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Phase 4: Metrics for Evaluation

The last phase involves one step that most companies have been struggling with: measuring business value of KM. When pushed for hard data, managers have often resorted to ill-suited and easily misused approaches, such as cost-benefit analysis, net present value (NPV) evaluation, vague ROI measures, or, at best, Tobin's q. Chapter 14 describes the traps that companies are most vulnerable to and suggests ways to avoid them while devising a robust set of company-specific metrics for KM.

Step 10: Real-Options Analysis for Knowledge Management

The tenth step—measuring ROI—must account for both financial and competitive impacts of KM on your business. This step guides you through the process of selecting an appropriate set of metrics and arriving at a lean but powerful composite. We will use the Nobel Prize- winning real-options approach for analysis. We will also evaluate many ways in which real-options data can be tracked. We also see how successful companies have approached metrics, what errors they have made in the past, and how you can learn from their mistakes.

Being able to measure returns serves two purposes: It arms you with hard data and dollar figures that you can use to prove the impact of effective KM, and it lets you refine KM design through subsequent iterations.

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