“Knowledge” is now known to be so important to business performance that it has become a sub-field of its own within strategy research. Technology-rich industries clearly rely on large quantities of technical knowledge, accumulated over many years, and protected by secrecy and sometimes by patents. But knowledge is also important in many other sectors, from retailers who use knowledge about customer behavior to the likes of Amazon.com and eBay, who voraciously gather information and insight about the best approach to many aspects of their operations.

Consulting firms belong to a class of organizations – professional service firms – that are especially dependent on building, maintaining and leveraging a wide range of knowledge domains. Figure 1 shows some of the points in the professional service architecture where knowledge drives performance:

Figure 1: Where knowledge drives performance in a consulting firm’s architecture. (Click image to view larger)

Knowledge enables new services. Having extensive insight into current issues confronting potential clients in an industry allows the firm to develop and test new services. The customer ‘choice pipeline‘ from Briefing 40 is an example of a piece of knowledge that developed in exactly that way. One firm possessed information on the pipeline data for many clients across several industries. This knowledge was developed into a sophisticated advisory service, well beyond the capabilities of firms in those industries, and tested out with some of the firm’s most loyal clients. Having shown the method’s value and codified how the process could be applied, the firm could then take the new service to many potential clients across a wide range of industries.

Naturally, being able to demonstrate in-depth knowledge of a potential client’s industry, markets and competitors greatly improves the ability to win clients. With more widespread knowledge of the issues confronting their clients, the firm can also sell them more projects. And since the projects will be more valuable to the client, the firm can charge more for them.
By month 12, the system comes into balance, but only through the same kind of bad mechanism we saw in Briefing 75 for the computer service firm — losing customers brings pressure back to a level that the center’s capacity can deal with. This is helped by the continuing increase in staff numbers, so although each person can by now only respond to 92 calls per day, there are by this time enough staff to manage all the incoming calls.

Knowledge brings large increases in the productivity of professional staff and hence raises their capacity — both directly, by showing individuals how best to approach a certain problem, and indirectly, by providing access to others in the firm with prior experience of the issue. Knowledge reduces the workload needed to complete each project simply by making available information that would otherwise have to be looked for.

Finally, the knowledge base can enhance the quality of work done for clients, both by demonstrating how well similar problems were previously tackled, and by providing benchmarks for performance.

Major consulting firms have largely mastered the management of their knowledge, and similar processes are to be found in most other kinds of professional firm; lawyers, marketing agencies, recruitment consultants, and so on. Few feel a need to quantify in detail the knowledge they hold, or to analyse rigorously exactly how much difference it makes – the benefits are so large that it is self-evidently a good thing to do, and to do well.

The case is less clear-cut for other kinds of organization, however. When embarking on knowledge capture for the first time, the effort to establish the information systems and persuade people to contribute may well be daunting. So such initiatives often fail, with management and staff alike withdrawing their support before the benefits are realized. This risk can be reduced by assessing first just what kinds and what quantities of information should be gathered, what effort this will require from whom, the uses to which the knowledge will be put, what benefits will arise for performance of different parts of the business system, and the continuing effort that will be needed to maintain the system.

Until next time…

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Costs and limits of knowledge

A knowledge base is not a “free lunch“. It takes significant time and effort by staff to collect, organize, submit and update information in the knowledge base—time that is not available for other tasks. Remember too that high-level knowledge decays, in just the same way as the call-center data in Briefing 77. It simply gets out of date, and less relevant to the new issues that arise.

There are diminishing returns to knowledge building. It would be great for a consulting firm to have access to the latest information on every conceivable issue that every potential client in every industry might raise, but it would use up more and more of the firm’s professional capacity to collect all that information. There are also implications for staff morale arising from over-ambitious knowledge gathering. Professionals want to be spending time working on real client problems, rather than being shut in the office writing up what they have learned. The more they try to capture, the less likely it is that the knowledge will ever be utilized by their colleagues, which is a demoralizing experience.

This briefing summarises material from chapter 9 of Strategic Management Dynamics, pages 607-610.

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