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Measuring Return on Knowledge

Measuring Return on Knowledge. Measuring and Managing Knowledge Dr.Thomas Housel. Knowledge Value Added(KVA). What does KVA do? It measures the knowledge resident in employees, IT and core processes. The knowledge is then translated into numerical form.

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Measuring Return on Knowledge

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  1. Measuring Return on Knowledge Measuring and Managing Knowledge Dr.Thomas Housel

  2. Knowledge Value Added(KVA) • What does KVA do? • It measures the knowledge resident in employees, IT and core processes. • The knowledge is then translated into numerical form. • This translation helps the allocation of revenue in proportion to the cost of value added by knowledge. • It helps investors to analyze the return of knowledge in processes.

  3. KVA Theory

  4. Three Approaches to KVA Steps Learning Time Process Description Binary Query Method 1. Identify core process and its sub processes 2. establish common units to measure learning time Describe the products in terms of the instructions required to reproduce them and select unit of process description. Create a set of binary YES/NO questions such that all possible outputs are represented as a sequence of YES/NO answers. 3. Calculate learning time to execute each sub process. Calculate number of process description words, pages in manual, lines of computer code pertaining to each sub process. Calculate length of sequence of YES/NO answers for each sub processes. 4. Designate sampling time period long enough to capture a representative sample of the core processes final product/service output.

  5. Steps Learning Time Process Description Binary Query Method 5. Multiply the learning time for each sub process by the number of times the subprocess executes during sample period. Multiply the number of process words used to describe each sub process by the number of times the subprocess executes during sample period. Multiply the length of the YES/NO string for each sub process by the number of times this subprocess executes during sample period. 6. Allocate revenue to subprocesses in proportion to the quantities generated by step five and calculate costs for each subprocess 7. Calculate the cost to execute each subprocess, calculate ROK, and interpret the results Three Approaches to KVA

  6. KVA Example • Exodus: A provider of web hosting services. • Current Issues: • Decreasing profit margin • Expansion opportunity • Emerging competition • Our goal: To identify areas for focus on increasing revenue from existing knowledge assets rather than just cutting cost.

  7. KVA Procedure • Determine core processes: Categorize functions at aggregate level. • Gather data on amount of knowledge embedded in each core area using learning time. • Weight the amount of knowledge executed in the process • Determine number of employees in each core • Determine automation percentage of process • Calculate knowledge percentage in each process • Determine annual budget for each core process • Calculate ROK

  8. Cost functional areas Circle rating in terms of difficult to learn (1=easiest, 3=hardest) Relative Learning Time (total = 100 months) Number of Employees Percentage of Automation SG&A 1 20 855 80% Operation 3 45 600 60% Management 2 35 255 80% Total 100 1710 High Level Aggregate KVA

  9. High Level Aggregate KVA Amount of knowledge embedded in Automation Total amount of knowledge Percentage of Knowledge Allocation Annual Revenue Allocation (in million of US Dollars) Annual Expense (in million of US Dollars) ROK 13,680 30,780 34.18% $82.7 $118.8 70% 16,200 43,200 47.98% $116.1 $197.2 59% 7,140 16,065 17.84% $43.2 $51 85% 37,020 90,045 100% $242

  10. KVA Calculations • Column 6 - Amount of knowledge embedded in automation = learning time multiplied by the number of employees multiplied by the percent of automation. • SG&A 20*855*80%=13,680 • Column 7 - Total amount of knowledge=learning time multiplied by the number of employees plus the automation: • SG&A 20*855+13,680=30,780 • Column 8 - Amount of knowledge allocated to each functional area: • SG&A (30,780/90,045)*100%=34.18%

  11. KVA Calculations • Column 9 – Total amount of knowledge is the total value surrogate of the annual revenue ($242 million): • SG&A – $242*34.18% = $82.7 million • Column 10 – Capture the cost used to generate value of the process: • SG&A - $118.8 million includes the general administrative costs and marketing expenses. • Column 11 – Return on knowledge (ROK) = allocated revenue / cost used to this knowledge: • SG&A – $82.7/$118.8 = 70%

  12. Result of KVA for Exodus • Sales needs business expansion due to demand for data storage.Customer turnaround is the slowest due to lack of automation • Lower ROK in the Operations shows need to improvement

  13. Summary • The notion of return on knowledge and its measurement • KVA method • KVA theory • A practical example of KVA

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