Knowledge Companies in the USA – Wave of the Future

When judged by official statistics the United States is a service society. 2/3 of all Americans are today working in what is labelled “the service sector”. When looking closer on the services sector we see that The service society is rapidly being replaced by the knowledge society, where more and more of the people are working in the knowledge industries, processing information.

50% of the fastest growing companies in the US are knowledge companies, i.e. they sell the knowledge and the know-how of their employees rather than manufacture products or provide services.

Knowledge companies employ highly educated people, knowledge workers, whose job it is to solve problems for their customers. Most of their time they process information, be it in advertising, management consulting, financial or legal advice, specialist nursing care, programming, systems design, teaching, energy conservation, etc.

The outcome of their information processing is not visible as a product, usually just a few reports or some highly specific advice. The main result is to improve the customer’s business, like a better deal at the court, a less polluted environment, a computer program that performs a task, improved sales or higher efficiency, or even a healthier body.

Not one of the problems is identical

The prime production resources are therefore the knowledge of the staff and their creativity in finding customized solutions. Such solutions can not be bought and sold like bars of soap, nor do the knowledge workers provide a packaged over-the-counter “service” like McDonalds. Instead they tend to work in a close long-term relationship with their customers.

No less than 24% of the fast growing knowledge companies in the United States, are involved in software development. Only 95 of the INC500 – 19% – are manufacturing companies whereas 155 – 31% – are traditional services incl. retail.

The lack of reliable official statistics in this area is notorious. Most of the knowledge companies on the INC 500 list are probably labelled “Business services” in the official statistics.

If we wish to see the future of corporate America, we don’t need a crystal ball or sophisticated forecasts. All you need to do is to visit some of the fast growing knowledge companies. The management styles they are pioneering and the strategies they are pursuing will be on the standard curriculum of the Harvards and the Whartons – but probably not until ten – twenty years from now.

One thing the small knowledge companies have learned – sometimes the hard way – is that knowledge businesses are people businesses and that their most important assets are as invisible as their companies are in the statistics.

If you want to learn how to manage people and intellectual capital, don’t watch the GEs, the GMs or even the Microsofts. Talk to the entrepreneurs and staffs of TGV, (INC40), Mevatec (INC43), Staffing (INC99) or Kestrel (INC118) instead.

Karl E. Sveiby PhD, October 1995

Share of Employment in the United States

(Caution: Some 3% of the categorisations in the INC 500 analysis are uncertain, since I have had to rely on the brief description in the INC500-list, but I do not think this uncertainty distorts the general conclusions).

Source: OECD database Paris

America’s 500 fastest growing companies

The sector Business services in the US has grown steadily over the years and is now employing 18 million people, as many as the whole manufacturing sector.

Do you know what business you are in?

One of the fastest growing business sectors in today’s economy is the knowledge sector – service-oriented companies or departments whose primary product is the knowledge and competence of their employees. (Read more about the knowledge sectors in USA and Australia).

For the knowledge organization, profits are generated through the successful management of intangible assets. This is in sharp contrast to the manufacturing organization, whose profits rely on tangible capital such as machines and factories. The difference is important, because most of the management models used today were inherited from this manufacturing tradition.

Tango provides a model which clarifies the business logic behind the knowledge organization and defines the specific factors which enhance profitability. These include familiar tangible factors such as pricing and capacity, as well as critical intangible factors such as image, know how, personal chemistry and individual competence.

Tango participants see how these intangible factors are directly linked to financial results, and learn practical strategies to manage them.

The biggest mistake a knowledge organisation can make is to exclusively focus on its customers.

Unlike manufacturing industries, the knowledge organization cannot afford to focus too heavily on its customers alone. That is because the knowledge organization constantly competes in two markets: the market for key customers and the market for key employees.

Developing this dual perspective and understanding how it affects corporate profitability is the first step in successfully managing a knowledge organization. Getting your staff to adopt this perspective and apply it to everyday business decisions is the next. Tango helps you do both.

Workshop Demonstration Photo

What is Tango?

Tango (from Lat. I touch) is a unique non-computerized business simulation designed for all decision makers in knowledge organizations. Participants are divided into four-member management teams. Each team is given a company to run for seven annual cycles, pursuing its business strategy in order to maximize profitability. Each team competes with the other teams for the same customers and key personnel. The simulation takes one day or two days (advanced level) to complete.

While factors like image, know-how and personal chemistry are not tangible, they are nonetheless real – particularly in the eyes of customers. Unless a knowledge company can find ways to visualize these intangible factors, it will have a hard time controlling and improving their offering. Managed properly, however, the intangible factors can be powerful assets.

Using simulations and discussion groups, Tango sheds light on intangible assets. It gives them tangible forms with names and values just like any other asset so that for the first time they can be visualized and managed.

Workshop Participation Photo

Participants learn by doing

Tango mirrors the real World. Participants are pitted against other companies who are constantly trying to steal the most valued employees and customers. Participants also test new ideas and see how they affect their company – they learn by doing as they choose their business strategy and then manage their tangible and intangible assets for long-term financial success.

Most importantly, participants learn to strike a balance between attracting the right employees and customers and ensuring adequate profits and cash flow. Taken on their own, these factors would seem relatively easy to manage. But the point of Tango is to demonstrate that none of these factors exists in isolation. Changing any one factor can radically affect the organization’s position in both the customer and employee markets and can eventually affect profitability.

What emerges is a clear understanding of how these factors affect a knowledge organization. Participants are able to apply what they learn to their individual situations leading to greater customer and employee satisfaction, as well as greater financial results.

Participants in Tango learn:

To formulate and implement strategies that incorporate both key people and customers.
To find the balance between increasing your company`s effectiveness and profitability for the short run and enhancing its strength over the long run.
How your company´s profitability (both short-term and long-term relates to investments in personnel, competence and confidence building measures with your customers.
The value of “indirect” marketing, such as customer care attitude and service to influence the company´s reputation. Your customers make their decisions to purchase based in large part on your company´s image.
How to measure success when your product, professional competence, is intangible. [KS1] Why? Because decision making has very little to do with computers. Also because human beings learn through the body. Learning is enhanced by actually being able to physically touch the environment.
Tango is designed for employees on all levels within organizations that do business based on the competence of their personnel. Number of participants: Twelve to twenty-four. Time required: One to two days.

Number of participants: Twelve to twenty-four.

Time required: One to two days.

The material is delivered complete with a simulation model (one per group), material for the participants and support material for the instructor. Instructors are trained and approved by Celemi. We will gladly help train instructors within the company.

Instructors are trained and approved by Celemi. We will gladly help train instructors within the company.

The value of the seminar derives from providing a complete overview of the company and a better understanding of the specific circumstances of knowledge companies, leading to increased effectiveness and success for the company in both the long and short run. Call us or write and we’ll be glad to show you how Tango can rejuvenate your company.

The Intangible Assets Monitor™

Profit as a Yardstick

Measurements of profit are interesting, because they show how much is “left over” for the shareholders, when everything and everybody else have been paid for, and paid. However, as every accountant worth his salt knows, there are so many ways to distort one year´s profit figure that the truth is in the eye of the beholder. Research and development are sometimes treated as an investment, sometimes as a cost. If a company displays increased profit, because of reduction in R&D, is that a real profit or not?

Reported profits of employee-owned companies are customarily very small, since the desire to demonstrate the organization´s success, is more than outweighed by the desire to avoid paying a penny more in company tax than is absolutely necessary. And how do you value work in progress? Hidden factors like invoicing being delayed or brought forward can heavily influence the reported figures. Large effects on the reported profit figures are often due to unidentified changes in intangible assets. This multiply the problems even further. Profits are simply not a good yardstick for comparing companies with large intangible assets. The least helpful profit indicators are Return on Equity or Return on Assets. More useful are Profit in % Sales or (best) Profit in % Value Added.

Profit Margin

Profit margin is a key indicator that describes the profit-generating capacity of the flow of revenue. Profit margin is an important indicator of how attractive it may be to invest money in a knowledge company, but it does not tell much about the actual efficiency of its employees. Nevertheless, profit margin is generally a better measure of efficiency than return on equity or investment, for example, which is totally irrelevant in companies where financial capital plays an insignificant part.

Profit margins vary a great deal from one industry to another. Where profit margin expresses profit as a percentage of turnover, you must try to determine the composition of the revenues, for they may include varying proportions of commissions, expenses, hardware sales, etc. A better way of expressing profit margin is therefore to use the ratio of profit to value added.

Efficiency and Effectiveness

Although often used as synonyms, efficiency and effectiveness measure different things. Efficiency is calculated solely on input variables; effectiveness is calculated with both input, and output variables. Efficiency measures of show how well an organization is using its capacity, regardless of what it produces. A criterion of efficiency, often used by consultancy firms is billable time; time billed to clients, as a proportion of time available. This measures how much time consultants are paid for. It is a simple and good indicator of short term profitability because it measures capacity usage but it says nothing about what the consultants accomplish in that time. Effectiveness measures how well an organization is satisfying the need of those it serves.

The needs of the various parties concerned may, of course, differ; shareholders are interested in dividends; customers are interested in service levels, and quality. Firms should, therefore, employ different efficiency measures, for different audiences. ROI (return on invested capital) is a criterion of efficiency popular in financial circles. It measures profit generated by the capital invested in a company, or a project and is thus a very important indicator of efficiency, to both creditors and the owners of the invested capital. For shareholders, the most important figure is what they earn after tax, in the form dividends on the capital they have put into the company; the return after tax on their own equity, often shortened ROE.

The management must also track the return on the firm´s total capital, and on particular investment projects, so that they can control their allocation of capital. Unfortunately, this technique cannot be applied to intangible assets, so various income statement, and non-monetary measurements, must be used instead to calculate efficiency.

Effectiveness is difficult to measure also because one must often go outside one´s own organization. For measuring customer satisfaction, an important indicator for effectiveness, one must rely on customer polls. Therefore effectiveness is seldom measured. Even if it is not practically possible to measure effectiveness, it is never-the-less valuable to think in effectiveness terms. What gives the most revealing picture of performance? To focus on the costs of people or on the revenues they bring in? Cost focus is efficiency oriented, revenue focus is effectiveness oriented.