Knowledge Management:
Recognition and Reward

by Professor Prabhu Guptara
Director, Organisational and Executive Development Wolfsberg Executive Development Centre
(a subsidiary of UBS A.G.) Ermatingen, Switzerland
Presentation at The Economist Conferences' 1998 Conference,
"Knowing More than your Competitors: Putting Knowledge Management to Work"
London, 24-25 September 1998
e-mail: prabhu.guptara@ubs.com

May I start by clarifying that I am speaking here in an individual capacity and not as a representative of any of the organisations with which I am connected. Earlier in my career, I was full-time executive chairman of ADVANCE, when I had experience of work with several sectors including, in the financial services sector, with Barclays, HSBC Group, Deutsche Bank, Sedgwick, and so on. I continue now as non-executive Chairman of ADVANCE, so I am still very much in touch with all that company is involved in: ADVANCE specialises in two fields, we help with organisational transformation and we help with enabling organisations to become more and more international. Now I have been three years full time with UBS, and my academic work continues too - supervising theses for PhDs and MBAs, visiting professorships, and so on - and of course I continue to do bits of research myself, for example my research report on "Senior Executives in the Global 100 Companies and their IT Competence" (recently published by ADVANCE and Wolfsberg).. In my talk here, I am drawing on all these areas of activity.

Moreover, I ought to emphasise that my role today is to stimulate discussion and debate, in the interests of which I will take the liberty of using exaggeration in order to make a point, in the same way as a cartoonist does. I will not always make you laugh (though I hope I will do so sometimes), but I do expect to stimulate thought.

In coming to the topic of Knowledge Management, it is worth setting the context, at least minimally.

The first point to note is that we are living, for the first time in human history, in a time when, in principle, we have the possibility of over-supply of all goods and services. Economics, business, society, pay and legal systems, politics and government are based on a rather different and outdated assumption of what kind of world we live in; their assumption is that we live in a world of scarcity. This business of living on outdated assumptions is true specially of the world of banking. Management arrived rather late in the world of banking, and of course KM has not yet arrived. The reason is that our attitudes and structures are still mired in the past world of scarcity of opportunity for customers to put their money into a safe haven.

But, in today's world of over-supply, relationships are up for grabs. Let me illustrate this from the history of marriage: the establishment of monogamy in Western society by Christianity has been undermined since the Second World War. Though what effect the contemporary resurgence of Christianity will have remains to be seen, what has happened so far is that we have moved from one-man-one-woman for life, to "serial monogamy" (that is, one-man-one-woman for as long or as short as that lasts - and the average length in England is thirty seven months - before people move on to another so-called "monogamous" relationship)….MONOGAMY TO SERIAL MONOGAMY to simply cohabiting as long as one wishes, with no particular sense of guilt over affairs by either party. Please understand that I am not making a moral judgement here, I am simply describing in an objective way what I see happening in the area of marriage and comparing it to what is happening in the world of banking relationships. In the past, divorce in marriage was as rare as divorcing yourself from your bank. Till, today, a banking relationship has a good chance of outlasting both affairs and marriages, and may in fact be the longest-standing relationship a man or woman has! The question is, of course, whether banking relationships will continue to have staying power.

The stability of both personal and financial relationships had something to do with "protected markets", with legislation, with the degree of competition, and of course with the values of the people concerned. Both parties assumed that the relationship was for life, both parties acted as if the relationship was for life, both parties benefited in the long term through a holistic relationship and its holistic results.

There is a further parallel, and not only in the world of financial services organisations, with employees' loyalty to their employers and the loyalty of employers to their employees. Such loyalty too seems old -fashioned and passe today. But I am not convinced that the present flirtation with lack of loyalty, whether in the field of marriage, or in the field of the company-client relationship, or in the field of the employee-employer relationship will be sustainable in the long run. De-creation can be fun and can even be pretty impressive, but it will never outperform the ability to create; creativity, like anything else of beauty, is forever. Loyalty, never fear, will make a come-back, but only on much deeper foundations than we have had, in marriage, in company-employee relationships, and in company-client relationships.

But I am being too philosophical. Let me narrow the focus more precisely to KM.

The theoretical benefits of knowledge management are clear: in order to maximise internal efficiency, internal co-ordination, service to clients, and overall profitability, one needs to make explicit as much as possible of the tacit knowledge within an organisation, and then keep it up to date in a form that is "accessible-on-demand" as well as "pushed-out-as-useful".

Knowledge Management is, therefore, sometimes offered as a panacea for improving the profitability of modern financial institutions. Unfortunately, though I dearly wish it was such a panacea, Knowledge Management is only one ingredient within the overall creation and implementation of strategy in a company which, if got right, can make for success.

In other words, Knowledge Management will never make up for poor products, poor strategy or poor systems OHP2^* (KM supported by products, strategy and systems) indeed it is crucially dependent on (AS WELL AS A PRIME CONTRIBUTOR TO) the health of an organisation's products, strategy and systems.

Let me start by drawing your attention specially to IT systems - my recently published research report, to which I referred a minute ago, on the topic of "Senior Executives in the Global 100 Companies and their IT-Competence" is a salutary reminder that most of (even) the largest companies in the world are far from being healthy at least in that one crucial dimension, for the simple reason that top management still regards IT as something for the little backroom boys and girls, not for macho top managers such as themselves. One CEO I know personally had his first-ever presentation on IT within the last five weeks! We may, if we have the time, come back to the sorts of problems created in organisations because of inadequate attention to IT systems.

On the second crucial dimension, strategy, let me simply emphasise that nothing, but nothing, will make up for poor strategy, specially in these days of oversupply of everything. I notice in today's circumstances, by contrast, an increasing reluctance to have any strategic thinking at all.

Similarly, nothing will make up for lack of quality in the third crucial dimension: products. It is not simply that your products have to be of good quality, they have wholly to meet the needs of your clients, and they have to be appropriately priced and appropriately channelled to your customers.

Let me assume that you are one of those few lucky or intelligent organisations which have managed to try, at least, to get your systems, strategy and products right. Can you then be confident that your organisation will be able to make Knowledge Management work?

Unfortunately, the frank answer for most of even such organisations is No.

There are five main reasons why organisations, including those which claim to understand the importance of KM and claim to want to make it work, have a constitutional inability to make it work: OHP3: The Five Factors
Now it may be that, in your company, you suffer from all five of these disabilities, or it may be that you suffer from two or three of these, or indeed it may be that you suffer from only one of these. It is possible that you belong to a company which can't make KM work for one of the less common reasons, but these are in my experience the most common reasons why KM does not work.

But let me come to the second common reason why we can't make KM work:
OHP5: the Five Factors

Probably the single greatest obstacle to establishing KM in a company is the way in which power is accumulated and exercised in most organisations. For there to be career success, there has to be a modicum of demonstrated business success of course. But you and I know that success is not a matter only of ability or application: it is partly a matter of luck and, in most organisations, it is a matter of the quality of relationships with previous power-holders, of managing impressions, of politics, of starting high profile initiatives and jumping away from them before it becomes evident that there is more froth than substance. This is symptomatic of organisations which are not transparent, which do not face and address and solve real issues. Thankfully, the number of such organisations is beginning to decrease, or at least more and more organisations are trying to implant honesty, transparency and a welcome for bad news.

The key point about the accumulation and use of power is that, in most companies, power is used to lord it over others. KM, however, requires power to be used to serve others: KM requires an institutionalisation of a fundamental unselfishness, a fundamental attitude of wishing to serve customers, not only outside a company, but crucially within the company.

Further, power is accumulated by means of "doing well" at narrowly defined jobs, usually within a division, function or region. More important, power is accumulated at least partly by gaining access to information, and by witholding it from others. This is sometimes called "the strategic use of information". KM, by contrast, requires free flow of information across individual, divisional, regional and hierarchical boundaries. But this brings us straight to a discussion of the role of organisational structures in preventing KM.

* OHP denotes Over Head Projector foil used during this presentation.

So is the problem that of matrix structures? Not really.

In another company, let us call it company B, which I also know from personal experience, there are strong functional divisions OHP 7 - Company B (Divisions), so much so that each division could almost be said to be a separate company. How does KM work in this company? Even more poorly than in the case of Company A! I know, for example, that certain customers in Italy, already customers of one of the divisions, were approached by one of the other divisions! - so that there was not only lack of co-ordination within the company, from the viewpoint of the customer, but the second division which approached the customer actually rubbished the first division by telling the customer that the first division did not know what they were doing! Is it any surprise that the customer promptly quit not only division A but division B as well and went to a competitor? We are talking here about a customer annually worth several hundreds of thousands of dollars in profits to the company concerned.

Or let us take another company I know, Company C. This one is structured strongly by business unit OHP 8 - Company C (business units) (in fact, it operates only in one country and that not in Europe; in my experience, it is typical of many financial services institutions which have operations in only one country). This company is so strongly localised that the business unit managers are best described as kings. That is, they are responsible for their own recruitment, pay- and bonus-decisions, IT-decisions, bottom-line results, everything. In this case, as in the case of Company B my knowledge was and is current. Does this help it to make KM a reality? Not at all. Each of the business unit managers tries to "own" customers, and the reality is that customers will not be owned. They have a variety of needs, and operate out of a variety of locations, and this kind of business unit-isation is not particularly useful from the viewpoint of the customer; moreover, it does not help Company C to sell a whole range of products to the customer; precisely the reverse.

Now the point to note about all organisations, not just these three, is that each tried at least at a particular point in time to create a structure which suited what it saw as the situation in the market-place (in the case of C, the company perceived the existence of a strongly localised market; in the case of B, the company saw a strong functional market specialisation in worldwide niches, in the case of A, the company thought there was an integrated market across financial services worldwide). And none of these structures necessarily enables KM to work.

So what structure WOULD enable KM to work? Well, in an ideal world any of these structures COULD work, if there was enough institutionalised altruism or egalitarianism in the company, which allowed information-sharing and business-cooperation across divisional or departmental or business-unit lines. In the real world, with every individual concerned about building their own empire, about their own bottom line, their own bonus, and so on, what happens is relative rarity of free information-flow across such boundaries - that is, only where individuals know and trust each other and are willing to "scratch each other's back", but not otherwise.

So what kind of structure would enable KM to work in the real world? Unfortunately, only one kind of structure: that organised by customers. The interesting fact is few banks today are organised by customers. Why is this? Because financial services companies certainly know about products, and they may know about regions or business units, but they certainly don't know about customers and organising yourself by customer segment is too far outside the zone of comfort.

Now, I am sure to be challenged by some of you who THINK that you are organised by customers, so let me clarify what a organisation would look like if it was really organised by customer. FLIPCHART At a high level, the company would be organised by the customer segments in which it is most interested (I assume that there will be some customer segments in which it is not interested). Each of these segmental-divisions would face "outwards" to their customers, who they try to serve by "buying" from their internal or external "suppliers" those products and services which best meet the needs of their customers. This implies of course that there must be such "product and service suppliers", but the success of these product and service suppliers will lie in demonstrating to their "buyers" that they have the best products/services in the world for the particular set of customer needs involved. Let me clarify by putting it this way: most financial services people involved in relationships with customers today, like "tied" agents of an insurance company or "tied" pubs in a chain owned by a particular brewery, are able to sell only the products of their own company to customers; by contrast, a "free" agent or a "free house" is able to sell the products of any company to its customers. Till such a revolution takes place in financial services companies, customers will continue to suffer from a fundamental lack of trust in the people from financial services companies with whom they deal. In the absence of such trust, KM is impossible. There is, in other words, a fundamental difference between a company which hires a workforce to "push" a certain set of products to the public (a production-oriented company), and a company which has a workforce fundamentally concerned with meeting the needs of its customers irrespective of the source from which the products/services come (a customer-oriented company). All banks I know are production-oriented rather than customer-oriented today. This will not last, and only genuinely customer-oriented companies will survive, let alone be able to make KM work. May I repeat: it is only when companies are entirely restructured by the customer-base that they are enabled to build genuine customer-orientation and enable the entire company to be driven by the customer.

Before we move on from considering the role of Structures in weakening KM, one final point. Structures are by nature hierarchical, and the nature of hierarchies is to militate against communication, and therefore against internal relationships. If KM is to be implemented in a company, constant dialogue is required especially with employees lower down in an organisational hierarchy. Often, it is they who know why KM is not working, and how KM can be improved. We who sit relatively near the top may think that there is considerable openness to new ideas in the company, and this may be true compared to the situation perhaps a few years ago. But whether we are genuinely open to radically new ideas is something which only a minion of an employee can tell you. By the way, does your company measure the gap between how open top management says it is to ideas from lower down, and what people lower down the totem pole feel about this? If you don't do that, then I suggest you do, if you want objectively to measure the progress you are making or not making as a company towards making internal relationships work across the hierarchy. Which brings me straight to the question of what our companies DO measure. OHP 9 - Five Factors (again)

3. MEASUREMENT SYSTEMS

Measurement systems too militate against KM because they measure the wrong things. Usually, they measure bottom-line results though, in some enlightened companies, they have introduced a "balanced scorecard" and started measuring "key performance indicators" and even started doing "360-degree assessment" - that is, the assessment of the performance of employees not only by the boss, which is traditional, and of course still essential, but supplementing the boss's assessment with assessments from fellow-employees and, in rare cases, from employees in other bits of the company with whom the employee has to deal; in rarer cases still, such assessment includes that of customers. But of course if the assessment questions do not include measures which have to do with KM, then it is clear that what will get rewarded, through promotions and bonuses, will be whatever is measured, not what ought to be rewarded.

So what should get measured? Clearly, OHP 10 - what should… Contribution to and Utilisation of Company Knowledge in pursuit of Profitability VERSUS that of your competitors. I do not know of a single company which is doing this systematically today.

* OHP denotes Over Head Projector foil used during this presentation.

4. ORGANISATIONAL CULTURE

Finally, I come to the fact that the organisational culture OHP 11 - Five Factors (again) vitiates the possibility of success with KM in contemporary organisations. What do I mean? There are many things which create an organisation's "unspoken rules and ways of doing things" and I will take just three of these things.
OHP 12 - Org C is formed by…

First, the gossip and the informal communication which takes place between employees about "Who really holds the power and how s/he got there" and "How things really work around here" and who the company heroes are and what the stories of company heroism are - these, in my experience, have never focused on what makes for KM.

Or take how new employees are inducted into a company. Arthur Andersen is an example of a company which has got this right. A new employee, on joining the company anywhere in the world, is brought to the St. Charles Centre of the company in the USA, where he or she is introduced to the key personalities, the philosophy of building and maintaining customer relationships, the current range of key products, company history and so on, in addition to the normal gruelling schedule of professional preparation of course. Not only is this done for new employees, every single employee has an yearly visit to the St Charles Centre in order to be able to be part of the intensive networking which is at the heart of the company's extraordinary success. As Arthur Andersen has grown, it faces the challenge of how to extend that sort of approach worldwide, as it is no longer sensible to bring everyone to St Charles. The last I heard, they were thinking of building similar centres in other parts of the world. But whether they have one such centre or three or a hundred is irrelevant to my point, which is that consciously building a culture in which information-sharing rather than information-hoarding, relationship-building rather than power-building is the priority, requires systematic effort and expense. Not many companies get beyond rhetoric on this.

Finally, let us take the question of the approach to recognition and reward and let us start by focusing on one small but powerful lever: the bonus system. PriceWaterhouseCooper and Arthur Andersen have a single bonus pool for everyone in the company. Different pay structures, of course, in different countries, but one bonus pool. And if you are at the right level of the hierarchy to participate in the bonus pool (which is at the level of Partner) then it does not matter what part of the company you are in, or how well or badly your own part of the company is doing, you will get your share of the bonus if the company as a whole is doing well: what a powerful incentive to maximise the overall profits of a company rather than only the profits of one's own division or department or business unit! You want to know why cross-selling does not work in your company? Look at the bonus structure!

So let us look at the whole RECOGNITION & REWARD dimension. What sorts of things are companies doing in the area of Recognition & Reward to create a culture of knowledge-sharing? The actions should be obvious. First, some companies are focusing on getting KM to help unit-management (geographical-, functional- or business-unit) on the basis that if it does not work even in such narrow areas it is certainly not going to work in the wider arena of the company as a whole! And that, if it does work in a narrower area, then perhaps there may be interest in expanding the role of KM. The problem with unit-oriented KM is that it adds exponentially to cost as each product- or business- or regional-unit reinvents the wheel and buys separately and repeatedly what is necessary to build the wheel in each unit, when all that is necessary is one wheel for the whole organisation.

Another problem with this approach is that, as it is the result of a fundamental lack of understanding at senior levels regarding what KM is all about, and indeed what organisational synergy and organisational effectiveness are all about, no one lower down in the organisation pays any great attention to KM either. An executive from one organisation rolling out a super-duper new Customer-Information Management System, which it has developed over several years at a cost of several million, confessed to me yesterday that only 20 out of the 800 who have already received the system over the last several weeks are using the system!

What can you do to increase usage? Well, OHP 13 - Some R&R ideas there are expensive but low-profile ways, such as "floor-level helpers" (which this organisation will introduce in the next few weeks) who can work at badgering individuals. But this is, in my view, similar to paying attention to each individual pimple on your face when your problem is not the pimples themselves but the unhealthy lifestyle of which the pimples are an expression.

Another way which is being tried is that of ensuring that people do not get their "sign-off" for expenses, salary and/or bonus till they are up to date with their records of client meetings, for example, in the company's client management information system. This ensures some sort of data entry into the system, but doesn't say anything about the quality of the information entered - and in an age when all of us are drowning in information, quality of information is the life-and-death issue. Some organisations I know have attempted to fix this problem with awarding prizes every month (in one case, every week) for the best-quality information entered. Of course, one can always query what constitutes quality, and quarrel about whatever criteria are presented or in use! But some criteria or quality control is better than none; moreover, it gives you a foundation which can be improved upon.

A more significant move, in one organisation I know, has been to take a "top slice" off the overall bonus pool available to a Division, and insist that it be awarded for the "best" cross-product contributions. In this particular case, the amount is $5million and has yet to be awarded, so we await its impact with interest but, in principle, it gives something of a foundation on which progress can be made if it seems to make a difference to cross-product information-sharing, and 5million is not nothing, especially if it is all awarded to one person, or even 20 people. If it is dribbled out between a thousand people, on the other hand, it may not have much of an impact. I have not yet been able to calculate what percentage of the total bonus pool that 5m will be (for the very good reason that the organisation in question settles upon the size of its bonus pool for a calendar year in February the following year) but this kind of "top-slicing" is a good start, provided it is a significant enough "top-slice". But it is no substitute for the whole of the bonus pool being shared at the appropriate level in your organisation.

Though investment bankers are probably not unique in disliking training, such attitudes are not typical. Most people are glad to have the opportunity to have training - if it is on a subject of interest, and if it is of a quality that is at least acceptable. It is therefore worth considering whether training can be used as a method of recognition and reward.

The same holds for offering high-profile holidays and entertainment, in the way that is now traditional in the sales industry.

The key matter is that OHP 14 - R&R must…of using such resources as are made available to you, to make the greatest possible impact on the culture of your company, because that is the whole secret of making KM work.

CONCLUSION:

As I have already indicated, my experience is limited and you may belong to that uncommon organisation which has succeeded not only in making KM work but also in aligning everything from the use of power to the measurement systems to the informal culture of your organisation to support KM. If so, I should be pleased to discover your organisation - and especially if you will allow me to learn from it!

And allow me, in conclusion, to repeat: OHP 15 - the bad news is… Most barriers to lack of success with KM are internal to the organisations which claim to want to make a success of KM.

I have painted a somewhat dark picture of what causes KM to fail and of the causes for it. May I assure you that my purpose is not to depress us, not to cause us to lose hope. It is precisely because I believe that all these issues can be addressed by us, that I have taken the care that I have to delineate the problems as clearly and unrelentingly as I have. Without accurate diagnosis, no doctor can hope to help a patient. With accurate diagnosis, such as I hope I have made some sort of start at providing, there is at least some hope that we can find the appropriate remedies. Accurate diagnosis may be depressing, but I hope that my accurate diagnosis is also incredibly empowering: OHP 16 - …but precisely because
if the barriers are internal to our organisations, it means that we can change them if we want to.

Here is my suggestion regarding the simplest possible point at which to begin
OHP 17 - A Test For… And finally, here is my list of the foundational or root barrier-creators in organisations: OHP 18 - The foundational… It is not a small army to take on, and I wish you luck.

KM needs to be accepted as a Key Success Factor, and institutional as well as informal measures put in place, if KM is to have any chance of contributing to corporate success.

Thank you

* OHP denotes Over Head Projector foil used during this presentation.

Professor Prabhu Guptara
Director, Organisational and Executive Development
Wolfsberg Executive Development Centre
(a subsidiary of UBS AG)
CH-8272 Ermatingen
Switzerland
Tel: + 41.71.663.5605
Fax: +41.71.663.5590
e-mail: prabhu.guptara@ubs.com

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