I recently read a fascinating article in the April issue of Vanity Fair about Michael Burry’s bet against the massive subprime mortgage bubble in the United States. Why was he the only one to find the financial mechanisms to bet against the bubble? The information was out there. The knowledge was not. From the available information, Michael developed the knowledge that ultimately resulted in his fund delivering a net gain of 489% with a profit of $100 million for himself and $725 million for his investors.
For Michael Burry and other fund managers, there was plenty of information out there showing the terminal decline in lending standards. Unlike others, Burry wasn’t satisfied with just the information. He wanted the knowledge that would enable him to bet against the subprime mortgage bubble. To build and manage the knowledge from the available information, and therefore to optimize his fund management business, he spent months scanning and reading mortgage bond prospectuses and pairing that knowledge with the use of credit default swap (CDS) financial instruments. CDS instruments (essentially insurance policies against the defaulting of corporate bonds) enabled Burry to put his knowledge into action and systematically build up a large and successful bet against subprime mortgage bonds.
Burry’s story, like many others, illustrates that having information is not enough. Information (in all forms: electronic, printed, in people’s heads) needs to be processed and managed in a way that elicits and disseminates knowledge. Knowledge management also includes processes and activities that elicit both tacit and explicit knowledge from people in the organization. For example, your company may have people in the field (e.g. repair and service personnel working at customer sites) that have built up valuable field knowledge over the years. Is that knowledge being captured, disseminated and reflected in your current business processes and analytics? If not, you’re missing out on a key avenue for business optimization that could help improve customer service while lowering the costs of delivering that service.
Knowledge Management systems and platforms provide the tools that help capture, classify and disseminate knowledge but they are not the key to capturing knowledge. The key is people. That may be obvious, but it’s not uncommon to see IT systems implemented with the expectation that knowledge will follow. Mining the tacit and explicit knowledge within your organization needs more than an intuitive Knowledge Management system. It needs an approach focused on encouraging and rewarding knowledge contribution. The service professional in the field making service calls needs both a way to easily contribute their knowledge (the “system”), and a reason (the incentive) to contribute their knowledge. Do the service personnel carry hand-held devices that can easily be used to capture knowledge? If not, can hand-held “knowledge capture” devices be effectively introduced into their working practices? Do you instead (or also) schedule regular meetings with service personnel with the explicit agenda of capturing their experiences, information, and feedback in order to dig out and capture tacit knowledge? What do the service personnel receive in return for their additional efforts to record their knowledge? Of course, you don’t have to reward your service personnel for their additional knowledge capture efforts, but you’ll likely find that they contribute less without some kind of incentive. And, if knowledge management is one of the keys to business optimization, it thereby follows that any hindrance to knowledge capture will slow business optimization efforts.
My experiences with many organizations are that knowledge management is ad-hoc and minimal at best. How many times have you heard such questions after someone has left an organization: “How did John …”, “Why did John …”, “How did John figure out …”, etc? Clearly, John’s knowledge was either not captured and/or people aren’t trained to know where to look and/or systems were not in place to effectively capture John’s knowledge. Net result is less than optimal: knowledge is lost, work is redone, inefficiencies continue, mistakes are made, etc. The fix is Knowledge Management, one of the keys to business optimization.