April 2005

Learn to Uncover Hidden Value

Published in the Ark Group magazine "Inside Knowledge" April 2005
By Karl-Erik Sveiby


The main problem with all measurement systems is that it is not possible to measure social phenomena with anything close to scientific accuracy. All systems, including traditional accounting, have to rely on proxies, such as euros and dollars, that are often far removed from the original source of value.

The failure to acknowledge this fundamental problem creates a basic inconsistency between managers’ expectations, the promises made by methodology developers and what the systems can actually achieve.

So entrenched are traditional measurement paradigms that executives and researchers have not even started to explore the most interesting reason for measuring intangibles: the learning motive. The process of measuring can be used to uncover costs or explore value-creation opportunities that are otherwise hidden in traditional accounts. What does the trend of staff turnover tell us? What is the value of the learning that takes place when staff interact with customers? What is hidden behind the fact that the innovation rate in the organisation is going down? What is the value-creation opportunity lost in not spreading best practices?

There is huge potential for value creation in finding the answers to these questions. The learning purpose avoids the manipulation trap. If the purpose is learning, not control or reward, both employees and managers can relax and engage fully. A learning purpose also allows more creativity in the design of metrics, a more process-oriented, bottom-up approach rather than a top-down command.

Six principles can be identified to guide the implementation of a learning-measurement system:

• The process of developing metrics is crucial. The metrics in a learning model should be produced bottom-up, with heavy involvement from all relevant groups;

• The indicators should be used by the same people who produce them, and they should be used to improve their own processes, not anybody else’s;

• The indicators should be openly available to anybody who wants to take part. Confidentiality is anathema to learning;

• If the indicators suggest a difference between, say, a high-performing and a low-performing unit, the units in question should be required to meet. The difference in performance should become the starting point for a dialogue to discover hidden value: are we measuring the same thing? What is it that we can do better? This is a crucial step: the difference in performance becomes an invitation to learning; a common search for hidden value rather than an opportunity to punish or reward;

• Make sure double-loop learning occurs as part of the process. The dialogue should not be considered complete until it also yields ideas on how to improve the indicators themselves;

• The indicators should never become the basis for a reward system. If rewards are to be distributed at all, they should be group-based and allocated to those who make the highest value improvement, i.e., possibly what was previously the lowest performing unit!