Supplementary files are available for this work. For more information about accessing
these files, follow the link from the Table of Contents to "Reading the Supplementary Files”.
Building a Knowledge-Based Strategy
A System Dynamics Model for Allocating Value Adding
Capacity.
Karl-Erik Sveiby Keith Linard Lubomir Dvorsky
Professor in Knowledge Director, Centre for Consultant, Computer
Management at Swedish Business Dynamics & Science Corporation (Aust)
School of Business Knowledge Management — Postgraduate Student,
Administration and University of New South University of New South
Economics in Helsinki, Wales Wales
Hanken.
karlerik@ sveiby.com.au keith@ linard.info ldvorsky@ csc.com.au
ABSTRACT
This paper reports on a project which integrates the pioneering work on ‘intangible
assets’ by Karl-Erik Sveiby with system dynamics based human capital modelling
undertaken for the Australian Federal Public Service by the UNSW Centre for Business
Dynamics. The project aims to create a dynamic ‘management flight simulator’ which
helps managers understand better the dynamic interrelationships in organisation design
and, in particular, the interrelationships between an organisation's profitability (both
short-term and long-term) and investment in people competence, internal structure and
relationship building measures with customers. The expected use of such a simulator is
assisting managing partners of professional services organisations to improve the
allocation of both their own and their staffs’ ‘value adding capacity’.
KEYWORDS: Knowledge management; intangible assets monitor; system dynamics
modeling.
Introduction
Despite the fact that simple human resources (HR) capacity models have been stock-in-
trade for system dynamics software manuals and training courses for over a decade
(High Performance Systems Inc., 1990a, 1990b; Wolstenholme, 1990) there are
surprisingly few published papers that focus specifically on the personnel or workforce
dimensions of the system dynamics of organisational value creation. Where
organizational models are reported they typically focus on the production or distribution
chain rather than on the people competence and people relationships of the organisation.
At the same time, whilst key corporate management paradigms such as Balanced
Scorecard, Intangible Assets Monitor and Intellectual Capital Accounting are implicitly
concemed with organisational feedback relationships, as implemented they evince little
awareness of the existence of system dynamics modelling. Whilst interactions between
key performance indicators are often acknowledged, perhaps by way of high level
causal loop diagrams, the suites of decision support tools provided to implement such
paradigms lack dynamic modelling capability.
Gulf between general management & systems dynamics
This lack of awareness by management practitioners of the field of system dynamics
appears to be ubiquitous. An extensive review was made of management journals and
WWW publications in relation to system dynamics perspectives on human resource
management, workforce planning, workforce value creation and organisation design.
Outside of the system dynamics community itself, the material was minimal. The
review showed a widespread appreciation of the importance, and complexity, of ‘system
interrelationships’, but little or no appreciation of dynamic modelling tools available to
provide decision support in this regard.
Linard (1999) reported a similar lack of awareness of system dynamics concepts
in public sector literature on organisational performance monitoring and evaluation and
in the private sector balanced scorecard literature. Kaplan and Norton, for example, in
their 10 years prior to 2001 of writing journal articles and case studies on the BSC, a
concept that depends fundamentally on the causal feedback link between key
performance indicators and organisation strategy, refer only once to system dynamics
modelling ... in a footnote. (Kaplan and Norton, 1997).
Wolstenholme (1997) discusses factors associated with the gulf separating
systems thinkers and current management practice where the prevailing methods “are
essentially linear, open loop approaches and heavily data orientated, but generally well
used ... the main reasons for this are simplicity and a strong relationship to what the
organisation does and can relate to.” Wolstenholme emphasises that a system
dynamics intervention is more likely to succeed if it can use existing ‘accepted’
management approaches as hooks by which to relate systems thinking and system
dynamics to existing activities.
Morecroft (1997, 2000) suggests just such a ‘hook’, arguing that system
dynamics is a natural way to unite two powerful ideas at the heart of mainstream
management strategy paradigms, resource accumulation (resources being classified into
tangible-intangible and managed-unmanaged) and dominant logic. A variety of papers
from Morecroft’s system dynamics group at the London Business School have focussed
on the structural dynamics of organisations and the dynamics of resource structure.
Similarly, Wolstenholme (1998) and Linard (1999, 2000) suggest that the
‘causal-chain’ basis of the BSC provides a ‘hook’ to incorporate system dynamics
concepts into scorecard implementation.
However, there are dangers in exploiting a management paradigm simply
because it provides an apparently plausible ‘hook’ for system dynamics, if that
paradigm is fundamentally anti-systemic. Who is catching whom? Thus, it has been
argued that the BSC concept itself has some fundamental systemic flaws that cannot be
remedied by ‘retro-fitting’ a system dynamics flight simulator. Sveiby (1999) contends
that, whilst BSC and the Intangible Assets Monitor (IAM) have superficial similarities,
BSC takes ‘industrial era’ theory of organisations for granted and simply adds non-
financial measures to the traditional financial indicators in a non-systemic fashion.
IAM, on the other hand, takes an information era perspective. It is a stock/flow
theory based on the notion of people as an organisation’ s only profit generators. Human
actions are converted into both tangible and intangible knowledge "structures" which
are directed outwards (external structures) or inwards (internal structures).
Conceptually, IAM is most amenable to a system dynamics framework. It has a
strong systems underpinning and its ‘stock-flow’ understanding is compatible with
system dynamics modelling concepts. These are strong ‘hooks’ for seeking a dialogue
between a widely accepted management framework and system dynamics modelling.
The key challenge in implementing IAM in a rigorous system dynamics framework
relates to the IAM’s significant focus on ‘soft variables’
SDM & the People Dimension of Value Creation
‘Soft variables’ in system dynamics modelling
Many firms proudly boast “people are our most important asset.” In public service
organisations and professional services firms, people typically are the only value-
generating asset. Depending on the problem situation being addressed, to simulate how
management decisions may affect value creation in such organisations inevitably means
addressing qualitative (or ‘soft’) variables, such as morale, productivity or work quality.
The use of qualitative variables is contentious in system dynamics modelling, as
in other areas of the social sciences. Over the past 18 months, queries to the System
Dynamics List-Server (<system-dynamics@world.std.com>) on questions relating to
“attractiveness multipliers’, “human behaviour in system dynamics models”,
“qualitative variables and the mapping of ideas” and “soft variables” generated robust
exchanges of views amongst leading academics and professionals in this discipline.
Professor Geoff Coyle has provided a number of thoughtful and challenging
contributions. In an early intervention he asked for a “ demonstration of the added value
of quantification in cases where, as I have tried to explain, there may be serious
uncertainties in data and causal mechanisms.” !
To this George Richardson of the University of Albany responded: “But if such
"soft" variables are crucial to the policy dynamics of the system, then the only
absolutely sure way we can be wrong is to follow Geoff's advice and not try to quantify
them!”
Norman Marshall, of McKinsey & Company, took a very pragmatic view, referring to
HR modelling done by that company: “We were aware that on the one hand soft
variables were important drivers of the system; on the other we knew that attempting to
put them in would get us into a syndication exercise of religious intensity and
geological timescales. So instead we built a much simpler model ...”°
Jay Forrester, in a later discussion of these issues noted that if a factor is
significant in a decision context “... omission of soft variables is not possible. If one
"omits" a variable, it has a very specific assumed value in the model. It is being set to
zero or to some other value that inactivates the structure of which it is a part. To leave
out the variable or concept is to say explicitly that it has no importance. Often zero
significance is the most unlikely of the possible subjective estimates.”*
Coyle, G. System Dynamics List Server, <system-dynamics@ world.std.com>, 16/8/00
Richardson, G. System Dynamics List Server, <system-dynamics@ world.std.com>, 17/8/00
Marshall, N. System Dynamics List Server, <system-dynamics@ world.std.com>, 21/8/00
Forrester, J. System Dynamics List Server, <system-dynamics@ world std.com>, 16/10/01
Forrester’s comment may be applied to virtually all project management
software packages. These products implicitly assume, for example, that increasing
hours of overtime per week does not affect productivity, quality or the amount of re-
workin either the short or long term. The effect of overtime on productivity or quality is
implicitly assumed to be ‘1’. Empirical research across the broad field of project
management demonstrates this to be false.
In HR management, judgements will inevitably be made which, implicitly or
explicitly take into account diverse qualitative effects of options or strategies on staff
behaviour. Performance management systems, bonus systems and performance based
pay implicitly assume feedback impacts on qualitative factors such as firm loyalty,
morale, productivity and so forth. To the extent that qualitative variables are perceived
to be relevant to the problem under review, and would otherwise implicitly be factored
into managerial decision making, it is far better to confront the choice values openly and
explicitly rather than allow them to be hidden. In this way, decision makers and
stakeholders are better able to identify the implications of the qualitative assumptions
and to challenge their usage or valuation if this seems desirable.
Defining and valuing ‘soft’ human resources variables
In the system dynamics list server discussions noted above, Jim Thompson, from Global
Prospectus, made a significant point: “A soft variable is objectionable when its
meaning is ambiguous. ... When variables are properly defined and explained,
resistance to their use diminishes.” °
Our review of HR related papers to past four conferences of the International
System Dynamics Society identified many papers where ‘soft variables’ were loosely
defined and /or simply relied on plausible values of relatively ill-defined variables.
‘Plausible’, in this context, means based on the professional judgement of the modellers
and consensus of the client team, but with no empirical basis or very limited data.
Papers by two of the current authors, Linard and Dvorsky, were no exception.
An important dimension of our current project has been to undertake a detailed
review of the HR research literature to identify empirical research into ‘soft’
relationships typically applied in system dynamics models of HR systems. In addition
to adding rigour to our current modelling project and thereby assist its ‘marketing’ to
senior managers, our literature review has the longer term aim to:
0 provide a data source for system dynamicists working in HR modelling, against
which ‘plausible values’ of qualitative variables may be judged; and
© propose rigorous definitions of HR variables typically applied in system
dynamics models of HR systems; and
© promote standardisation of labels and definitions of terms in HR system
dynamics models.
Over 1000 articles from 50+ journals have been reviewed thusfar, about 150 in
detail. These covered the gamut of management related disciplines, including
accounting, economics, labor relations, psychology and systems theory as well as
specific HRM literature.
5 Thompson, J, System Dynamics List Server, <system-dynamics@ world.std.com>, 17/10/01
Knowledge Capital, Knowledge-Based Strategy & Value Creation
Sveiby (2001) defines ten knowledge-based strategies to maximize an organisation's
value creation. These seek to improve knowledge transfers between three families of
intangible assets so that the capacity-to-act of people both inside and outside the
organisation is enhanced. The three families of intangible assets are external structure;
internal structure; and individual competence. The combination of intemal structure
and individual competence can collectively be called the firm’s ‘knowledge capital’.
External structure
The external structure can be seen as a family® of intangible relationships with
customers and suppliers, which form the basis for the reputation (image) of the firm.
Some of these relationships can be converted into legal property such as trademarks and
brand names. The value of such intangible resources is primarily influenced by how
well the company solves its customers’ problems, which involves an element of
uncertainty. Reputations and relationships can be good or bad, and can change over
time. They are partly independent of individuals.
Internal structure
When people direct their actions intermally, they create an internal structure. The
family of Internal Structure can be seen to hold patents, concepts, models, templates,
computer systems and other more or less explicit administrative tools and processes.
These are created by the employees and are generally ‘owned’ by the organisation.
However, the organisation can legally own only a small part of the Internal Structure.
The informal power play, the internal networks, the ‘culture’ or the ‘spirit’ can also be
regarded as belonging to the internal structure. It is useful to include also the
competence of individuals, such as that of support staff, accounting, IT, HR and
management, in the intemal structure family, since it is not possible to separate the
internal structure from it’s creators.
Intemal structure is thus partly dependent on and partly independent of
individuals. Even if the most valuable individuals leave a company, such as a
consultancy firm, that depends heavily on them, at least part of both the internal and the
extemal structures (for example, the brand name) will typically remain intact and can
serve as a platform for a new start, (Sveiby & Lloyd, 1987).
Individual competence
The individual competence family consists of the competence of the professional and
technical staff on the one hand and support and managerial staff including R&D staff,
factory, sales and marketing employees - in short all those who have direct contact with
customers or whose work directly influences the customers’ view of the organisation.
The distinction between professional/technical staff and support/managerial staff
is made because their different roles determine both how they relate to each other and
® The notion of Family was suggested by Wittgenstein (1995). A family is a grouping based on common
properties. Its contrast is the Category, which is a grouping based on division between mutually
exclusive properties.
how they relate to the external world. Such a classification is useful for strategy
formulation and action planning.
Knowledge strategies for value creation
Value creation can best be understood through the systemic interrelationships among
these families of intangible assets, and the associated ten knowledge strategies,
illustrated in Figure 1.
1. Knowledge transfers between individuals
. Knowledge transfers from individuals to external structure
. Knowledge transfers from external structure to individuals
. Knowledge transfers from individual competence into internal structure
. Knowledge transfers from internal structure to individual competence
. Knowledge transfers within the external structure
. Knowledge transfers from external to internal structure
. Knowledge transfers from intemal to external structure
. Knowledge transfers within internal structure
10. Maximise Value Creation - See the Whole
COND FPF wD
3. Knowledge 2. Knowledge
transfers/conversions transfers/conversion
from external structure s from individuals to
to individuals external structure
1. Knowledge
transfersiconve
iin rsions between
farce anerslong External Individual individuals
Structure Competence
within extemal
structure
7. Knowledge 4, Knowledge
transfers/conversions f transfrsiconve
from external to rsions from
internal structure individual
competence to
internal
8. Knowledge structure
transfers/conversions ‘
from intemal to external Internal Structure
structure (Jools&P rocesses) 5. Knowledge
transfers/conversions
from internal structure
9. Knowledge to individual
transfers/conversions 10. Maximise the competence
within internal Value Creation - See
strucuire: the Whole
Figure 1. The Ten Knowledge Strategy Issues
Overview of Key Facets of the Dynamic Intangible Assets Monitor
The interrelationships among the ten knowledge strategies, provides the underpinning of
the system dynamics ‘management flight simulator’ that is presented over the
subsequent pages. The system dynamics model operationalises the intangible asset
monitor within the context of a professional services organisation. Its design draws on
Sveiby’s extensive studies across diverse corporations and on studies by the UNSW
team of professional services organisations and public sector agencies. It has been
validated against a division of a multi-national firm.’
The various quantitative or qualitative relationships used in the model, and
described in the following pages, draw on the HR literature reviw (Annex A), the
authors’ research and experience and empirical data and management beliefs of our
client.
Knowledge Capital
The firm’s two major internal resources are two stocks: Individual Competence and
Tools & Processes.
1. The stock of Individual Competence
Individual_Competence of a professional services organisation consists entirely of its
consultants and their capacity to act. (The capacity to act of support staff is placed in
the Intemal Structure).
Consultants in large professional services firms face a career path from out-of-
university junior to Senior Partner. Most are weeded out on the way. Fewer than 1 in
20 of the juniors make Senior Partner.
Vacancy fled Vacancy. filed
P_Consuitant hiring Directors_hirng|
Consiftanis_ hiring
a
A
CConsulfnis_resigning Parmers,reifonin,
Figure 2. Employee promotion chain in a professional services organisation
Data in the model supplied with the conference proceedings has been modified to protect the confidentiality
and intellectual property of the organisations against which the model has been validated.
In the current version of the model, consultant competence is considered to be a
function of consultant level (consultant, senior consultant, director and partner), time at
that level and the firm’s investment in competency enhancing activities.
Competence levels are influenced by:
Experience: this is simply measured in months in an employee category. Planned
enhancements will modified this to include range of projects undertaken.
Quality of experience: the ‘experience months’ can be adjusted by a factor
depending on proportion ‘good learning projects’. This will be subsumed in the
project range, noted above.
Formal training:
Meeting days: the time spent, under the direction of a senior partner or director, in
formal project ‘knowledge sharing’ .
Recruit ‘quality’ factor: The raw competency of a novice consultant is adjusted to
reflect the impact of time spent by Partners in recruitment.
Pace of change: This variable drives the redundancy of competency level and
depends on the pace of development within the evaluated industry.
Competence_per_employee_cat
Competence increase jcompetence_decrease
Competency _from_Sharing Knowledge_at Meetings Pace_of change
Consultant_Competency_Gained_from_Projects
Competency_from_Training
Figure 3. Competence
We can then calculate the stock*:
Total Competence for firm Group = Number of consultants on each level *
Average Individual Competence for each level.
The ratio Average Individual Competence can be calculated as an indicator of
competence in a project team, in firm Group as a whole, in subunits, etc.
From these definitions, staff turnover has a significant impact on the stock of individual
competence, both directly and also indirectly.
£ The algebra for combining qualitative variables is contentious. The authors regard the paper by Nathman
(1994) as a key guide, supplementing the HR literature discussed above.
2. The Stock of Tools & Processes (T& P)
~~
Total revenue O
A
Cost_per_new_product ===
Time_to_develop_new_product!
of Revenue_spent_on_newPrDev—¥—
Product_portfolio
product_obsolesence
a ae a)
nev_product.development( _) ——C )
Product_useful_life
Figure 4. Product portfolio
A significant dimension of the firm’s intangible assets is its investment in its
‘product portfolio’. This both value adds to the capacity of the consultants (in terms
of work efficiency and capability) and provides a product differentiator in the
marketplace. At this stage, the model simply addresses the expenditure on new
product development (typically capital investment in ‘knowledge infrastructure’
such as groupware communications products), average time spent on product
development or maintenance and average obsolescence time.
When fully implemented, the stock of T&P will encompass:
Investment in knowledge databases: For intemally generated knowledge databases
this investment is defined as time spent entering the information moderated by the
competence level of the staff entering the data. This allocates higher value to
knowledge data created by more senior staff.
The value of external (acquired) knowledge databases is what firm pays for them
converted into time at average cost. This allocates extemal databases a fairly low
value compared to internally generated databases, which would appear to mirror
reality.
Investment in generic tools acquired and made available to the consultants (such as
this SD-model). Money paid in license fees is converted to competence value at
average competence as the value.
Investment in organisation-unique products, tools and processes (both client related
and admin). The R&D hours spent in development add to the stock at a rate of the
respective staff competence value * time spent.
Support staff: The competence value of non-chargeable support staff is calculated in
the same way as that of consultants, using their relative level of remuneration as an
indicator of value.
Bought-in services, for instance admin support from the firm’s central
administration will be added by converting the internal allocation of costs to
competence value. This will make the model more generic, by permitting
comparisons between full in-house administration vs. subcontracted.
Depreciation: Useful life of knowledge data reduces the stocks.
Support staff turnover reduces support staff value.
Consultant turnover reduces the value of investment in generic T&P.
The total value of the T&P is a stock, which we add to the Total Individual Competence
to get:
Knowledge Capital =Total Individual Competence + T&P
When fully implemented, the stock of Knowledge Capital will be able to be converted
to a constant dollar equivalent.
Value adding capacity
Arguably the most valuable ability of a consultant is the capacity to add value to the
firm, to the clients and to the colleagues. Typically, business simulations assume that
allocations of resources are made with dollars as the bottleneck. This is not true for
professional services. The bottleneck is 'Value Adding Capacity’ (referred to henceforth
in this paper simply as ‘capacity’).
The firm invests in capacity (recruitment + training + on-the-job experience,
R&D in capacity saving/enhancing tools and processes); it buys 3rd party capacity
(capacity-saving tools, sub-contracting in); and it spends capacity (in assignments, on
client acquisition, on presentations, on writing proposals, in administration, on
recruitment panels, on R&D, on management of juniors, etc) and it sells capacity to
clients.
The Managing Partner's (MP) have the highest capacity per person are the most
valuable resources of the professional services organisation. Few consultants have the
attributes necessary to rise to this level. Their primary strategic concern is to get the
optimum ‘capacity allocation’, between the competing requirements. The MP can
spend capacity on:
0 investing for the future (training, knowledge development, recruiting etc)
o doing assignments or project work;
0 client acquisition and nurturing existing major clients.
In the model, the definition of Capacity = Time available per staff level * (Knowledge
Capital / Total #of consultants).
‘Capacity’ thus has a (quality * time) by time dimension. It is based on the
definition of ‘Knowledge’ as a ‘Capacity-to-Act’ (Sveiby 1997). Investments in Tools
& Processes influence the Capacity by adding weight to the average individual
competence.
For a particular firm it is possible to convert Capacity into dollars. The
conversion factor will need to be customised to the particular wage structures and
operating basis. It is also possible to convert IT costs and the costs of extemal
databases into ‘capacity’ because they a capacity saving/enhancing tools.
External structure
The ‘external structure’ models the intangible relationships with customers and
suppliers. The client population is divide among the overall Pool_of_Potential_Clients,
which constitutes the marketplace for the firm, Potential_Clients, who have engaged the
services of the firm as a ‘one-off’ trial; and Established_Clients, who are satisfied with
the quality of service of the firm.
Rate_of_change_in_Potental Clients Impact_of_Proj_Team_ Competence_on_Proj_ Success
Oa /
/ Established Clients
Pool_of Potehtial Clients
ECs_disengaging
Tissot ciens
it
<> Number_of_ contacts
Parners_copacty_on_ marketing New_Clients
Figure 5. Clients process chain
Potential Clients are new clients, previously unknown to the firm, who are
important for the firm’s growth. Their transfer from the generalised
Pool_of_Potential_Clients is influenced by:
Capacity allocated to marketing efforts (Capacity as defined above):
Partners and directors time allocated to potential clients
First project success rate
oo°0 0}
Referring clients - word of mouth based on overall project success rate
In relation to marketing impact, MW and BB clients as considered largely
distinct, so two marketing budget variables are required.
The higher the capacity allocated to these efforts the higher the conversion rate
from Pool_of_Potential_Clients to Potential Clients. There is also a time lag between
capacity allocated to marketing and the conversion to Potential_Client stock. Managers
have a fairly well established view what the time lag is.
Clients generate a stock of potential projects, Leads (tenders) each month, which may
be converted into Projects (Project_Backlog) and eventually to Work in Progress. The
generation of leads is influenced by:
o Number of clients
Type of client (MW or BB)
Longevity of the relationship with a client
Organisation’ s project success rate
Maintenance of client relationship
Capacity spent on responding to tenders
oo0Cc8OUmUCODUlUCOD
Capacity spent on preparing and sending proposals to existing clients
Normal_project_success_rate
Bea fosner aod Picject completing_good_projects
vant Impact_of_competition_on_success_rate
r™~
SC_Generdted_Leads Relative_Competency_of Group
XA
Toject_Success_Multiple
Blddding Success Rate
/ \ Project_Backlog Work_in_Progress
| We eee |
poe
los|ng_leads S i <>
Time_to_develop_leads losing_time
A;
\ new/projects_start
Leads_generated
Leads_lost Projects_Lost
Figure 6. Leads and Project Backlog
“Most Wanted” Clients
The Client stocks are arrays consisting of 2 dimensions:
o Most Wanted clients (MW clients)
0. other clients (referred to as Bread & Butter or BB clients)
MW clients are the strategic assets of the firm. They can be in a market segment
the firm wants to enter, large ‘Fortune500’ firms or in strategic areas as discussed
below. Typically small in number, they provide a significant portion of the firms
income. Simultaneous loss of several MW clients may trigger a collapse of the firm, as
has been seen in the aftermath of the Enron collapse. BB clients typically provide a
large number of low value projects.
MW clients come with ‘good’ projects that influence:
o Financial result - they improve average fee per capacity, because they come
from clients with less price sensitivity;
o Learning - challenging engagement that positively impacts on increase of the
individual competence of the employees
oO New Products / services - they increase the capacity and quality of products,
tools and processes which can be leveraged to other clients;
o Referring Clients and High Image Clients - they improve the extemal
structure by enhancing the conversion rate from potential client to client by
actively endorsing the firm or by their own high image.
The value of this client classification is that it is highly action oriented. The firm can
use it to be pro-active in its client selection. By allocating more or fewer resources to
canvass the “learning type” of clients the firm will, for instance, influence the individual
competence of its consultants.
Modelling the knowledge strategies
1. Knowledge transfers/conversions between individual professionals
Knowledge transfers/conversions between individuals are concemed with how to best
enable the communication between employees within in the organisation and determine
what types environments are most conducive to creativity. The strategic questions are:
How can we improve the transfer of competence between people in our organisation?
And: How can we improve the collaborative climate? The most important issues
concem trust in the organisation.
The collaborative climate determines the willingness to share and co-create. The
collaborative climate index (CCI) can be compared to the ‘bandwidth’ of all
communication. The CCI is determined by a survey validated against a group of other
firms. [Refer www.sveibytoolkit.com]
Communication_Activities
Aiorartficsting ahs actvies_ diminishing
Or =
impact_of dolars_on_coms (vy
tte.) :
spent_on_communication_infrastructure 4 Impact_of Communication on_Collaborative_Clim
impact_of_contributed_time_on_comms(
oun ot cnmatan dd
Figure 7. Corporate communication
Activities to improve the stock include:
o Spend capacity on Staff meetings
Spend capacity on trust-building staff education
Spend senior partner capacity on ‘cultural indoctrination’.
Spend capacity on manager education
ooo°o
Spend capacity on recruitment
2. Knowledge transfers/conversions from individuals to external structure
Knowledge transfers/conversions from individuals to the external structure are
concemed with how the organisation’s employees transfer their knowledge to the outer
world. The strategic question is: How can the organisation's employees improve the
competence of customers, suppliers and other stakeholders? Answers to such questions
lead towards activities focused on empowering the employees to help the customers
learn about the products, getting rid of red tape, doing job rotation with customers,
holding product seminars, providing customer education, etc.
Activities to improve the stock (Figure 5) include:
o Spend capacity on client & public presentations and education
0 Spend capacity on book writing/publishing
o Spend capacity on more elaborate reporting processes
3. Knowledge transfers/conversions from external structure to individuals
Employees leam from customer, supplier and community feedback: novel approaches
to problem solving, innovative work practices, and new technical knowledge.
Knowledge transfers / conversions from the external structure to individuals are
concemed with how the organisation’s employees can learn from the external structure.
This is the counterpart of section 2, above. Organisations tend to have procedures in
place that capture such knowledge (see section 7, below), but they are typically
scattered, not measured and hence do not systematically influence strategy formulation.
The strategic question is: How can the organisation’s customers, suppliers and other
stakeholders improve the competence of the employees? Answers to this question leads
towards activities focused on creating and maintaining good personal relationships
between the organisation’s own people and the people outside the organisation.
Leads Generation
Number of leads by age of Established Clients
-MW
| leads_generatn Leads_
leads_out
=<
=
‘Number of leads by age of Established Clients
-BB
Neracb ob Pees, Sccs
apacity_on_leads
ae percentage _total_projects_goc
Number_of Le
sadsifrom_New_Clients
Ppriners_capacty_on_mkt Est Clients
Num_leads_per.clent by age eben aracty-on mt Esk a
A Lt
Established, Clients_by_age Clients
Leads_Gen_per_Clien
Figure 8. Leads generation and relations with external structure
Activities to improve the stock:
o Spend capacity on entertaining clients
o Spend capacity on joint ventures with clients
o Spend capacity of juniors (over and above project need) on client projects
4. Knowledge transfers/conversions from competence to internal structure
Huge investments are currently being by professional services companies made in order
to convert competence (often tacitly held) individual into data repositories. According
to IDC worldwide, knowledge management (KM) services spending will increase at a
compound annual growth rate of 41%, rising from $2.3 billion in 2000 to $12.7 billion
in 2005 (IDC, 2001). The idea is that information in such repositories will be shared
with the whole organisation. Indeed, the marketers of database software have been so
successful that many managers believe that buying a database is equal to knowledge
management. Our model sees this as only one of nine strategic activities. The strategic
question is: How can we improve the conversion of individually held competence to
systems, tools and templates?
Answers to this question lead towards activities focused tools, templates,
process and systems so they can be shared more easily and efficiently.
Innovation _C_lfe_expectancy
Impact_of Innovation _C_on_Rework
Impact_of InpevatorC_on_Productivity
Perc_Revenue_spent_on_RD Fane eamicaney
Innov_C_generating Innov_C_implementing
Innov_Capital_ Implemented
Innovation_capital
Job_security
Impact_of_OKC_on_IC_generating
‘Commitment_to_Improvement_program
JOrganisational Knowledge Capacity Mngmt.Resources_to_IC_implementatio
Impact_of Mngmt_Res_on_Succ_of_Implementn
Total_Skill_ Capacity
Figure 9. Innovation capital transfer
Activities to improve the stock of innovation capital include:
o Spend capacity on entering data in databases
o Spend capacity on R&D into admin processes
o Spend capacity on R&D into tool development
o Spend capacity on R&D into consulting processes/templates
5. Knowledge transfers/conversions from internal structure to individual
competence
This is the counterpart of 4, above. Competence “captured in a system” is information
and this information needs to be made available to other individuals in such a way that
they improve their capacity to act; otherwise the investment is a waste. IT systems can
by definition only produce information. The key to value creation is whether that
information generates competence. The strategic question is: How can we improve
individuals’ competence by using systems, tools and templates?
Answers to this question leads towards activities focused on improving the
human-computer interface of systems, action-based learning processes, simulations and
interactive e-leaming environments.
Activities to improve the stock include:
o Buy +spend capacity on intemal e-leaming system
o Buy +spend capacity on KM system for projects, cases, etc
6. Knowledge transfers/conversions within the external structure
What do the customers tell each other about the services/products of a supplier? How
are the products used? The conversations among the constituencies can have an
enormous impact on a strategy of a company. Strategy formulation from a knowledge
perspective adds a richer range of possible activities to traditional customer satisfaction
surveys and one-way PR-activities. The company can support the competence growth
of customers and influence how competence is transferred between the stakeholders in
the external structure. The strategic question is: How can we enable conversations
among the customers, suppliers and other stakeholders to improve their competence to
serve their customers?
Quality
quality_in
Project Success_ratio
| quality_aging_out
Impact_of_Quality_on_Image
Perceived_Image
Image
2 = XO
© eee
Impact_of_Fraud_events_on_Image|
7
Fraud_Short_Term Memon
4
Figure 10. Quality and Perceived Image
Answers to such questions lead towards activities focused on partnering and alliances,
improving the image of the organisation and the brand equity of its products and
services; improving the quality of the offering; conducting product seminars and
alumni programs. They also lead to a focus on factors, such as fraud or quality failures,
which have the potential to diminish or even destroy the firm’s reputation.
Fraud_event resurfacing
f)
Fraud_Short_Term_Memory
a
Fraud_Long_Term_Memory
oy
Fraud_occuring 14 ) i C
© 2
; Ls fraud. ging
6. [ }
a
A
ttof_Mgt_Effectiveness_on_Fraud_ Prob
Relative_Staff_ Satisfaction
sg
SA
/
lan
R
/
\
\
Se
fraud, forgeting
Effect of Moraleon_Fraud_Prob
Fraud_Short Term Memory
Fraud Events
ao 1
Effect of Fraud_in_$ t_m__on Fraud Prob
Figure 11. Fraud events
Activities to improve the stock include:
o Spend capacity on Client seminars
o Spend capacity on Image building activities
o Spend capacity on Alumni program
o Spend capacity on quality assurance
ve Knowledge transfers/conversions from external to internal structure
Knowledge transfers/conversions from external to internal structure are concemed with
what knowledge the organisation can gain from the external world and how such new
knowledge can be converted into action. The strategic question is: How can
competence from the customers, suppliers and other stakeholders improve the
organisation’s systems, tools & processes and products?
Answers to such questions lead towards activities focused on empowering call
centres to interpret customer complaints, creating alliances to generate ideas for new
products, R&D alliances, etc.
Activities to improve the stock include:
o Buy Tools & Processes.
o Buy extemal Databases
8. Knowledge transfers/conversions from internal to external structure
This is the counterpart of 7, above. The strategic question is: How can the
organisation’s systems, tools & processes and products improve the competence of the
customers, suppliers and other stakeholders?
Answers to this question leads towards activities focused on making the organisation’s
systems, tools & processes effective in servicing the customer, extranets, product
tracking, help desks, e-business, etc.
Activities to improve the stock include:
0 Invest in ExtraNet
o Spend capacity on client help desk
9. Knowledge transfers/conversions within internal structure
The intemal structure is the supporting backbone of the organisation. The strategic
question is: How can the organisation’s systems, tools & processes and products be
effectively integrated? Answers to such questions lead towards activities focused on
streamlining databases, building integrated IT systems, improving the office layout, etc
Activities to improve the stock include:
o Invest in Office
o Build integrated Intranet
0 Streamline databases.
10. Maximise Value Creation - See the Whole
The nine knowledge transfers/conversions exist in most organisations. However, they
tend not to be coordinated in a coherent strategy, because management lacks the full
perspective that a knowledge-based theory may give them. Most organisations also
have legacy systems and cultures that block the leverage. Therefore, many of good
initiatives go to waste or neutralize each other.
Investment in a sophisticated IT system for information sharing, for example, may be a
waste of money if the organisation’s climate is highly competitive - only non-essentials
will be shared. Reward systems that encourage individual competition will effectively
block efforts to enhance knowledge sharing. Lack of standards and poor taxonomies
reduce the value of document handling systems. A program for knowledge sharing with
customers is neutralised by red tape protecting commercial secrets. Efforts to use ex-
employees for building marketing relationships are useless if people leave the firm
alienated or alumni programs are delegated to the administrative function. Data
repositories do not improve individuals’ capacity to act unless the databases are made
highly interactive.
A large number of actions will increase the capacity of a consulting firm in likely
descending order. For calibration purposes the following list is presented to the
Managing Partner for ranking.
o Recruiting more senior staff
Recruiting higher quality staff
Reducing the staff turnover
Increasing proportion of “good” projects
ooo 0
Spending time on investment in R&D
Increasing the speed of career
Spending time on training
Reducing getting-up-to-speed time for new recruits
Spending time on meetings for sharing information
Spending time on entering data in databases
ooo 90o 0
o Buying external databases
The flight simulator is designed to assist the Managing Partner assess the likely pay-off
from such initiatives.
The System Dynamics Flight Simulator
The control panel of the flight simulator is organised around three sectors which
encompass the knowledge strategies discussed above: the firm’s people, its clients and
its tools and processes.
Buttons in the Client Sector give access to the model sub modules for Client
Base and Corporate Image. Buttons in the People Sector give access to the model sub-
modules for Professional Skills and the Signals Culture (in essence the feedback
indicators); the Tools & Processes Sector gives access to Client and Organisation
related tools and processes.
Professional Skills
Navigation within the model is effected through menu bars:
The menu buttons also permit the user to control the simulation (run, pause, stop), to
activate ‘what-if’ controls and to activate reports, as illustrated below.
Motivation to Share Knowledge
lox)
Training
% Revenue spent on RED
Share_Knowledge
Training days (days/year)
ree <i
eres © i-——— >
wim: ————e!
relative_motivation
RMAL_MOTIVATION
Target tra_days_tor_Partners
‘Skills_of 4
Size_ot,
jent
Financial (Profit & Loss) Sector
cl =l5) xj
Revenue Overheads
) —1—Monthly_Computer_Costs
10,000,000- i sn RD_Costs
ha _ Monthly_Expenditure_on_Re
5,000,000- a ee cruting
g '
is A ¥ 2h —4—Monthty_Training_Costs
oF —g~ Total_monthly_salaries
0 20 40 60 60 100
80,000,000- —4—Profit
~~ Sum_Total_ Revenue
30,000,000:
ws gerd
a
( ) ofessaeta
—3— Total_Cost
o 20 40 60 80 100
The simulator structure has now reached a fairly stable state, although considerable fine
tuning is expected to the mathematical relationships in the course of validation testing
against the actual processes of a major professional services firm. Similarly, significant
refinement is expected to the ‘what-if’ controls and output reports as we identify the
particular needs of senior managers.
References
Assistant Commandant for Human Resources, 2000, ‘2001 - 2005 Business Plan:
Providing the diverse, effective “Force” to meet the current and future “Work” needs of
the Coast Guard’, US Coast Guard, 2000.
Coyle, G, 2000, ‘Qualitative Modelling in System Dynamics - or What are the wise
limits of quantification?’ 17th Intemational Conference of the System Dynamics
Society, Wellington, August 1999.
High Performance Systems Inc., 1990, ‘Stella II User’s Guide’. Hanover NH.
IDC, 2001. International Data Corporation, ‘Knowledge Management Factbook’
[Online]. Available from World Wide Web:
(http://www .idc.com/D ata/Software/content/offer/K nowledge/default.htm
Johanessen J., Olaisen J. and Olsen B., 1999, ‘Systemic thinking as the philosophical
foundation for knowledge management and organizational learning’, Kybernetes, 28/1,
1999.
Kaplan, RS and Norton DP, 1996, ‘Linking the Balanced Scorecard to Strategy’,
California Management Review, 39/ 1, 1996.
Linard, K., Sloper, P. & Paterson, D, 1999, ‘Towards a Dynamic Feedback Framework
for Public Sector Performance Management’, 17th International Conference of the
System Dynamics Society, Wellington, August 1999.
Linard, K., Basset, M., Dvorsky, L. & Yoon, J., 2000, ‘A dynamic balanced scorecard
template for public sector agencies’, 19th International Conference of the System
Dynamics Society, Bergen, August 2000.
Mandal, Abhijit, 1999, ‘The Dynamics of resource Structure: A Hidden Source of
Competitive Advantage?’, London Business School System Dynamics Group Working
Paper WP/0034
Morecroft J., 1997, ‘The Rise and Fall of People Express: A Dynamic Resource-Based
View’. 15th International Conference of the System Dynamics Society, Istanbul,
August 1997,
Morecroft J., 2000, ‘Visualising and Simulating Competitive Advantage: A Dynamic
Resource-Based View of Strategy’, London Business School System Dynamics Group
Working Paper W P/0036.
Nuthmann, C, 1994, ‘Using Human Judgment in System Dynamics Models of Social
Systems’, System Dynamics Review, 10/1, 1994.
Parker S. R. and Marriott, J.A., 1999, ‘Personnel Forecasting & Strategic Workforce
Planning - A proposed simulation cost modeling methodology’, in Farrington P. A.,
Nembhard H. B., Sturrock D. T., and Evans G. W., eds., Proceedings of the 1999
Winter Simulation Conference.
Prasad M and Denny J., 1999, ‘Modeling Organizations Using a Hybrid Simulation
Approach. 18th Intemational Conference of the System Dynamics Society, Bergen,
August 2000.
Price, J., 1997, Handbook of Organizational Measurement, Intemational Journal of
Manpower. Vol 18 No 4/5/6. pp. 305-558
PSMPC, 2000, ‘Human Resource Capability Model’, Public Service Merit Protection
Commission, Australian Government.
Smith, P. A. 1998, ‘Systemic Knowledge Management: Managing Organizational
Assets For Competitive Advantage’. Joumal of Systemic Knowledge Management
(April, 1998), e-journal at http://www. free-press.com/journals/knowledge/
Strassmann, P. 1999, ‘Information Productivity Assessing the Information
Management Costs of U.S. Industrial Corporations’, Information Economics Press,
New Canaan.
Sveiby, KE. 1997, ‘The New Organizational Wealth: Managing and Measuring
Knowledge-based Assets’, Berrett-Koehler, San Francisco.
Sveiby, KE. 1997, ‘The Balanced Score Card (BSC) and the Intangible Assets
Monitor’.
Sveiby KE, 2001, ‘A Knowledge-based Theory of the Firm To guide Strategy
Formulation’, Journal of Intellectual Capital, 2/4, 2001.
WalshJ. and Monks K., 1997, ‘Interunit Linkages and Interunit Learning: The Role of
strategic Human Resource Management in the Multinational Enterprise’. 15th
International Conference of the System Dynamics Society, Istanbul, August 1997.
Wittgenstein L. (1995): Philosophical Investigations. (Orig 1953). Blackwell 1995
Wolstenholme E., 1990, ‘System enquiry: a system dynamics approach’, Wiley,
Chichester.
Wolstenholme E., 1997, ‘The Gap between System Dynamics and Current Management
Practice - Some Messages to help reinforce the value of a Systems Approach to 21st.
Century Management Practice’. 15th Intemational Conference of the System Dynamics
Society, Istanbul, August 1997.
Wolstenholme E., 1998, ‘Qualitative v. Quantitative Modelling: The Evolving Balance’.
16th International Conference of the System Dynamics Society, Quebec , August 1998.
Back to the Top
