2. KM 101 Dr. Nick Bontis Associate Professor of Strategic Management, McMaster U. Director, Institute for Intellectual Capital Research Associate Editor, Journal of Intellectual Capital Chief Knowledge Officer, Knexa Solutions www.NickBontis.com nick@bontis.com

3. Seminar Agenda Phase 1: Knowledge Era –understanding the context of the information age Phase 2: IC Multi Perspectives –What is IC? Depends on who you ask. Phase 3: IC Models –levels of analysis, types of knowledge, stocks & flows Phase 4: SLAM Measures –alignment of stocks and flows with performance Phase 5: Causal Mapping –Structural equation methodology and measures Phase 6: National IC Index –Country level measurement and modeling Phase 7: Software Demonstration –TangoNet and Tribute

4. Mind Land Machine Knowledge Era Industrial Era Entering A New Era ? Agriculture Era Tobin’s q GroupWare Internet Accounting Metrics Tech

5. Internet users: 30 million - 1999 817 million - 2005 WTO In 1997 home PCs passed TVs in units sold Retail Week Canadian Internet Usage: 1995 4%, 1998 25%, 2005 75% Nielsen Internet traffic doubling every 70 days Dept. of Commerce

6. KM Research Highlights IDC reports FORTUNE 500 wasted $12 billion duplicating work Ford reports $914 million cost savings due to KM from 1997 - 2000 Chevron saves $650 million since 1991 due to KM Texas Instruments saves $1 billion cumulatively since KM program launched in mid 1990s Gartner Group reports –90% of FORTUNE 500 working on KM –33% of FORTUNE 1000 had begun KM programs by 1999 –will rise to over 50% by 2003 World Economic Forum –95% of CEOs feel that KM is critical to success

7. Myths of Measuring KM 1.The reality is that when you finally do it, you are never satisfied 2.The few who are doing it are probably not doing it well 3.Those who say they are doing it are probably lying 4.No one is sure what it is, but they hear that it is great 5.Everyone thinks everyone else is doing it

8. KM Research Highlights Stats Canada (348 organizations surveyed) –93% have KM initiatives, 25% dedicated budget –Why have KM? Competitive advantage, human capital, intellectual capital retention Fortune 500 –80% have KM initiative(s) in place, 25% have CKOs 53% have KM staff, all #s expected to grow –6% have KM initiatives company-wide, 60% < 5 years KM is owned 32% Sr.Mgt., 25% HR, 16% IT Government - all levels Institute for Intellectual Capital Research –CKOs from 40% HR, 40% IT, plus other (hired within)

9. Multi - Perspectives Accounting Training & Development Economics Human Resources Organizational Behaviour Strategy Finance Technological Systems Marketing Sales

10. Aoccdrnig to rscheearch at Cmabrigde Uinervtisy, it deosn't mttaer in waht oredr the ltteers in a wrod are, the olny iprmoetnt tihng is taht the frist and lsat ltteer be at the rghit pclae. The rset can be a total mses and you can sitll raed it wouthit a porbelm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe. Volunteer for a Reading test

12. Where are we going? Lester Thurow - MIT “ The dominant competitive weapon of the 21st century will be the education and skills of the workforce.” Jac Fitz-enz - Saratoga Institute “ The contingent workforce will become the dominant model.” President Clinton - U.S. White House “ By having the chance to work while you learn... You embody the growing unity between experience and education.” Steve Maharey - NZ Labour Spokesperson on Education “ Maori and Pacific Island peoples in particular remain under represented in tertiary education.”

13. Importance of phenomenon *Choo and Bontis (2002), Bontis (2002) *Fitz-enz (2000) *Max Boisot (1998) & Choo (1998) 4Knowledge Assets, Knowing in Organizations *Sveiby (1997) & Stewart (1997) & Roos (1997) 4Organizational Wealth *Nonaka and Takeuchi (1995) 4The Knowledge Creating Company *Drucker (1993) 4arrival of the “knowledge society” *Toffler (1990), Handy (1989) 4ultimate resource, intellectual assets 3 or 4 times BV

14. Tracing KM’s History  Egyptians, Greeks, Monks, Knights  Taylor (1911)  Evidence of codification of knowledge  Simon (1945)  Cognitive capacity “bounded rationality”  Schumpeter (1952)  Innovation from new combinations of knowledge  Penrose (1959)  Organization is a knowledge repository

15. IASC, CICA, FASB & SEC … Help!

16. Distinguishing the Terms

17. Devil’s Advocate

18. Knowledge Management The Danger of KM * Achievement Driven * Paternalistic 4 Balance 4 Organizational Slack Organizational Performance

19. Level of Analysis: Individual J recruitment J building competencies J assessing weaknesses J retention J compensation J satisfaction

20. Level of Analysis: Group concerted team action collectively aligned mind sets synergy cohesion shared perception of the business environment

21. Level of Analysis: Organization Strategy Continuous Improvement Systems Culture Leadership Structure Trust Technology

22. IC Conceptualization *2nd order *multi-dimensional *3 sub-domains *drivers 4trust, culture 4leadership Human Capital Structural Capital Relational Capital

23. Conceptual Model - Firm

24. House Metaphor

25. IC Perceptual Model

26. Nonaka (SECI Model)

27. Metaphors and Analogies stocks and flows –production system –capacity utilization, bottlenecks, throughput –ties-in stocks of knowledge and flow of learning bathtub analogy –tap in and leak (knowledge flow) –water level (intellectual capital) –the whole water system (organizational learning) We need an integrative framework!

28. Strategic Learning Assessment Map H R S IndividualGroupOrganizationCross-organization Individual Group Organization Cross-organization Flow Output Flow Input Feed-forward Feed-back Legend: H (human), R (relational), S (structural) = IC)

29. Measure, Test and Evaluate multi-method approach (quantitative and qualitative) –IICR Knowledge Audit –IICR Knowledge Audit: survey design (Likert-type) www.Saratoga-Institute.comobjective proxies (www.Saratoga-Institute.com) turnover and training & dev. –benchmarking of HR metrics (turnover and training & dev.) IICR e-Flow Audit –e-mail direction (IICR e-Flow Audit) –knowledge sweeping (dynamic corporate yellow pages) Some tools to check out...Some tools to check out... –Knexa.com, BrassRing.com, OpenText.com –Monster.com, eLance.com, Talent websites Tango SimulationTango Simulation –www.TangoNow.net IC DisclosureIC Disclosure –www.Celemi.se –www.Skandia.se –www.Carlbro.dk

30. KM Continuum IICR KM Diagnostic Tribute Technology KM Seminars

34. KM Diagnostic Audit Managerial Leadership Value Alignment Retention of Key People Human Capital Depletion Business Performance Employee Satisfaction Employee Commitment Employee Motivation Training & Development Human Capital Relational Capital Human Capital Effectiveness Structural Capital Process Execution Knowledge Integration Knowledge Generation Knowledge Sharing 0.751 0.506 0.475 0.5300.3260.360 0.358 0.734 0.4560.429 0.430 0.285- 0.233 - 0.372 - 0.337 0.327 0.439 0.543 0.491 0.394 0.262 0.307 0.442 R 2 = 28.5% R 2 = 68.2% R 2 = 44.1%

35. Age Obesity Heart Attack Correlation between Age and Risk of Heart Attack + 0.36 (p < 0.01) Correlation vs Path Analysis Correlation between Obesity and Risk of Heart Attack + 0.32 (p < 0.01) + 0.36 + 0.32

36. Age Obesity Heart Attack Path between Age and Obesity + 0.26 (p < 0.01) Correlation vs Path Analysis Path between Obesity and Risk of Heart Attack + 0.43 (p < 0.01) X + 0.26 + 0.43

37. Managerial Leadership Value Alignment Employee Satisfaction Employee Commitment Employee Motivation Training Human Capital Relational Capital Human Capital Depletion Retention of Key People Business Performance Human Capital Effectiveness Structural Capital Process Execution Knowledge Integration Knowledge Generation Knowledge Sharing 0.751 0.506 0.475 0.5300.3260.360 0.358 0.734 0.4560.429 0.430 0.285- 0.233 - 0.372 - 0.337 0.327 0.439 0.543 0.491 0.394 0.262 0.307 0.442 R 2 = 28.5% R 2 = 68.2% R 2 = 44.1% Outcome Constructs

38. Participating Organizations ABN AMRO North America Inc. Allstate Insurance Company AMP Australia AMP UK Andersen Consulting Aon AXA Client Solutions Blue Cross Blue Shield of Florida Blue Cross Blue Shield of Illinois / Texas Blue Cross Blue Shield of North Carolina CNA Commercial Insurance Equitax Farmers Insurance Group Hartford Financial Services Hewitt Associates, LLC Intermountain Health Care International Monetary Fund Merrill Lynch National City Corp. Northwestern Mutual Life Penn National Insurance PNC Bank Savings Bank of Utica United Health Group Zurich U.S.

39. Quantitative Metric Model Human Capital Effectiveness Human Capital Valuation Human Capital Depletion Human Capital Investment + + _

40. Quantitative Metric Model Human Capital Effectiveness Human Capital Valuation Human Capital Depletion Human Capital Investment + + _ Revenue Factor Income Factor

41. HC Effectiveness - Income Factor

42. Quantitative Metric Model Human Capital Effectiveness Human Capital Valuation Human Capital Depletion Human Capital Investment + + _ Revenue Factor Income Factor Compensation Expense Factor Compensation Factor

43. HC Valuation - Compensation Factor

44. Quantitative Metric Model Human Capital Effectiveness Human Capital Valuation Human Capital Depletion Human Capital Investment + + _ Revenue Factor Income Factor Compensation Expense Factor Compensation Factor Development Rate Training Investment

45. HC Investment - Development Rate

46. Quantitative Metric Model Human Capital Effectiveness Human Capital Valuation Human Capital Depletion Human Capital Investment + + _ Revenue Factor Income Factor Compensation Expense Factor Compensation Factor Development Rate Training Investment Voluntary Turnover Involuntary Turnover

47. HC Depletion - Voluntary Turnover

48. Areas of Concern

49. Human Capital Depletion Business Performance Employee Satisfaction Employee Commitment Employee Motivation Training Human Capital Relational Capital Human Capital Effectiveness Structural Capital Process Execution Knowledge Integration Knowledge Generation 0.475 0.5300.3260.360 0.358 0.734 0.4560.429 0.430 Managerial Leadership Value Alignment Retention of Key People Knowledge Sharing 0.751 0.506 0.285 - 0.233 - 0.372 - 0.337 0.327 0.439 0.543 0.491 0.394 0.262 0.307 0.442 R 2 = 28.5% R 2 = 68.2% R 2 = 44.1% Research Implication I

50. Managerial Leadership Value Alignment Retention of Key People Human Capital Depletion Business Performance Employee Satisfaction Employee Commitment Employee Motivation Training Process Execution Knowledge Integration Knowledge Generation Knowledge Sharing 0.751 0.506 0.475 0.530 0.358 0.734 0.4560.429 0.430 0.285- 0.233 - 0.372 - 0.337 0.327 0.439 0.543 0.491 0.394 0.262 0.442 R 2 = 28.5% Human Capital Relational Capital Human Capital Effectiveness Structural Capital 0.3260.360 0.307 R 2 = 28.5% R 2 = 68.2% R 2 = 44.1% Research Implication II

51. Managerial Leadership Value Alignment Retention of Key People Human Capital Depletion Training Human Capital Relational Capital Human Capital Effectiveness Structural Capital Process Execution Knowledge Integration Knowledge Generation 0.751 0.506 0.475 0.5300.3260.360 0.285- 0.233 - 0.372 - 0.337 0.327 0.543 0.394 0.262 0.307 0.442 R 2 = 28.5% R 2 = 68.2% 0.430 Knowledge Sharing Business Performance Employee Satisfaction Employee Commitment Employee Motivation 0.358 0.734 0.4560.429 0.439 0.491 R 2 = 44.1% Research Implication III

52. Managerial Leadership Value Alignment Retention of Key People Employee Satisfaction Employee Commitment Employee Motivation Training Human Capital Relational Capital Human Capital Effectiveness Structural Capital 0.751 0.506 0.475 0.5300.3260.360 0.358 0.734 0.4560.429 0.430 0.285 - 0.372 - 0.337 0.439 0.543 0.491 0.307 0.442 R 2 = 28.5% R 2 = 68.2% Business Performance Human Capital Depletion Process Execution Knowledge Integration Knowledge Generation Knowledge Sharing - 0.233 0.327 0.394 0.262 R 2 = 28.5% R 2 = 44.1% Research Implication IV

53. Managerial Leadership Value Alignment Retention of Key People Employee Satisfaction Employee Commitment Employee Motivation Training Human Capital Relational Capital Structural Capital Process Execution Knowledge Integration Knowledge Generation Knowledge Sharing 0.751 0.506 0.475 0.5300.3260.360 0.358 0.734 0.4560.429 0.430 0.285- 0.233 0.327 0.439 0.543 0.491 0.394 0.262 0.307 0.442 R 2 = 68.2% Human Capital Depletion Business Performance Human Capital Effectiveness - 0.372 - 0.337 R 2 = 28.5% R 2 = 44.1% Research Implication V

54. KRA Health Canada

55. Elements of KM Programs

56. KM Applications Matrix IndividualGroupOrganizationExtended

57. Arsenal of KM Tools Simulate Scenario planning Expert systems Virtual organization KM Laboratories Disseminate Distributed e-learning Communities of practice Knowledge portals IC reporting / disclosure Communicate Apprenticeships Job rotation Organizational slack Ba design/implementation Map Workflow analysis Knowledge maps Statistical flow timing eFlow Audits Categorize Taxonomy development Intranet groupware Text mining Organizational libraries Contextualize Expertise locators Intranet yellow pages Document management Video teleconferencing Hypothesize Mathematical models Neural networks Knowledge discovery Longitudinal forecasting Gather Data warehousing Information navigation Competitive Intelligence Environmental scanning Diagnose Awareness / storytelling KM audit / survey Values assessment Customer focus groups TACITEXPLICITEMBEDDED

58. Background Information United Nations –Nationalize IC concept –Leverage for public policy –Isolate a target area for study McMaster University –World Congress on IC –1st MBA with KM minor –Develop methodology –Research and collect metrics –Design a structural model

59. Arab Region Algeria Bahrain Comoros Djibouti Egypt Iraq Somalia Sudan Syria Tunisia UAE Yemen Jordan Kuwait Lebanon Libya Mauritania Morocco Oman Palestine Qatar Saudi Arabia

60. Conceptual Model - Firm

61. Conceptual Model - Nation

62. House Metaphor

63. Descriptive Statistics

64. Financial Capital

65. Human Capital (1 of 4)

66. Human Capital (2 of 4)

67. Human Capital (3 of 4)

68. Human Capital (4 of 4)

69. Process Capital (1 of 2)

70. Process Capital (2 of 2)

71. Market Capital (1 of 2)

72. Market Capital (2 of 2)

73. Renewal Capital (1 of 3)

74. Renewal Capital (2 of 3)

75. Renewal Capital (3 of 3)

76. Sampling for the NICI 10 of 22 countries representing 77% of the population

77. Development of the NHCI

78. Development of the NPCI

79. Development of the NMCI

80. Development of the NRCI

81. Countries Ranked by NICI Is the NICI a good predictor of a nation’s wealth?

82. Structural Model of NICI H3 H1 H4 H2 H5 H6 R 2 = 20.9%

83. Clustering by NICI and GDP Relative FC GDP / capita NICI TM 1.0 0.5 0.0 0.0 0.5 1.0 Kuwait Jordan Tunisia Egypt Morocco Yemen Algeria Oman S. Arabia Sudan R 2 = 20.9%

84. Conclusions National intellectual capital accounts for nearly one-fifth of the explanatory power of the financial wealth of an Arab country. Human capital is the pre-eminent antecedent for the intellectual wealth of a nation. As a nation’s citizens codify their knowledge into the systems and processes of a country (H1), those structural capital assets can then be renewed for the future (H2) by investing in research and development. A feedback loop further develops a nation’s human capital (H3). Eventually, the codified knowledge base of a nation can be marketed (H4) within the global and domestic economies. As the human capital continually develops (H5), a nation’s ability to market its intellectual wealth will result in a higher financial well-being (H6).

85. Future Research Larger sample across many more nations (allows for bench-marking). Longitudinal nature of impacts (i.e., time lag effects of constructs and measures). Alternative financial capital measures In-depth intra-national analysis (i.e., within industrial sectors or sub- geographies) Intermediating effects (i.e., poverty, gender empowerment, health)

86. Background Information

87. Conceptual Model - Firm

88. Conceptual Model - Nation

89. Developed Nations Norway Russia Singapore Italy Japan New Zealand Sweden UK USA Australia Canada China Finland France Germany

90. Descriptive Statistics (1 of 2)

91. Descriptive Statistics (2 of 2)

92. Prime Minister’s Report CategoryCanada's PerformanceTop Performer EconomyAverageU.S. Labour marketsTopU.S. InnovationPoorSweden EnvironmentPoorSweden EducationAverageU.S. HealthAverageJapan

93. Financial Capital

94. Human Capital (1 of 2)

95. Human Capital (2 of 2)

96. Process Capital (1 of 2)

97. Process Capital (2 of 2)

98. Market Capital (1 of 1)

99. Renewal Capital (1 of 2)

100. Renewal Capital (2 of 2)

101. Development of the NFCI

102. Development of the NHCI

103. Development of the NPCI

104. Development of the NRCI

105. Development of the NMCI

106. Countries Ranked by NICI Is the NICI a good predictor of a nation’s wealth?

107. Structural Model of NICI H3 H1 H4 H2 H5 H6 R 2 = 20.9%

108. H3 H1 H4 H2 H5 H6 R 2 = 20.9% Modified NICI ? Poverty Gender Empowerment Health H7 H8 H9 H10 R 2 = 83.3% 0.913 -0.670 0.578

109. Poverty

110. Health

111. Gender Empowerment

112. Clustering by NICI and GDP Relative GDP / capita NICI 1.0 0.5 0.0 0.0 0.5 1.0 Sudan Kuwait Jordan Tunisia Egypt Morocco Yemen Algeria Oman S. Arabia ?

113. G8 + by NICI and NCFI Relative NFCI Relative NICI 4.0 0.0 -4.0 -2.0 -1.0 0.0 1.0 2.0 United States Canada Sweden Russia Japan Finland Norway United Kingdom Germany Australia New Zealand France Singapore Italy China

114. Further Developments... IICR KM Diagnostic Tool (business and government) –Health, financial services, software, chemical, hospital IICR KM Seminars (business and government) - certification Education (McMaster University, Tangonow.net) eFlow Audit (codified proxy of e-mail flow) World Congress (http://worldcongress.mcmaster.ca) Jan 19-21, 2005 Journal of Intellectual Capital (http://www.emeraldinsight.com/jic.htm) 1 text Oxford U. Press with Choo, 1 books with BH KMCI Press Knexa.com (Tribute incentive methodology, ICUs, rewards) NICI (National Intellectual Capital Index) for United Nations Longitudinal causal mapping with integration (RBC project) Citation impact (literature and cases) Knowledge auction experiments

115. Knexa Solutions New knowledge assets with old value measures Market mechanism “the invisible hand of the market” Exchanges –what’s next? … talent markets … total markets Internet Auction Model –E-bay, Yahoo, Bid.com, etc. … stickiness, bid-ask Cost / benefit micro calculation ICUs – electronic tokens and the reward of redemption

116. 5 To Do’s Immediately 1.Raise awareness about knowledge era challenges Action: Fully engage employees about KM 2.Don’t throw training dollars down the toilet Action: Benchmark your T&D / FTE investment 3.Attempt to recoup talent that leaves the firm Action: Implement universal exit (entry) interviews 4.Accelerate your knowledge absorption rate Action: speed reading test ( www.bontis.com/speedread ) 5.Be mindful of technology investments Action: Test that search costs are reduced

117. Dr. Nick Bontis Ph.D. DeGroote Business School McMaster University Tel: (905) 525-9140 x23918 Fax: (905) 304-7734 Director, Institute for Intellectual Capital Research Chief Knowledge Officer (CKO), Knexa Solutions Associate Editor, Journal of Intellectual Capital nick@bontis.com www.NickBontis.com Thank you!  Speaking, training  Keynotes, seminars  Consulting, surveys  www.NickBontis.com