What is Your Organization’s IQ?

What if you were able to measure your organization’s rate of innovation – its ability to build on its knowledge base to grow, increase revenue, and improve productivity?  A professor at the Olin School of Business, Washington University in St. Louis is doing just that: armed with a sizeable National Science Foundation grant (which is pretty rare for a business prof), Dr. Anne Marie Knott is researching how to measure a firm’s IQ to figure out what makes smart organizations tick.  The implications are obviously significant…

Dr. Knott’s work is completely against the academic grain in that it challenges a 20-year-old concept called “absorptive capacity” – the idea that for an organization to assimilate new knowledge, it must have prior knowledge on which to expand.  In other words, absorptive capacity assumes that organizations can only get smarter if they are smart in the first place.  Obviously, this can’t be true.  For example, organizations with little or no knowledge in a particular technology, product, process, or market can acquire another organization that does possess that knowledge.

So rejecting the concept of absorptive capacity, Dr. Knott believed that organizations could benefit greatly from knowing empirically if their investments in research and development were paying off.  I’m labeling R&D broadly, as: making investments in anything from products, services, processes, markets, technology – in fact, one could call it making investments in innovation.  Knowing this information would not only help organizational leaders determine how much to invest in R&D, but it would also suggest how much an organization should spend on acquiring knowledge from other organizations in the event that they needed to close a gap somewhere.

What emerged from this work is the notion of “organizational IQ” – a measurement that quantifies a firm’s effectiveness in generating revenue from R&D expenditures.  Though she’s currently focusing on businesses, I believe Dr. Knott’s work could also apply to nonprofits, educational institutions, healthcare organizations, governmental agencies – to help them measure the return on investment for their outcomes or impact.

Before you close this article and move onto something else because you don’t think it applies to you, consider this: if you were able to accurately quantify your organization’s (or department’s or team’s) effectiveness at innovating – at improving products, services, processes, or virtually anything else in your enterprise – wouldn’t that help you set action plans and budgets that enable you to invest at the “right” levels to generate a desired return?  And if you were able to actually measure your organization’s (or department’s or team’s) IQ, wouldn’t that help you monitor improvements over time – of whether or not your organization was getting smarter?

It would have helped Hewlett Packard.  Knott used her IQ tool to explain the harmful impact that former CEO Mark Hurd’s decisions had on HP’s intelligence.  According to Knott’s calculations (and as reported in the June 2011 Washington Magazine), for most of the 25 years leading up to Hurd’s tenure, HP had an IQ of about 159 – yes, that’s in the “genius” range for humans.  Why?  HP was brilliant at innovation, mainly thanks to highly effective research and development practices.  One could also argue that they had a keen ability to allocate appropriate budget levels to sustain this R&D – that they had figured out the “right” levels of investment to keep their knowledge at a level required for continued innovation, growth, and sustained competitive advantage.

However, by the time that Hurd took over, the effectiveness of HP’s R&D had declined.  Rather than focus on innovating, succeeding CEO Carly Fiorina had sold off the “smartest” parts of Hewlett Packard – those divisions that were successful at innovating – and bought companies that simply weren’t as smart.  As a result, Knott calculates that HP’s organizational IQ dropped to 83 – that’s below average according to educational and psychiatric labels.

According to Knott: “The irony is that given Hewlett Packard’s current IQ, it is grossly over-investing in R&D – that is like buying books for someone who cannot read” she says.

Knott’s goal for organizational IQ is to ultimately provide a tool to help firms determine if they have the right stuff to turn research and development investments into profits (or, in the case of nonprofits, into growth of mission, impact, and so forth).  Knott predicts that IQ information will provide useful data for organizations because “…once you know your IQ,” according to Knott, “you can actually start to improve it.”  In essence, your organization can indeed get smarter.

And that leads to a positive cyclical pattern: smarter, more efficient firms will in turn generate more innovation.  According to Knott: “Economic growth comes from innovation, and R&D is the biggest source of innovation.  So if we can get each firm to increase their IQ a little bit, that will lead to a permanent increase in economic growth.”

Some things are incredibly difficult to measure – like organizational knowledge, effectiveness in innovation, and return on investment of the “soft stuff” like marketing and employee development.  But as Dr. Knott is proving, even hard-to-measure soft stuff can be measured.  And if it can be measured, it can be tracked, managed, and improved.

Interestingly, both Performance Improvement Network sessions in March focus on organizational measurement: March 1 (Minneapolis) will feature the National Marrow Donor Program’s use of Balanced Scorecard and March 14 (St. Paul) will feature Perry Parendo’s insights on decision making with data.  Information on both sessions is w or at http://www.councilforquality.org/performance_current.cfm.  And these discussions are – as always – free for members of the Council (and open to non-members for a small fee).

Yours in Improvement,

Brian S. Lassiter
President, Performance Excellence Network (formerly Minnesota Council for Quality)