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36 The Conductive Organization Intangible assets are not often recognized as a component of an organization’s collective assets (see Figure 3.1). However, these intangible assets (i.e., knowledge capital) play a key role in capability generation. They are the result of learning that take place within the organization and between the organization and its customers. We describe intangible assets in terms of: Human capital: the attributes, competencies, and mindsets of the individuals who make up an organization. The individual capabilities of an organization serve to build organizational capabilities and create value for customers. Structural capital: the strategies, structures, processes, culture, and leadership that translate into specific core competencies of the organization (e.g., the ability to develop solutions, manage risk, engineer processes, understand markets). Organizational capabilities leverage individual capabilities in creating value for customers. Intangible Assets Knowledge Capital Structural Capital Customer Capital Financial Assets Tangible Assets Figure 3.1 Types of Assets in an Organization Organization Enterprise Human Capital The Knowledge Capital Model 37 Customer capital: the sum of all customer relationships, defined as the depth (penetration or share of wallet), breadth (coverage or share of market), sustainability (durability), and profitability of the organization’s relationships with all of its customers. While customer capital includes all external relationships, we focus on customers and suppliers—not all stakeholders. Our goal is to focus on people directly involved in value creation for the customer and the organization. Our challenge is that the overall blueprint of today’s organization has, for the most part, been inherited from the industrial era, leaving organizations ill equipped to manage their intangible assets. The Knowledge Capital Model The Knowledge Capital Model (see Figure 3.2) provides a new perspective for managing the intangible assets in an organization—for systematically developing, maintaining, leveraging, and renewing them. An organization creates value when individual employees interact with customers. The quality of these relationships will determine the effect on the organization’s customer capital. The structural capital interacts directly with customer capital but also serves mainly as the platform from which human capital can increase the value created for customers. In other words, structural Human Capital individual capabilities Customer Capital customer relationships Figure 3.2 knowledge value creation Structural Capital organization capabilities Knowledge Capital Model 38 The Conductive Organization capital provides employees with the organizational support they need to offer added value to customers. We’ve made two key assumptions when creating this model: 1. An organization’s intangible assets are made of capabilities and relationships that are built through the exchange of knowledge. Value creation occurs as knowledge flows among the three types of knowledge capital. Knowledge exchange serves as the basis for accelerating learning and systematically developing individual and organizational capabilities. It’s essential that we promote and facilitate the free flow of knowledge across the organization. Achieving higher levels of conductivity relies on an organization’s ability to establish trust through releationships. Trust determines the bandwidth of knowledge exchange and the extent of the value creation potential. 2. An organization’s intangible assets form a system that must be managed through an integrated approach. It’s pointless to try and manage customer relationships in isolation from the development of individual and organizational capabilities. All three forms of capital (human, structural, and customer) should be developed and maintained in an integrated approach. The Enterprise Capital Model At Armstrong, we modified The Knowledge Capital Model and developed a new model that we call The Enterprise Capital Model (see Figure 3.3). Our belief is that value can’t be created for an organization or its customers if human, structural, and customer capital operate in isolation. Without interaction, there is only value in waiting. Instead, we need to increase the interaction and alignment among these three forms of intangible assets in order to create value. Human capital, for example, is often viewed as a stand-alone entity. But actually, it’s incapable of creating value without the support of the organization’s structural capital or interaction with The Knowledge Capital Model Value in waiting Value creation interaction Human Customer 39 Structural Value creation resultant Figure 3.3 Armstrong’s Enterprise Capital Model customers. An organization can recruit the brightest and best in its sector, but if an internal process, structural configuration, or poor leadership blocks them, the organization’s employees will provide little value to anyone, least of all to their customers. Similarly, any attempt to build structural capital without considering human capital is bound to fail. We need only look at the fallout of ill-conceived or overly zealous downsizing or reengineering programs to be reminded of the need for human capital to interact with structural capital. Value Creation and Depletion Our experience has also led us to conclude that value is either created or depleted with every single interaction among the knowledge capital elements. Each one of the millions of interactions that take place every day within a global organization and with its customers and partners in value creation networks creates or depletes value. For example, customer capital is created when there is a highquality knowledge exchange between individual employees and customers—between human capital and customer capital. This is conductivity at the customer interface. 40 The Conductive Organization Value creation is further assured when the structural capital of the corporation is configured to support employees in the delivery of added value to the customer. This action may be as simple as ensuring that customer-facing processes are designed so that each employee can make real-time decisions with customers without securing approval from the management hierarchy. Conversely, customer capital is depleted whenever a customer has a poor contact with an organization’s employee or when the structural capital of the organization is poorly configured to meet customer needs. For example, if a customer telephones a call center and the employee has incomplete information about that customer or the customer is passed between departments and has to continually repeat the nature of the enquiry, customer capital will erode, thereby putting financial capital at risk. Clarica Example Recognizing the interrelationships among these three dimensions can provide corporate leaders with a powerful early warning signal of potential problems. For example, in the late 1990s, Clarica acquired the Canadian operations of MetLife. Due to the process reengineering required to merge the companies, the quality of customer service declined for a while (the reshaping of structural capital was impacting the exchange of knowledge at the customer interface). Clarica’s chief executive officer, Bob Astley, commented that this, albeit short-term, reduction in service quality was a matter of real concern. Eventually the company would pay for it in financial terms. The CEO’s concern led to a series of interventions geared to accelerate the integration of operations from MetLife into Clarica with an increased focus on providing quality customer service. This example of a leader recognizing the dependencies between customer and financial capital—how they are intertwined—reflects an understanding of the increased attention to intangible assets in the knowledge era. The Knowledge Capital Model 41 Stocks and Flows Stocks and flows power the dynamic of the Knowledge Capital Model. Stocks represent the accumulated individual capabilities (human capital), organizational capabilities (structural capital), and customer relationships (customer capital). Stocks can be described as the amount or volume of capital that has been created through generating capabilities. They are to a large degree measurable and visible. A long-term relationship with a customer and a repository of customer information are examples of stocks. Flows are what happen between the stocks and what impel the creation or depletion of stocks. Flows are the exchange of knowledge between individuals in the organization and between the organization and its customers or partners in order to build new capabilities and deepen relationships. The conductive organization uses its existing capabilities and generates new capabilities to enable unimpeded knowledge flow, which in turn creates new stocks, increasing the organization’s intangible assets. How stocks flow depends on the type of knowledge that is being conducted. Explicit knowledge is knowledge that has been articulated or codified in words or numbers, such as tools, procedures, and templates. Explicit knowledge sharing is enhanced by technology to ensure that knowledge is captured and accessible throughout the organization. Tacit knowledge is the intuitions, perspectives, beliefs, values, and know-how that result from the experience of individual employees and of the organization as a whole. Unlike explicit knowledge, tacit knowledge encompasses things people know but that are not documented anywhere. It’s frequently communicated through conversations with the use of metaphors. Know-how, understanding, mental models, insights, and principles inherent to a discipline are all tacit knowledge. Tacit knowledge is shared personally through work teams or structures such as communities of practice, where people with shared interests come together to exchange knowledge and create solutions. 42 The Conductive Organization A knowledge architecture supports the dynamic interchange of stocks by a variety of methods. A knowledge strategy defines how the conductive organization encourages knowledge creation and exchange. It guides how new and existing knowledge is used to enhance capabilities. It also provides the vision and direction for investing in knowledge capital. The knowledge architecture provides the blueprint for achieving the knowledge strategy’s goals—it outlines the approaches for placing the collective knowledge of the organization at the disposal of everyone. Knowledge access and knowledge exchange are two components of the architecture that support the flow of tacit and explicit knowledge (see Figure 3.4). As we noted above, tacit knowledge is best exchanged between people, while explicit knowledge should be accessed with the support of technology. We’ll talk more about these components in our discussion of learning and collaborating in chapter 9. Flows have similar attributes to tacit knowledge. They are both people-based and can prove challenging to capture and articulate. Stocks are much more like explicit knowledge in that they are visible and accessible. A challenge for corporate leaders is to create the • culture-driven • mindsets/values • leadership principles tacit • object • memory • tech vessel • retrieval • internal access exchange (stock) (flow) explicit • technology-driven • infrastructure/architecture Figure 3.4 Knowledge Stocks and Flows • process • interaction • community • inquiry • external The Knowledge Capital Model 43 capabilities for the organization to enable the exchange of tacit knowledge and access to explicit knowledge—no small leadership task, given the historical context of most organizations and their leadership environments. Influences on Value Creation and Depletion Influences on value creation or depletion change at each interface between the elements of the Knowledge Capital Model—at points between human and customer capital, structural and customer capital, and structural and human capital (see Tables 3.1, 3.2, and 3.3). These influences can be discussed in terms of attractors and detractors—the pluses and minuses of particular influences. We use the term attractors to describe organizational characteristics that we believe create capital and detractors to describe characteristics that deplete capital. Table 3.1 Interface Creating or Depleting Capital at the Human Capital-Customer Capital Attractors Detractors Personal responsibility of employees for customer relationships Internal preoccupation Customer-focus and quality service orientation Insulated from customer contact Active learning with customers Inability to relate to customers Continuity in role High level of attrition change in customer-facing staff Responsiveness Lack of responsiveness Commitment to shared purpose Lack of alignment in actions Self-initiation—ownership of one’s rote in the enterprise Feeling of entitlement Sense-and-respond perspective Make-and-sell perspective Alignment of competencies to customer requirements Competency gaps Well-stated and understood strategies Lack of strategic clarity Solutions correspond with customer needs Inappropriate solutions 44 The Conductive Organization Table 3.2 Creating or Depleting Capital at the Structural Capital-Customer Capital Interface Attractors Detractors Well-tuned business processes geared to the customer Inefficient or ineffective processes not geared to the customer Win-win service orientation to customer Lack of connection and feedback loops with customers Simplified, streamlined structure aligned to customer relationships Internally generated turbulence Harvesting as opposed to distributing knowledge Insufficient or inaccurate technical support Learning with the customer as an inherent part of service Learning focused only on internal needs Products as building blocks for innovative solutions for the customer Predominance of product orientation versus solution orientation Table 3.3 Interface Creating or Depleting Capital at the Structural Capital-Human Capital Attractors Detractors Shared sense of purpose organization Segmented (stove-pipe) Entrepreneurial culture fostering individual initiative Bureaucratic barriers Cohesiveness through strategic bonding High proportion of low customer value activity Alignment of strategic capability elements Lack of customer visibility Dynamic leadership and managerial courage Strategic confusion Speed of change and agility Static and inflexible position Centralized leadership and decision-making Emphasis on learning and innovation Limited interest in learning, either internally or with the customer Articulated values Unarticulated values The Knowledge Capital Model 45 Creating capital at the customer interface requires committed, self-initiated, customer-focused employees willing to learn and codevelop solutions with customers and across functional units internally. As a consequence, value is created for the employees and the customers, and ultimately for the organization. And once again, we see generalized reciprocity—the give-and-take flow of knowledge in a trusting relationship—functioning as part of the conductivity within the organization and between the organization and its customers and partners. We find that self-initiation is essential to the development of highly committed employees focused on creating value for the customer. Self-initiated employees have a strong sense of ownership over their performance, their career, and their learning. This strong sense of ownership is a precondition to the employees having a strong sense of ownership for the value they create for the customer. Self-initiation is enabled by a culture in which the individual employee takes responsibility for growing his or her own capabilities through learning, collaborating, and knowledge exchange. Creating capital at the structural-customer capital interface requires customer-calibrated internal processes and structures. Customer calibration calls for a customer service orientation and leveraging of technology to capture and exchange customer information as well as the knowledge gained from learning with the customer. Capital at the structural-human capital interface is generated by ensuring that the organization’s culture is supportive of its aspirations—the individual employees think strategically with a full understanding of the organization’s imperatives and the customers’ needs. At this intersection, leadership has a significant role in cementing this customer-facing strategic mindset. Viewing these three tables together, we see that there is a critical cultural underpinning to the creation of capital at all three interfaces. It’s safe to say that the organization’s culture serves as the key determinant of value creation as well as a significant variable for producing a highly conductive organization. Generating knowledge