Two years ago recruitment organisation Morgan & Banks listed on the Australian Stock Exchange to stunning effect. With a capital asset base of around $5 million, analysts might have expected the offering to fetch somewhere between $15 million and $20 million. Instead it exceeded $162 million -- almost eight times the book value of its assets -- thanks to Morgan & Banks' flair for harnessing its strengths.
As Westpac's Ann Sherry told an Institute of Public Administration seminar recently, the reasons for the extraordinary result are illuminating, and it's a success Westpac is keen to emulate. "Morgan & Banks is a business that revolves around placing the best people in jobs. The bricks-and-mortar assets of Morgan & Banks are worth far less than the inherent value of something more intangible: its intellectual capital," Sherry says. "For Morgan & Banks, the talents of its people, the cleverness of its management, and the strength of its customer relationships are the real keys to its future." Like Morgan & Banks, Westpac's own competitive edge is shifting from product and price to people, as its practical efforts to harness its collective intellectual resources forge a close working relationship between human resources and IT. Together the two business units are working to transform intellectual capital into a business driver by seeking it in three separate places: in Westpac's people, in its organisational structure, and in its customers. So while Sherry, the head of group human resources, considers innovative ways to harness intellectual capital through HR, Mark Veyret, the general manager, marketing & knowledge management, looks at ways to use knowledge in the business to create shareholder value.
"There are two schools of thought in relation to this whole area of knowledge management," Veyret told CIO. "One school is people-oriented -- focused on tacit knowledge, on the idea that if we all hold hands the knowledge will flow.
That's the Californian school. The other school says it's all technology-oriented, and whatever the question the answer must be the intranet or in Lotus Notes. Of course, knowledge management really relies on a combination of both," she says. "When you go through and look at the successful companies who are effectively managing knowledge, the successful companies are weighted about 90 per cent on the people capital, and 10 per cent on the information infrastructure to drive that." Westpac runs more than 80 different software applications for data, information and knowledge management in its various divisions, but striking a balance has meant driving both the technology and the human resources effort back to the bottom line and to shareholder value.
The finance industry's competitive environment has undergone radical change over recent times. Deregulation, technology leaps and increasing globalisation have all had far-reaching impact on Westpac's business. Like other banks, Westpac knows it can no longer rely on opening its doors, turning out the same products, and expecting customers to turn up as they have always done. Its customers can go to a mortgage originator or an insurance company for their home loan, seek out a foreign investment bank for their investment products, or get a credit card sponsored by a telecommunications or an automotive company.
"The traditional, loyal customers are fast becoming an endangered species, as new information-rich customers take advantage of their access to competitor information and seek out better prices and better service," Sherry says. "With the Internet now enabling customers to link even more directly to businesses, customer power can only grow."To counter the threat to its customer base, Westpac pursues intellectual capital not only in the data, information and knowledge that resides within its workforce, but in the training, experience and intuition of its staff, and the relationships it has built between its people and its customers. "The intellectual capital is made up of three components: it's made up of customer capital, people capital and process capital," Veyret says.
"Many people, when they look at the area of knowledge and intellectual capital, think only in terms of the tacit or people knowledge that exists within their organisation. That's a big no-no, because you know going forward that the nature of the economy isn't command and control; it's actually a Web-based or a network-based structure. That network means that when you leverage intellectual capital, you leverage your customer capital, you leverage your people capital and you leverage your process capital. The question is how best to use the technology to leverage these three types of intellectual capital."Westpac knows the full weight of intellectual capital extends far beyond mere existence of knowledge and skills -- into its ability to capture the knowledge, to nurture capabilities, to develop a willingness to share the knowledge, to distribute and use it, and to translate it into product or service.
The first challenge is to recognise exactly what knowledge, information and data is important to its business. "I define data as the raw information that exists within the company," Sherry says. "For Westpac, for instance, 35 per cent of our customers are aged over 45. Information puts the data in a bigger context: the over-45s are a growing customer segment with a higher potential spend on financial services products as opposed to straight transaction services.
"The knowledge is where we temper the information with experience and a dash of strategy: we will grow the over-45 segment by 20 per cent if we package the financial services, superannuation and online equity trading to meet their diverse needs." Motivation = SuccessIn Business at the Speed of Thought Bill Gates wrote that in the information age "how you gather, manage and use information will determine whether you win or lose". Sherry argues it's actually how you inspire, manage and motivate the people who are gathering the information that will be the real key to success.
Without people, she says, information has minimal value.
Westpac's driving strategy is to get closer to its customers, ensuring every encounter customers have with the bank is a professional and personal experience they'll want to repeat. Key to that is enabling staff to understand customers and empowering them to deliver the services they know customers want.
That means investing in people and bringing them into the centre of the organisation.
"Traditional hierarchies, where the decision-making and knowledge resides at the top and is parcelled into segments as it makes its way down to the bottom, are no longer relevant. The knowledge organisation seeks to break down structures and enable people to operate in a boundary-less way. Information and knowledge in this type of organisation spread in a far less controlled, but far more productive, way," Sherry says.
Westpac is still learning how to encourage that to happen and sees it as an ongoing organisational challenge. But Sherry maintains there have been perceptible changes at the retail customer service level. Here banking has shifted from mainly branch-level service to a mix of face-to-face contact and electronic solutions such as telephone banking. That shift has freed staff from a lot of paperwork and basic transactions, and changed the nature of their jobs, so that, for instance, they might be part of a customer team in a telecentre where their focus is on customer solutions.
Convinced satisfied staff carry that satisfaction over to the way they deal with customers, Westpac helps keep staff happy by encouraging them to develop individual development plans, defining their goals and deciding the training, mentoring and other assistance they need. The bank expends considerable energy in creating the right culture by making people proud of where they work, helping them understand their collective goal, and fostering belief in the vision of the company.
Its human resources policies encourage diversity, reward merit, and offer flexible, family-friendly conditions. "Westpac's experience of the last few years has driven home to us that there's a clear link between happy, motivated staff, and happy, satisfied customers. Nurturing this link has seen our staff satisfaction levels increase from around 5, on a scale of 1 to 10, to reach 7.5, and our customer satisfaction increase by 25 per cent. That's quite a leap, and I think highlights the fact that investment in our people capital has a very clear dividend for the future," Sherry says.
If its investments in people set Westpac on the road to harnessing its intellectual resources, the second part of the journey involves the organisation itself, connecting people to the terabytes of data it collects and making it meaningful and useful to the business. That means finding ways to determine the meaning of the information it receives, stores and shifts through its intranets, Web browsers, search engines, databases and knowledge exchanges.
By mining data in an intelligent way the bank seeks to contain and retain the knowledge it needs and use it to augment and support ideas being put to work.
Sherry says technology is just a tool in this quest. "When our managers or financial advisers sit down and speak to a customer, or operators answer telephone queries, we need to have the collective knowledge of the bank at work, so that the right information can be available to support the customer contact.
"We have to build our knowledge stocks -- to know what knowledge to store, know where to find it, what priority to give it, and then devise how to access or distribute the knowledge," she says. "We have to avoid falling into the trap of collecting too much information for the sake of it, then failing to use the data. That's disconnected information, not capital." Westpac has built what Sherry calls "pods" of intellectual capital throughout the organisation. These living pods show how people combine with technology and a flat organisational structure to deliver knowledge that is active and accessible. It runs internal chat lines on key business issues and has electronic communities of practice. And since information can never be intellectual capital unless it moves, technology is the enabler that ensures the capital flows through the organisation.
Westpac knows the most successful, high ROI knowledge-management deployments are based around electronic white and yellow pages. It has therefore captured both its products and people in massive Lotus Notes databases that detail people's backgrounds, interests, specialities and streams of knowledge, as well as the bank's product capabilities. Veyret says both white and yellow pages are relatively easy ways to help organisations quickly use technology as an enabler to assist them in sharing people and tacit knowledge, throughout the organisation.
Westpac recognises the enormous value of knowing its customers. It therefore tracks each customer's every contact point with the bank, like a technology footprint, through databases showing the transactions they conduct, the products they buy, and the queries and payments they make.
"Figures such as customer retention rates, or the flip side: defection rates, profitability per customer, and market share in different segments, are all really measures of customer capital," Sherry says. "We take customer capital very seriously at Westpac, because it lies at the heart of our business strategy. We have spent the last decade rebuilding our customer base through regional acquisitions and through getting closer to our existing customers." The effort involved looking at every customer relationship the bank had, assessing both its current profitability and its potential for future source of business. Today it constantly looks for ways to add value to every relationship, by first knowing its every customer need then delivering on those products and services.
Clearly the strategy works. Sherry says when Westpac merged with the Bank of Melbourne, it adopted a three-pronged approach that combined the business objectives with staff and customer objectives. It worked hard to protect the strong relationship the Bank of Melbourne had with its customers and refused to jettison high-cost customers for the sake of getting figures to match projections.
Its reward was to finish with 30,000 more customers than the pre-merger customer base of Westpac and Bank of Melbourne combined -- a first for any bank merger. It increased its number of priority customers by 25 per cent, and lifted customer cross sales from an average of 1.7 to 2.9 products per customer.
Westpac, which serves 710 of Australia's top 1000 companies, was also the first organisation to use the good Samaritan legislation in Australia, and it did so in the interest of fostering good customer relationships. Veyret says the legislation gave the bank the opportunity to share what it was doing on Y2K and the global best practices and Australian best practices it had adopted. It posted all the information on its Web site and promoted and advertised its availability. It also ran customer forums in Sydney and Melbourne to share its knowledge with customers and to tap into the accumulated corporate memory of those customers in discussion forums.
"Customer capital involves tapping the knowledge that exists within your customers," Veyret says. "That's the key to going forward."Basic DifferencesUnderpinning the intellectual framework of Westpac's KM efforts is an appreciation of the difference between the old and new economy, Veyret says.
The old economy was based on depreciable assets. The new economy values intangible assets and looks at the best ways to leverage those. That way those intangible assets can actually increase in value.
For example, knowing an organisation has a Mandarin-Chinese speaker on staff is valuable. But it is the way Westpac leverages that knowledge by calling on that person for help in translations, that makes both the person and the knowledge valuable.
With 32,000 people on staff, Westpac concentrates its front-office efforts on making sure it takes only three mouse clicks to get to the right contact point or piece of knowledge. And it makes sure pieces of knowledge can be combined to make new knowledge.
"The real value in knowledge, quite frankly, is this: combine K1 knowledge with K2 knowledge, and you can get a new piece of knowledge, K3, which is really, really valuable. That's wisdom," Veyret says. "Westpac has terabytes of data.
The next element on that spectrum is information, and information is just structured bits and bytes. Unfortunately, a lot of the information is what I call 'white slime', the stuff that clogs up your e-mails, your voice mails and your snail mail. Fifty per cent of information that gets generated in reports is just white slime."Then comes knowledge which Veyret defines as information that is used for action. Relying on the tried, true and classic principles of good information management, Veyret says knowledge must have a point of reference and it must be used for action.
"The final thing is wisdom, which is accumulated knowledge. So normally when I move from job to job the first two weeks, for morning tea, lunch and afternoon tea I go and speak to people with more than 20 years' experience in that organisation. Adding up those morning teas, lunches and afternoon teas times 30 people, times 20 years' corporate memory gives me 600 years of corporate memory.
"That's what you should do in knowledge management. And the issue is: how do you get to find out these people that actually have lots of good ideas? Part of that is not technology. Part of it is actually plugging into networks to say: tell me those people who've been around a long period of time to talk to," Veyret says.
It's an understanding that underpins Westpac's entire approach to knowledge management. By combining HR and IT in its knowledge management efforts, Westpac is confident it can harness all its collective intellectual resources, whether they reside in people, organisational structure or customers.
Who's in Charge of Knowledge Management?By Jim BotkinThousands of companies worldwide are spending millions of dollars on knowledge management systems. But fewer than 20 per cent of these systems enhance the bottom line, while more than 30 per cent are outright failures. Who's responsible? Who can make the concept sing? Is it the CIO? IBM's top knowledge management practice leader, Larry Prusak, says no. "Any knowledge management system that spends more than a third of its budget on technology is not a KM initiative but an IT project," he says. Is it the CKO? Certainly knowledge management is part of a chief knowledge officer's mandate, but as Motorola University's former knowledge management director, Mark Schleicher, says, "Knowledge management is not a mechanism to fix a screwed-up business."So it must be the CEO, right? Recent studies have shown more than 80 per cent of CEOs don't "get it," or fully appreciate the role of knowledge in business.
This may be part of the problem, but it's wrong to think a single player or department can kiss an ailing knowledge system and make it better.
What's missing is a new model of management appropriate to a knowledge economy.
Most management models taught at business schools and practised by CEOs and their underlings emphasise either a centralised hierarchical structure or its opposite -- a decentralised flat organisational structure. Many companies swing back and forth every decade or so between the two. The flat model is now in vogue. However, when a firm's stock prices also stay flat, pressures mount to swing back to the centralised model.
But a knowledge economy is both-and rather than either-or. For instance, for knowledge management systems to be effective, they need to gather knowledge from all corners of a decentralised organisation and beyond, extending their reach into suppliers and customers. And any knowledge system needs to be centralised to adhere to quality and reliability standards. Otherwise, as CSC's chief knowledge architect Sami Albanna says, "If two out of twenty hits yield obsolete or useless information, you'll lose your user."The winners in the knowledge economy will be those companies that can build and operate networked businesses -- where centralised or decentralised business units are replaced by linked and interdependent knowledge communities. How these work in different industries will emerge over the next two to three decades. But some indicators are visible now.
Concepts key to the organisation of the future are systems thinking, entrepreneurial behaviour and knowledge communities. Systems thinking because it's the dynamic connections between nodes in the network and their interrelationships that are key. Entrepreneurial behaviour because it's an attitude of risk-taking rather than preserving the status quo that will drive the need for innovation. Knowledge communities because the community concept is eclipsing teams as the form that engages passion, commitment and loyalty -- and ultimately raises the bottom line.
So who's responsible for knowledge management? Not just a knowledge management chief or guru, but also company leaders who together create the conditions where networked business can thrive, where knowledge can be shared and where knowledge communities can blossom. The CEOs, CKOs and CIOs who understand this will be those who make their knowledge systems sing.
(Jim Botkin is president of InterClass in Cambridge, Massachusetts, and author of Smart Business: How Knowledge Communities Can Revolutionize Your Company (The Free Press, 1999). Contact him at firstname.lastname@example.org)
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