From HBR – Social Media versus Knowledge Management

On the surface, social media and knowledge management (KM) seem very similar. Both involve people using technology to access information. Both require individuals to create information intended for sharing. Both profess to support collaboration.

But there’s a big difference.

  • Knowledge management is what company management tells me I need to know, based on what they think is important.
  • Social media is how my peers show me what they think is important, based on their experience and in a way that I can judge for myself.

These definitions may sound harsh, and biased in favor of social media, and to some extent they are. Knowledge should be like water — free-flowing and permeating down and across your organization filling the cracks, floating good ideas to the top and lifting all boats.

But, really, is that anyone’s KM reality?

KM, in practice, reflects a hierarchical view of knowledge to match the hierarchical view of the organization. Yes, knowledge may originate anywhere in the organization, but it is channeled and gathered into a knowledge base (cistern) where it is distributed through a predefined set of channels, processes and protocols.

Social media looks downright chaotic by comparison. There is no predefined index, no prequalified knowledge creators, no knowledge managers and ostensibly little to no structure. Where an organization has a roof, gutters and cistern to capture knowledge, a social media organization has no roof, allowing the “rain” to fall directly into the house, collecting in puddles wherever they happen to form. That can be quite messy. And organizations abhor a mess.

It is no wonder, then, that executives, knowledge managers and software companies seek to offer tools, processes and approaches to tame social media. After all (they believe), “We cannot have employees, customers, suppliers and anyone else creating their own information, forming their own opinions and expressing that without our say. Think of the impact on our brand, our people, our customers. We need to manage this. We need knowledge management.”

This is exactly the wrong attitude for one simple reason: It does not stop people from talking about you. Your workforce, customers, suppliers, competitors, etc., will talk about you whenever, wherever and however they want. Even pre-World Wide Web, these conversations were happening.

We’re long past the time to seek control; it’s time to engage people.

Business leaders recognize that engagement is the best way to glean value from the knowledge exchanged in social media — and not by seeking to control social media with traditional KM techniques. That only leads to a “provide and pray” approach, and we have seen more than our share of “social media as next-generation KM” efforts fail to yield results.

So how do organizations gain value from social media, particularly in situations where they have not been successful with KM? The answer lies in a new view of collaboration: mass collaboration.

Mass collaboration consists of three things: social media technology, a compelling purpose and a focus on forming communities.

  • Social media technology provides the conduit and means for people to share their knowledge, insight and experience on their terms. It also provides a way for the individual to see and evaluate that knowledge based on the judgment of others.
  • Purpose is the reason people participate and contribute their ideas, experience and knowledge. They participate personally in social media because they value and identify with the purpose. They do so because they want to, rather than being told to as part of their job.
  • Communities are self-forming in social media. KM communities imply a hierarchical view of knowledge and are often assigned by job classification or encouraged based on work duties. Participation becomes prescribed, creating the type of “mandatory fun” that is the butt of many a Dilbert cartoon and TV sitcom. Social media allows communities to emerge as a property of the purpose and the participation in using the tools. This lack of structure creates the space for active and innovative communities.

Creating mass collaboration involves more than building technology and telling people to participate. It necessitates a vision, a strategy and management actions we will discuss in subsequent posts.

The point here is that while they may seem similar, social media and KM are not the same. Recognizing the differences is a crucial step toward getting value out of both and avoiding a struggle of one over the other.

It is also a step toward becoming a social organization.


From HBR – Shifting Finance from Controlling to Improving

It’s difficult to get senior executives who have been successful managing a particular way to realize that they need to change their approach. Yet this is exactly the challenge facing leaders of the finance function who are asked to help their organization improve the way that work is done. As finance shifts its focus from controlling costs to advising managers on improvement activities, CFOs must change their thinking and behaviors.

Consider for example CFO Ric Magnuson of Group Health Cooperative, a nonprofit health care system in Seattle with 10,000 employees, who started out as a skeptic on the process improvement activities his company launched in 2008. He had not been exposed to the approach his company chose (“Lean”), and all the tools and concepts were new to him. “I didn’t get it. I saw a lot of money being spent. I was against it.” But along the way he switched from being a skeptic to being an advocate. He gives credit to mentors who helped him. “We had Orry Fiume (one of the founders of “Lean Accounting”) come in a couple times. (Lean Accounting redesigns a company’s performance measurement system so that it encourages continuous improvement.) I got a mentor (“Lean Sensei”) who became my shadow, 40% of their time through the first seven months, helping me through. Then I became an advocate. I had to throw out 25 years of learning. Getting the CFO on board is key. Now I know that.”

CFO Tim Olson of ThedaCare, a healthcare system in Wisconsin, went through a similar conversion. “Before I came to healthcare, I was at a manufacturing company and a trucking company. There it was all about the shareholder. It was about handling ups and downs in the economy, including laying off employees. The culture here at ThedaCare is different. People are treated with respect. I’ve learned to balance customers, quality and safety, people, and cost. Even though when I get up and talk, because it’s my role, I talk about finance, I’m always thinking about the impact on customers, quality and safety, and employees as well.”

How did the finance function at Group Health, ThedaCare and others make the transition from business policeman — focused on oversight, surveillance and compliance — to coach and adviser on improvement activities? In four main ways:

  1. Provide information managers and the front line can use. Most accounting information is prepared by finance for external use. Internally, finance typically facilitates centralized goal setting and then drives financial targets down into departmental plans and budgets. However, to support improvement, financial information needs to be presented in simple terms that everyone, especially frontline workers, can understand and use. For example, as described in the book Real Numbers, CFO Jean Cunningham revised the reporting at her manufacturing company, replacing accounting code words like “variances” and “ROI” with simple language so that everyone could participate in monthly reviews of operations. Finance became a coach and educator on the financial view of the organization and helped manage improvement activities.
  2. Balance the financial view with customer and employee views: While speaking for the financial (shareholder) view, finance should always keep the employee, customer, and quality views in mind. For example, at ThedaCare they use a triangle to think about the benefits of improvements. At the center is the customer. On the three points of the triangle are safety/quality, employee engagement, and financial stewardship. They try to impact all positively with any change they make.
  3. Streamline financial processes to focus on improvement. As I described in my last post “Stop Budgeting, Start Improving,” ThedaCare and Group Health eliminated their budgeting processes and replaced them with rolling quarterly reviews. Many other companies, such as Boeing and Parker Hannifin (a $12 billion manufacturer of motion and control technologies), have adopted similar approaches that reduce time spent on budgets (and other bookkeeping and accounting activities) and engage cross-functional teams in discussions of improvement activities. (For more on the Boeing and Parker Hannafin stories, you can see webinars at BMA, Inc.)
  4. Get help. Both Group Health and ThedaCare had advisers work with them who had been through a finance transformation. CFO Ric Magnuson had a personal coach working with him for seven months.

Having grown up with a mission of controlling the expenses of the organization, measuring performance, complying with regulations, and focusing the organization on shareholder value, CFOs need to unlearn command-and-control thinking before they can learn how to help lead improvement. They need to develop their ability to see the way to profit through improvement activities, not through manipulating financial quantities. The best way to do this is to get out of the stands — keeping score — and onto the playing field — helping improve operations.

Question: Have you seen CFOs and finance organizations shift their time and activities from controlling to improving operations?

From HBR: What Else Every CEO Needs to Know About the Cloud

I have an article in the new (November 2011) issue of Harvard Business Review called “What Every CEO Needs to Know About the Cloud.” It’s aimed at managers and executives who work outside the IT department and might not know or care very much about what goes on inside the IT department. So why should such people be interested in cloud computing?

Because it’s going to change both how, and how well, their organizations work. This is a strong claim, and many find it a ridiculous one. After all, companies already have tons of technology; it’s not like they’re operating at present without hardware, software, databases, and networks. The move to the cloud is just a shift in where these resources are located. Executing this shift sounds like a classic job for the IT geeks, and one that needn’t concern the rest of the company.

But it should, and it will. To see why, we need to look back at a previous technology shift. A century ago, manufacturing industries were in the middle of the long process of electrification — of replacing steam turbines with electric motors. Short-sighted factory owners considered this a simple substitution, and ignored the broader possibilities offered by electric power. These possibilities eventually included putting a separate motor on every machine in the plant, setting up overhead cranes, conveyor belts, and assembly lines, and converting factories from tall narrow buildings to long low ones.

All of these advances were invisible at the dawn of electrification. They only became apparent over time to the experimenters and innovators. Lots of successful incumbents were neither, and so lost out over time to their more productive and nimble rivals.

In the article, I argue that the same dynamic will play out around cloud computing. I explain that the cloud offers benefits at the level of the individual, the group, the data, and the application. And these are just the ones that we (or, more properly, I) can see right now. The article discusses, and largely dismisses, reliability and security concerns, and gives advice on how to start moving into the cloud.

Of course, one article can’t come close to touching on all the important topics related to cloud computing, and I had to leave a lot out. I don’t talk much about mobility and speed, for example, even though these are critically important subjects in business today, and ones where the cloud offers advantages.

Technology has finally caught up with workers who don’t sit at the same desk all day, every day. We now have laptops, notebooks, tablets, and smartphones, and a lot of us (most of us?) use them pretty heavily because we’re mobile — we move around during the workday and hit the road on business trips.

Thanks to the cloud, our data, documents, applications, communications, and social networks can come along with us, and be available almost no matter where we are. Without the cloud, mobility and the proliferation of devices would inevitably lead to severe fragmentation (where did I put that document?) and frustration. With it, we can be productive virtually everywhere.

We can also be faster. When everyone on a team is online and interconnected no matter where they are, and when they all have access to the same information, they can act more quickly. The delays, redundancies, and misunderstandings that plague so much group work can be reduced. As the pace of business continues to increase, the ability to make good decisions faster becomes more critical, and the cloud becomes more attractive.

The cloud is not the answer to all business problems by any means. But as I hope to demonstrate in the article, it is a significant advance, and it is inevitable. The future path of business is never clear, but it is cloudy.


From HBR – End the Religion of ROE

There is no more powerful question in a U.S. corporation than “what’s the ROE on that?” Social media spending? Wellness checkups? Better working conditions? Return-on-equity hurdles threaten them all. Conversely, why market cigarettes? ROE justifies the means.

We think there’s more to business success — and that something as straightforward as a simple equation could put capitalism on a better path.

To an extent not widely recognized, it was an equation in the first place that gave ROE the power to dominate not just investment decisions, but an entire business culture. A hundred years ago, the focus on squeezing every drop of return out of equity capital made great sense. As the industrial revolution progressed, society was enjoying enormous benefits from mass production, which brought former luxuries within middle class reach. Just as electronic commerce would later sweep business, mass production came to one industry after another. But unlike websites, factories were capital intensive. The revolution ran on equity capital, which was in short supply. Anyone would have concluded that allocating capital according to expected return on equity would be optimal for growth.

The ability to do that rose to a new level in 1917, when General Motors was in financial difficulty and DuPont took a major position in the company. (GM represented an important channel for Dupont’s lacquer, artificial leather, and other products, and Pierre du Pont was on GM’s Board.) DuPont sent Donaldson Brown, a promising engineer-turned-finance staffer, to Detroit to sort things out, and sort them out he did.

Brown noted a simple fact: Return on equity can be broken down into a three-part equation. It is logically the product of return on sales times the ratio of sales to assets times the ratio of assets to equity. By parsing ROE into the DuPont Equation (very rapidly to become a business school mainstay), he provided the basis for organizations divided into functions with their own objectives. He reasoned that if marketers worked on maximizing return on sales, production managers were rewarded for the sales they squeezed out of their physical plant, and finance managers focused on minimizing the amount of equity capital they needed, ROE would take care of itself.

Thus Brown not only sowed the seeds of the today’s hated silos, he also set three “runaways” in motion. That is to say, he created objectives with such strong feedback loops that they were pursued single-mindedly, even to unhealthy excess.

Biologists use the term “runaway” to describe what happens when a single criterion dominates the mating choices of a species to the exclusion of other valuable traits. Among peacocks, large tails so charm the peahens that the male tail has grown to the point where the males are stressed by the nutritional burdens of growing and carrying the stupendous appendage, and are more subject to predation because of its weight. Even as the population of peacocks declines, peahens persist in their preferences. Runaway feedback reduces the fitness of the species. (And here’s a simpler version, courtesy of lab experiments in the 1950s: given a lever to stimulate the pleasure centers in their brains, rats will allow themselves to die of starvation and exhaustion. The feedback from pressing the lever overwhelms the positive sensation they would experience from eat or sleep.)

In the case of ROE, spurred on by the DuPont equation, society came to suffer from similarly entrenched corporate runaways. In their pursuit of margin, marketers sought market power even to the point of monopoly, requiring antitrust laws to cry stop at the last moment of the end game. Similarly, production engineers treated their factories royally and their labor as expendable, until unions and labor laws intervened. Financial managers, supported by their bankers, increased their debt-to-equity ratios until capital requirements were imposed—oops, we mean until there was a catastrophic financial crash and a depression. Then banking regulations were imposed. (Apparently unconvinced of the causal link, in the 1980s we re-ran the experiment. Once again, stimulating the financial pleasure center proved irresistible and near-fatal.)

The lesson: Return on Equity, like peacock tail splendor, is a very poor guide for allocating resources. It fails for two reasons. First, fixating on ROE fails to maximize the benefit of business to society because it measures value in terms of returns to only one stakeholder; second, it allocates human resources as if maximizing the efficiency of financial capital were critical to growth of social welfare.

So it’s time to address our measurement system seriously at the firm level. It would help to have a new equivalent of the DuPont Equation that propels individuals and organizations forward just as powerfully but does not send capitalism off the rails. What might that look like? Most fundamentally, the objective of business must be broadened beyond ROE. Structurally, too narrow an objective function leads to runaways, in particular the fetishizing of financial return and measurements. And functionally, there is no longer a need to ration financial resources; there’s more money available than can be productively invested—which is why the financial industry is only minimally about investing, and all about flipping, swapping, hedging, engineering, and other forms of lever-pressing.

Instead, the measure of value creation should take into account the benefits perceived by all stakeholders, not just equity holders. (Note that this means accounting for negative externalities like health effects on neighboring populations, as well as positive ones like contributions to education.)

In addition, the measures should be broad enough to take into account variations in valuation around the world. As Richard Dickinson and Kate Pickett show in Spirit Level, a value like equality, for example, is prized more highly in Norway than in the U.S.

And in terms of its effects on managerial decision-making, the new system should create feedback and incentives that nudge managers toward innovating for tomorrow’s world, not optimizing for today’s. When ROE holds sway, a more or less certain return on a cost-reduction investment nearly always trumps a speculative bet on a new business model. That only makes sense if you are operating in a state of equilibrium—which might have been close enough to the truth in some sepia-toned time. Now we need managers to shift from a mindset of optimizing an equilibrium to adapting to and capitalizing on a dynamic business ecology. New measures can help reverse that priority, creating incentive systems that encourage enterprises to invest in the growth of their ecologies.

So here’s our candidate: we believe that corporations would do better for all their stakeholders and avoid the risks of runaways by focusing on Return on Innovation. An innovation-based measure would lead to an acceleration in investment with positive benefits for growth.

A new DuPont equation would measure the growth in value created by innovation (and again, that is value defined broadly). And like the original, NuDu would decompose this measure into three components:

  • The value of an organization’s innovation per person affected
  • The number of people affected by an innovation
  • The frequency with which the entity innovates
  • Arithmetically, that’s equivalent to saying:


    How does this guide decisions and actions in a different way? First, by stressing that the point is innovation. A dynamic economy requires growing companies—those that increase their value-added contribution over time. To maximize this, a company should prioritize the innovation that leads to the greatest value. That value must be measured across all stakeholders.

    Second, an innovation should have the widest possible market. As the late C. K. Prahalad pointed out, the “bottom of the pyramid” is a market and not a social problem. In a recent talk at MIT, Infosys founder Narayana Murthy put it this way: “Technological innovation is all about reducing cost, reducing cycle time, making life more comfortable. Therefore: who needs new technology more than the poor?

    And third, the battleground of competitiveness now goes beyond time to market, to include the frequency with which a firm brings valuable innovations to market. GE, by creating independent local development teams, is adding to the diversity of ideas and the opportunity to recombine them, and hence the likelihood of having innovations to bring to market more often. “More products at more pricepoints” is their name for this strategy.

    Looking at Apple, you’d conclude it had been using this equation for a long time. It has focused on building an ecology, earning its fair share of the rewards but leaving plenty for others who can earn them (at the expense of those who have historically extracted margin from market power by restricting the market). Apple’s offers are more highly valued than its competitors ‘— largely for intangible reasons ranging from design to sustainable disposability — and have extremely broad appeal globally. And it has brought true innovation to market more frequently than perhaps any other consumer products company ever.

    If our new feedback loop were put in place, managers would take seriously the objectives it targeted and start trying to make themselves as good by that standard. Enterprises — and this formula applies equally to businesses, government agencies, and NGOs — would find ways to organize around its components.

    It’s impossible to imagine all the ramifications when even superficial incentives are changed, and therefore even as we propose this change we don’t pretend to know what unintended consequences it might cause for companies and society. After all, ROE was a good thing for decades, until it wasn’t. Measurement systems first educate people on what’s valuable, then enlist them in figuring out unanticipated ways of creating that value, and finally degenerate into mindless games played for artificial advantage. Could this happen to measurement system based on growth of value for all stakeholders through innovation? Absolutely. But it will buy capitalism a lot of time to figure those out in the meantime.

From McKinsey Quarterly – Clouds, big data, and smart assets: Ten tech-enabled business trends to watch

Advancing technologies and their swift adoption are upending traditional business models. Senior executives need to think strategically about how to prepare their organizations for the challenging new environment.

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From McKinsey Quarterly – Competing through data: Three experts offer their game plans

MIT professor Erik Brynjolfsson, Cloudera cofounder Jeff Hammerbacher, and Butler University men’s basketball coach Brad Stevens reflect on the power of data.

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From McKinsey Quarterly – Are you ready for the era of ???big data????

Radical customization, constant experimentation, and novel business models will be new hallmarks of competition as companies capture and analyze huge volumes of data. Here’s what you should know.

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