent spent at least $1 million. In contrast, 57.2 percent of respondents with an informal KM program initially spent less than $500,000. However, an unexpected percentage (14.3 percent) of organizations had an initial investment of more than $5 million on informal KM programs.

Table 2: Recent Investments in Formal and Informal KM

(A) Most Recent Investment (FY2003) • (B) Formal KM Program (C) • Informal KM Program

(A) Less than $100,000 (B) 7.7% (C) 28.6%

(A) $101,000-$250,000 (B) 5.1% (C) 0.0%

(A) $251,000-$500,000 (B) 7.7% (C) 14.3%

(A) $501,000-$750,000 (B) 5.1% (C) —

(A) $751,000-$1 mil (B) 7.7% (C) 14.3%

(A) $1.001 mil-$1.5 mil (B) 5.1% (C) —

(A) $1.501 mil-$2 mil (B) 2.6% (C) 14.3%

(A) $2.001 mil-$3 mil (B) 12.8% (C) —

(A) $3.001 mil-$4 mil (B) 7.7% (C) —

(A) $4.001 mil-$5 mil (B) 2.6% (C) —

(A) Greater than $5 mil (B)20.5% (C) —

(A) Don't know/unable to answer (B) 15.4% (C) —28.6%

(A) Total (B) 100.0% (C) 100.0%

Financial data from the most current completed fiscal year (FY2003) also suggests that formal KM programs cost more to maintain on an annual basis. OSBC participants were asked to share information on the costs associated with ongoing KM efforts. Fifty-one percent spent more than $750,000 in 2003 for ongoing KM initiatives. The median cost to support formal KM programs was $1.1 million in 2003. In contrast, the median cost to support informal KM programs was $250,000. It is not surprising that 57.2 percent of organizations that have an informal KM program spent less than $1 million in 2003. Almost a third of respondents with an informal KM approach are unable to identify KM costs for the previous fiscal year (compared to only 15 percent of respondents that have a formal approach). This suggests that organizations with a defined KM strategy are forced to establish and maintain financial guidelines for KM initiatives.

It is also interesting to examine whether annual costs are higher among respondents that established a business case for KM programs. Annual spending is slightly higher in organizations that established a business case. More than half of respondents with a business case spent at least $1.5 million. The median annual cost for KM programs in organizations with a defined business case is $1 million. Yet more than half (52.9 percent) of organizations without a defined KM business case spent less than $1.5 million. Almost a third of organizations without a KM business case spent more than $5 million in FY2003, compared to only 12.5 percent of organizations that developed a business case for KM.

Table 3: Recent Investments (FY2003) With and Without a Business Case

(A) Most Recent Investment • (B) With Business Case • (C) Without Business Case

(A) Less than $100,000 (B) 4.2% (C) 23.5%

(A) $101,000-$250,000 (B) 8.3% (C) —

(A) $251,000-$500,000 (B) 4.2% (C) 17.6%

(A) $501,000-$750,000 (B) 8.3% (C) —

(A) $751,000-$1 mi (B) 8.3% (C) 5.9%

(A) $1.001 mil-$1.5 mil (B) — (C) 5.9%

(A) $1.501 mil-$2 mil (B) 8.3% (C) —

(A) $2.001 mil-$3 mil (B) 16.7% (C) 5.9%

(A) $3.001 mil-$4 mil (B) 12.5% (C) —

(A) $4.001 mil-$5 mil (B) 4.2% (C) —

(A) Greater than $5 mil (B) 12.5% (C) 29.4%

(A) Don't know/unable to answer (B) 12.5% (C) 11.8%

(A) Total (B)100.0% (C) 100.0%

Survey participants were also asked what percentage of KM costs relate to technology. Thus far, data indicates that the median percentage respondents are spending on technology is 25 percent.

Overall, in terms of spending, the aforementioned figures suggest that more formal KM programs with business cases tend to have higher investments and costs associated with running those programs. Given that formal KM structures often require more infrastructure and resources, it is not surprising that there are higher initial and ongoing costs attached.

The OSBC research also isolated specific KM costs per full-time equivalent (FTE) and the costs of communities of practice (CoPs) per community participant. The median cost for each KM FTE is $107, and the median cost of each CoP participant is $458.

To put this figure in context, it is helpful to compare costs associated with training and development. In its annual report on learning trends, the American Society for Training and Development (ASTD, astd.org) noted that organizations are spending about $812 per employee on learning initiatives. In addition, the ASTD reports that for every $680 a company spends on training there is an increased shareholder return a year later by 6 percent.

Other research suggests that KM investments will generate significant shareholder return. In the Most Admired Knowledge Enterprise (MAKE) survey conducted by Teleos, results show that top performers generated an average 24 percent total shareholder return from 1993 to 2003, compared to a return of 10.5 percent for average performers. Moreover, top KM organizations also outperformed peers in long-term total shareholder return by a 2-to-1 margin, have a higher than average market capitalization and show substantially higher return on assets.

Structure, roles, and resources

For the majority of respondents so far, KM is enterprisewide or centrally managed. Twenty-nine percent of organizations locate KM programs within a division, business unit or department. Twelve percent of organizations indicated that KM is managed in other areas.

Respondents were also asked if there is a core KM group in their organizations. The majority of organizations (62 percent) confirmed the presence of a core KM group.

The reporting structures for organizations with a defined core group for KM varied widely. Generally, KM core groups tend to report to a chief operations officer, chief information officer or a business or functional unit (such as operations, HR, organizational development or training). Twenty percent of respondents indicated the KM core groups report to other business functions within the organization.

A majority (75 percent) of respondents have designated roles (e.g., KM champions and CoP leaders) within business units. Participants stated that those individuals are responsible for encouraging and enabling knowledge sharing and reuse. Only 25 percent of responding organizations do not have designated roles for KM.

The OSBC research also extracted the median number of FTEs for the surveyed KM programs. Early data indicates organizations with formal KM programs employ roughly 1.9 FTEs per $1 million in revenue. Organizations with core KM groups have a median FTE number of 6.

KM activities and change enablers

The OSBC research surveys knowledge-sharing methods and activities of responding organizations. The results indicate that most organizations adopt a blended approach to deliver knowledge programs instead of relying on a single knowledge solution. A blended knowledge approach enables organizations to offer a variety of methods and activities to capture, disseminate, share and reuse explicit and tacit knowledge. Earlier APQC research suggests that best-practice organizations often adopt a blended approach to fulfill the varying needs of business processes and roles within an organization.

(Few organizations use expert locator systems. This is most likely because expert location systems are difficult to create and sustain for many organizations.)

Table 4: Current KM Activities Underway

(A) KM Activities • (B) All Respondents

(A) Communities of practice (B) 75.0%

(A) Best practices transfer (B) 62.5%

(A) Content management systems (B) 62.5%

(A) Lessons learned programs (B) 50.0%

(A) Knowledge retention efforts (B) 50.0%

(A) After-action reviews (B) 25.0%

(A) Virtual collaboration (B) 25.0%

(A) Expertise locator system (B) 12.5%

Moreover, organizations tend to divide their time equally among the most widely employed KM activities. Twenty percent of time is spent equally on CoPs, best-practices transfer and knowledge retention. Most organizations only spend 10 percent of their energies on lessons learned programs.

Table 5: Time Devoted Among KM Activities

(A) How Time is Devoted • (B) Median

(A) Communities of practice (B) 20%

(A) Best practices transfer (B) 20%

(A) Knowledge retention 20% (B) 20%

(A) Lessons learned process (B) 10%

(A) Other 30%

Implementing and sustaining change is often a struggle for many organizations. Roughly 62 percent of OSBC survey respondents use an explicit communication process to share information about tools and knowledge successes. An explicit communication process often includes an internal marketing campaign or planned communication process to share knowledge activities. Newsletters, e-mail, internal Web sites and company meetings are common approaches that help spread the word on the importance of knowledge programs.

Likewise, 50 percent of organizations provide designated points of contact for troubleshooting KM issues. Only 37.5 percent of organizations provide training or e-learning for KM tools and processes. The same percentage provides new employee orientation on job-specific CoPs or other KM processes and tools. Few organizations (25 percent) provide recognition and incentives for sharing or reusing knowledge.

Table 6: Most Widely Employed Change Enablers

(A) Change Enablers • (B) All Respondents

(A) Communication process about tools and successes (B) 62.5%

(A) Designated points of contact for troubleshooting KM issues (B) 50.0%

(A) Training/e-learning available for KM tools and processes (B) 37.5%

(A) New employee orientation on job-specific communities of practice or other KM processes and tools (B) 37.5%

(A) Recognition/incentives for sharing/reusing (B) 25.0%

Although the majority of respondents have a formal KM program with a defined business case, it is interesting to note that 90 percent of respondents do not have knowledge-sharing objectives as part of employee or management HR scorecards. This suggests that few organizations have fully institutionalized KM into their performance evaluation vehicles. Organizations that successfully institutionalize KM programs are typically able to monitor and measure KM and align rewards and performance evaluations with organizational efforts.

Capitalizing on valuable benchmarks

The OSBC research is still collecting and analyzing data, as APQC begins to examine where most organizations are in the evolutionary cycle of KM. Future OSBC research efforts will correlate costs, return on investment measures and resource allocations with the maturity of KM programs. In other words, what do organizations with mature KM programs spend on an annual basis? How many FTEs are deployed in programs that are just starting out compared to programs that are fully institutionalized? Do organizations with more developed KM programs use different methods and activities to expand their efforts? As KM efforts mature and involve new tools and business models, it is critical to understand how organizations are structuring, supporting and funding those programs. Clearly, the ability to obtain this information will help other organizations assess KM performance and costs.

Additional surveys are completed on a regular basis and results are continuously integrated. All organizations are welcome to participate in the effort and can complete a survey online through the APQC's Web site,.

Wesley Vestal is KM practice leader at APQC, e-mail wvestal@apqc.org.

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