By JOHN BERRY

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Attempts to define the nature and purpose of knowledge management and even hang metrics on its impact are headed for a higher plane. Several pioneering academics are seeking to quantify the dollar value of knowledge and its net effect on the balance sheet of a company. IT organizations beware.

It's understood that competitive advantage is gained through the creation and exploitation of knowledge-based assets. The new wrinkle is that knowledge and intellectual assets have become such a large contributor to corporate performance and wealth that the traditional snapshot of financial performance--the balance sheet--offers an incomplete picture.

Here's a rough sketch of the argument. Subtract a company's earnings derived from tangible and financial assets from total earnings, and the remainder is earnings not captured in the traditional science of finance: intellectual and knowledge asset earnings. For some companies, this number is quite small. For companies that depend on R&D, patents, trademarks and blueprints, this number is enormous. Industries that come to mind include media, biotech, software, pharmaceuticals and aerospace.

In one distilled example taken from a CFO magazine white paper, if we take estimated earnings of $5.5 billion at pharmaceutical company Merck, subtract financial and tangible asset earnings of $371 million, more than $5 billion represents the companies knowledge earnings. Is knowing this number important?

A growing body of thinkers says it is. If knowledge/intellectual assets determine the success or failure of a company--clearly so for Merck--we must develop a methodology to capture the value of these assets, because general accounting principles clearly do not. This is sure to be a contentious debate, one that the IT department might find itself in the middle of as it continues to justify knowledge management expenditures to the CFO--who more than likely has yet to buy in to this worldview.

All sorts of metrics cry out for attention, for example, the ratio of intellectual capital to sales or revenue. How about the ratio of intellectual capital to total IT investment?

The danger is for IT to extrapolate its ROI from revenue generated from an intellectual asset--an impulse made stronger when the company attempts to hang a dollar value on intellectual/knowledge assets. What is the proper contribution of IT to intellectual asset creation, whether it be a trademark, patent, blueprint or marketing plan? We might not be much closer to an answer than a couple of years ago. But the growing appreciation of intellectual asset contribution to a company's success demands we find an intellectually honest one--and fast.

John Berry is an IT management consultant and writer based in Bend, Ore. He can be reached at jb@empnet.com.