Beyond the knowledge management productivity paradox

Artist: Sarah Carter Jenkins www.sarahcarterjenkins

10 Years ago the Knowledge management Handbook stated that few companies were capable to develop a sound business case for knowledge management.

10 Years after, I still encounter in my working environment the same challenge. I call the knowledge managemewnt productitity paradox. The knowledge management productivity paradox is the concept that despite the importance for companies and organizations worldwide, there still seems to be little pay-off.

Knowledge management systems can no longer be viewed as a support service for a business. Knowledge management now has a lead role to play in the strategic planning processes of any organization.

As we move further and further into a knowledge in the network-based working environment, a critical question is how the value of knowledge management can be measured and evaluated!

We saw a similar development in the early nineties. The productivity paradox (also known as the Solow paradox or sometimes the Solow computer paradox) is the theory that computers have contributed negligibly to productivity, and is often summarized with Robert Solow‘s 1987 quip, “You can see the computer age everywhere but in the productivity statistics.”^[1] The paradox has been defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.”^[2] It was widely believed that office automation was boosting labor productivity (or total factor productivity). However, the growth accounts didn’t seem to confirm the idea. From the early 1970s to the time Solow was writing there was a massive slow-down in growth as the machines were becoming ubiquitous. (Other variables in country’s economies were changing simultaneously; growth accounting separates out the improvement in production output using the same capital and labour resources as input by calculating growth in total factor productivity, AKA the “Solow residual“.)

For understanding the paradox, different authors have identified different requirements; Turban, et. al (2008), mention that understanding the paradox requires an understanding of the concept of productivity. Pinsonneault et al. (1998) state that for untangling the paradox an “understanding of how IT usage is related to the nature of managerial work and the context in which it is deployed” is required.

One hypothesis to explain the productivity paradox is that computers are productive, yet their productive gains are realized only after a lag period, during which complementary capital investments must be developed to allow for the use of computers to their full potential. Another hypothesis states that computers are simply not very productivity enhancing because they require time, a scarce complementary human input. This theory holds that although computers perform a variety of tasks, these tasks are not done in any particularly new or efficient manner, but rather they are only done faster. Current data does not confirm the validity of either hypothesis. It could very well be that increases in productivity due to computers is not captured in GDP measures, but rather in quality changes and new products.

Economists have done research in the productivity issue and concluded that there are three possible explanations for the paradox. The explanations can be divided in three categories:

• Data and analytical problems hide ´´productivity-revenues´´. The ratios for input and output are sometimes difficult to measure, especially in the service sector.
• Revenues gained by a company through productivity will be hard to notice because there might be losses in other divisions/departments of the company. So it is again hard to measure the profits made only through investments in productivity.
• Revenues are unnoticed because of losses and expenses: there might be a third possibility; information technology doesn’t raise the productivity. For example: the output can increase with 50%, but if the input increases with 60% there will be a decrease in productivity.

At this moment I agree with Turban’s point of view . Knowledge management is – in his opinion – necessary for improving productivity and quality (similar to Abell’s cost and quality). I would prefer to add flexibility, innovation within the organization and its network.

Artist: Sarah Carter Jenkins www.sarahcarterjenkins