I had an interesting conversation this morning with a leader of internal collaboration and knowledge management (KM) services inside one of the large audit/consulting firms. We were discussing alternatives to demonstrating hard, currency-based ROI in KM and collaboration efforts. He was experimenting with alternative valuation methods because calculating credible ROI is always extremely difficult, if not completely impossible, in the “prove it conclusively” culture of an audit firm.
His organization is experimenting with ways to assign value to KM and collaboration projects by proxy. My conversation partner described one such proxy as follows (in my words, not a quotation of his):
What if the KM and collaboration functions could be outsourced? How much would it cost our firm to have someone else manage those activities?
The idea is that by calculating a hypothetical, but provable, cost for how much a third party would charge to manage your organization’s KM and collaboration infrastructure, applications, and activities, you can determine a proxy, expressed as currency, for how valuable those assets are to your company. Hosting charges for infrastructure and applications can easily be determined by floating an RFP for those services to potential providers. Much of the cost of KM and collaboration management activities are bundled in the salaries of staff assigned to lead and support those functions. So, yes, it is possible to come up with a hypothetical cost to outsource these support processes.
But is it desirable? I don’t think so.
First, discussing a hypothetical outsourcing of collaboration and KM functions sends the wrong message to the organization. It says that these things are not very important to success; they are commodities that provide relatively little value, no matter in what terms that value is expressed. It also ignores that these functions are embedded in an organization’s culture, which is impossible to value definitively, but undeniably important to the long-term success of the company.
Additionally there are a couple of mathematical problems with the approach. The proxy doesn’t include the cost of contributing and reusing knowledge, or of collaborating, accrued by each and every employee of the firm; only the avoided costs of staff managing those functions is recognized. Even worse, potential bottom-line benefits (or penalties) resulting from conducting effective (or ineffective) KM and collaboration activities are not recognized. This is the return, whereas the proxy described above only determines the (avoided) investment, and only partially does that.
So, as I see it, this proposed valuation method sends a death-wish message to the organization, understates actual incurred costs, and fails to recognize performance benefits (or penalties) to the organization. Is that right? Have I missed anything else?
To be fair to the individual who shared this approach with me, he’s no dummy. In fact he has great experience and understands KM, collaboration, and ROI better than most practitioners. I’m sure he realizes all of the limitations that I’ve stated. What is interesting to me is that we’ve reached a point in the ROI debate where someone of his stature would be suggesting such an approach to proxy valuation for KM and collaboration in the first place.
Please let me know how you feel about the use of a hypothetical outsourcing cost as a proxy for value added to a company by it’s KM and collaboration programs.