Interview of Mikko Arevuo for Knowledge Management Magazine

Who were the earliest pioneers (organisations or individuals) of KM in the financial sector, in your opinion? Who do you feel is leading the way at the moment?

To me the "grand old men" of the KM movement are Leif Edvinsson, Director of Intellectual Capital of Skandia Group and Hubert Saint-Onge, then Vice President of Learning Organisation and Development of Canadian Imperial Bank of Commerce (CIBC). Skandia's Intellectual Capital Navigator was the seminal tool for identifying, managing and measuring the world of intangible, value generating assets of an organisation. Furthermore, Skandia's efforts in KM were catapulted to the public domain when the company published the annual report supplement "Visualising Intellectual Capital" in 1994.
I also remember reading about CIBC's experimental knowledge-based lending group at a time when most City of London bankers and accountants were still debating what depreciation rate should be applied to the "fuzzy" item on corporate balance sheets - goodwill. In contrast, CIBC was trying to define a new way to assess the credit worthiness of knowledge intensive companies by analysing the imbedded value of knowledge assets, rather than adding up tangible assets of a balance sheet and lending a percentage against them.
It is impossible to nominate a clear leader in the KM space as the financial services sector is comprised of numerous entities operating in businesses ranging from cyber-banks to institutional investment management firms to global financial supermarkets all with differing KM programmes and priorities. However, I have been impressed by a number of institutions that are beginning to incorporate knowledge into their corporate philosophy. An example of one such company is Boston based State Street Corporation, an organisation serving institutional investors globally, who describes itself as an "investment technology, information and knowledge company".

What impact has KM had in the financial sector? Has the discipline truly established itself, or is there still a way to go?

I think the way to look at this is to determine why KM is of vital importance to the financial services sector. The sector has been delivered two potentially crippling body blows. Firstly, despite the sector's overall earnings growth and vast increase in economies of scale and scope, the market performance of the financial services industry has been unimpressive with market to book value ratios well below those of most other industries. Secondly, with unprecedented competition and commoditisation of service offer, the traditional ways of doing business seem to be changing, thereby requiring institutions to develop new business models that will provide competitive advantage.
In order to address the first problem, financial institutions need to develop knowledge capital management strategies that develop and harness the quality of intangible assets, and to create transparent metrics that accurately communicate the value of these assets to the investor community. In terms of competitive survival, financial institutions have a choice of two business models; one, that of a commodity supplier with massive economies of scale and scope required to compensate for low margins or, two, that of a differentiator/innovator with a superior service offer. Both require business models that are imbedded in the management of knowledge capital. As a result of the magnitude of the task, I think that most institutions still have a way to go with KM. Most people have examined the concept and whether it is sound and good (or not), but few have pushed the thinking beyond conceptual stages.

In your experience, has take-up been slower or quicker than in other industries? Why do you think this is?

As I alluded to in the previous question, the financial services industry is perhaps going through the most radical transformation of any industry. As a result of this managers have been trying to come to grips with the changing competitive landscape and fighting fires for survival. Many are also reeling from disastrous reengineering initiatives and as KM is often oversold, much as reengineering was, there is a reticence to jump on yet another bandwagon. I must also emphasise that many knowledge management tools do not live up to the promises made. One cannot apply a quick fix, a standard knowledge management tool to every situation and expect it to meet all the company's challenges. But then again, I am advocating a holistic strategic approach to the management of knowledge capital where the organisation is transformed from a production centred entity into a knowledge creating and sharing organisation, where measurement of the results of knowledge capital management are imbedded into a strategic measurement system to ascertain the true value added in terms of improved stakeholder value.

What industry-specific benefits can KM offer organisations in the financial sector?

The benefits are numerous; from increased market to book value by adapting a holistic knowledge capital management strategy to improved processing and administrative efficiency and improved customer satisfaction. In terms of efficiency, think about Skandia who developed a knowledge sharing system for well documented action plans, best practices and market intelligence required for establishing a branch office, put it all on the Intranet, with the quantifiable benefit that the company can now replicate its business success in one country to another without having to start from scratch.
GE Financial Assurance's Investment Services and State Street Corporation have used KM approach to improve customer satisfaction. State Street's French subsidiary has created a rather simple but a very effective solution using an interactive web-site "Discovery Corner" to develop customer risk profiles and then turn these profiles into individually tailored products and programmes to be marketed through targeted on-line offers and direct contact. GE Financial Assurance uses problem-solving checklists to create common definitions and measures of customer requirements. They have then instituted best practices to meet those measures across every part of the organisation to gauge performance against set criteria.
These are just a few examples and by no means financial services sector specific. In fact some of these solutions have been in place in consumer product companies for some time and are now being transferred into financial services. The key for financial institutions who want to differentiate themselves in a hyper competitive market place is, therefore, to create a business model that allows institutions to learn more of their clients' financial picture, use what they learn from this ongoing interaction to innovate and launch products faster and modify those products to a targeted demographic group or target market segment.

Are there also specific problems facing KM implementation in the financial sector?

The money industry is all about money. I would not be far off the mark by saying that financial services companies have viewed money as the panacea for a multitude of problems. If you have a problem with IT, spend some money, if you have a problem with staff retention, pay them more, if sales people do not meet sales targets, revamp the compensation system, if employees do not embrace knowledge sharing, build in a financial incentive and they will. However, after a while the people don't or won't. This is where the problem with installing a knowledge sharing culture comes in. Many sectors within financial services recognise and reward individual achievement above team results. Think about the star dealers in Michael Lewis' "Liars' Poker" or walk into any dealing room or even a tax consultants' office at annual bonus time and you will witness that the heroes are individuals, not teams.

How can/should these be addressed?

Organisational culture cannot be changed overnight and, let's face it, we are dealing with organisational transformation issues. The greatest challenge for successful implementation of a knowledge based strategy is finding the balance which promotes knowledge sharing and collective as well as individual learning, without threatening an individual's personal interests, i.e. financial compensation. The onus is on senior management to initiate a well programmed change initiative, which makes clear the benefits of a knowledge sharing organisation; knowledge sharing improves competitive advantage, it improves cost effectiveness, and it leads to personal growth, and, yes, knowledge sharing will be a performance criteria come annual bonus time.

How much emphasis is placed on KM technologies in the financial sector? Which KM technologies have had, or promise to have, the biggest impact?

This comes back to my earlier point about how KM is presented to organisations and what promises are made by zealous consultants. I attended a recent technology conference in London and counted close to a hundred systems vendors promising to solve your knowledge management problems. Is it surprising then that senior management delegates the implementation of knowledge management strategy to the IT department? The danger of technology based solutions is to rely on them too much. Technology is a vital enabler but it is not knowledge management, it is only a tool for people to manage knowledge. The focus must always be on people as the generators and users of knowledge. Having said this, I do think that various document management and workflow technologies will become more commonplace as will customer relationship management and enterprise management systems.

What will be the most important role of KM in the financial sector in the future? Will adoption rates continue to grow, or do you predict a shift in focus?

The commoditisation of financial services will continue to further depress profit opportunities, making it increasingly difficult for companies to differentiate themselves from the competition. At some point even the technology and the processes of today that enable leading organisations to improve their relationship management will become a commodity. Looking further into the future I anticipate a polarisation of the sector into vast scaled producers of financial services products and highly branded organisations selling products, which have all been, outsourced á la Nike and Tommy Hilfiger. As we know Nike and Tommy Hilfiger are ultra brand companies who in fact do not manufacture anything but subcontract production to outsiders.
Twenty-four hour trading and real-time processing will become the norm and business can be done wherever you have access to a computer, digital organiser or mobile phone, not to mention the fact that access speeds will be quoted in gigabytes per second. Some futurologists estimate humans will reach an absolute attention limit between 2010 and 2020, so that we can no longer cope with the tidal wave of information we are continually bombarded with. Hence, the key for corporate survival is knowledge - how to access it, manage and create it and use it to produce innovative solutions, be it investment funds or personal savings accounts, for an increasingly sophisticated and demanding consumer. And at heart of it is a human mind as an ultimate source of knowledge and innovation.