Academy ol ManagemenI Executive. 1998, Vol. 12, No, 4

Managing knowledge in globalservice firms: Centers of

excellence

Kail Moore and Julian Biikinshaw

Executive OverviewService firms that are global players benefit primarily from their ability to manage

their proprietary knowledge—assimilating new knowledge from around the world,building new knowledge through the interaction of professional employees, anddisseminating knowledge effectively throughout the firm. Centers of excellencerepresent the best practice of managing knowledge. Formally charged with theresponsibility of leveraging and/or making knowledge available throughout the firm,the center of excellence provides a focal point for knowledge development anddissemination and replaces an old-fashioned reliance on informal, word-of-mouthmechanisms. However, a center also raises substantial organizational andmotivational challenges.

Building Global Competitiveness in ServiceFirms

Electra Services Europe^ undertook a major reor-ganization in 1994, replacing its old country-fo-cused operations with Europe-wide businessunits. For John Skelton, the new head of corpo-rate marketing in Brussels, the change was anopportunity to seek out and leverage the pocketsof expertise that he knew existed in Electra Eu-rope. Using his extensive personal network,Skelton put together a list of best-practices incore marketing activities: the key account man-agement guru was based in Stockholm; the Lon-don unit had leading-edge groups in businessintelligence and customer loyalty measurement;database marketing was done best in Paris, andso on. These and others were designated as cen-ters of excellence, on whose leading-edge exper-tise in core marketing areas other units through-out Europe could draw.

Three years later, Electra's Center of Excellencemodel was only a partial success. Some centersare funded by the local country, so their prioritiestend to be towards helping local colleagues; somehave attempted to charge for their services, buthave found that administering the billing systemtakes half their time; and a few are funded through

Brussels, but there is great reluctance at a topmanagement level to increase the size of the head-quarters group. Visibility is also a problem: whilethe centers of excellence are well-known in theirlocal markets and in a few business units, thelarge majority of Electra's European operations arestill ignorant of them, and of the expertise theyoffer.

Electra's story illustrates challenges facingmany global service firms. Unlike manufacturingfirms that can rely on patented technologies orunique products, service firms gain their competi-tive advantage primarily through their ability tomake use of their proprietary knowledge on aglobal scale. Electra, like many other firms, hasadopted the center of excellence model as a wayof more effectively exploiting its geographically-dispersed expertise. While the advantages of theapproach are many, the management problems itpresents are substantial.

We conducted interviews in eighteen global ser-vice firms (Table 1) in the consulting, engineering,financial services, and transportation sectors. Wedefine a center of excellence^ as a small group ofindividuals recognized for their leading-edge, stra-tegically-valuable knowledge, and mandated toleverage and/or make that knowledge availablethroughout the global firm.

82

Company

Andersen

BovisBullCitibankDHLElectra

Ernsl & YoungKPMGIBM

McKinsey & Company

Monitor

Oxford Univ. PressP&ORoyal 8f Sun AllianceSkandiaUnisys

Academy of Management Executive

Home Country

USA

UKFranceUSANetherlandsUSA

USAUSAtmUSA

USA

UKUKUKSwedenUSA

Table 1The Firms Studied

Industry Sector

Consulting

ConstructionConsulting/ITBankingExpress DeliveryMarketing services

AccountingConsultingConsulting/IT

Consulting

Consulting

PublishingShippingInsuranceInsuranceConsulting/TT

Types of Centersidentified

FocusedVirtualCharismaticFocusedFocusedVirtualFocusedFocusedCharismaticFocusedVirtualVirtualCharismaticFocusedVirtualFocusedVirtualFocused 1FocusedFocusedFocusedFocusedVirtualPhysical Location

November

Number ofinterviews

8

3332S

117

2

2

24334

Knowledge Production in the Global Service Firm

The advantages of global reach to manufacturingcompanies are self-apparent. Materials can besourced from the lowest-cost location; manufactur-ing plants can be built to serve multiple nationalmarkets; R&D costs can be amortized over a muchbroader customer base than before. For servicefirms,^ however, the benefits of globalization aremore equivocal. If we think in terms of a valuechain of activities, global service firms typicallyreplicate the entire value chain in each country ofoperation, rather than centralizing certain parts inthe lowest-cost country.•* Competitive advantage isgained not through the sharing of activities butthrough the transfer of intangible assets fromcountry to country. These intangible assets include

Competitive advantage is gained notthrough the sharing of activities butthrough the transfer of intangible assetsfrom country to country,

the corporate name, image and reputation, propri-etary services, operating procedures, and know-how about key customer bases. Increasingly, thesource of these intangible assets is not the head-

quarters of the firm, but the various affiliate com-panies around the world. Top management's taskis to develop, leverage, and disseminate knowledgeon a worldwide basis, and to foster an environmentin which intercountry learning can occur.^

For a global service firm, new knowledgecomes primarily from interactions with clients,and interactions between team members aroundthe world.^ Client interactions represent a two-way flow of knowledge, in which the service firmuses its expertise to address a client's needs,enhancing and sharpening that expertisethrough usage. To the extent that market needscontinue to evolve, this form of interaction iscentral to the knowledge creation process. Asone respondent explained:

Things pop out of the woodwork in our or-ganization because of something at a cli-ent's site, which are then socialized throughthe community over time . . . . At some stagesomeone says, this is a significant amount ofwork being done, we are responding well to it,and making money; what we now need to do isformalize the competence . . . A lot of the beststuff gets created in the client's environment.It's usually a response to a real problem.

1998 Moore and Birkinsbaw 83

This market understanding is perhaps evenmore valuable in a global firm where there exists agreater range of opportunities to learn from a morediverse set of customer needs. Few headquartersorganizations can keep up with the rapid changesin their global market. Firm headquarters wereonce urged to tap into the learning of their foreignaffiliates' interactions with customers around theworld.' The experience of top firms, however, sug-gests that merely tapping into the affiliates is nolonger sufficient. Service firms need to move to thenext stage of global development in which theknowledge and ideas emanating from affiliatecompanies are leveraged and utilized in situ ratherthan simply being brought back to headquarters.

The other key source of innovations is the inter-action of internal teams as they fulfill client needs.Team members combine and build on prior expe-riences to create new techniques or ideas. Butthese creative solutions are often not shared withother teams in their own country, let alone glo-bally. Even the individual team members tend tolose the knowledge over time unless it is somehowinstitutionalized into the system.

To harness these two powerful sources of inno-vation and learning, global service firms haveadopted a number of approaches—enriching the

airline industry by flying employees around theworld for meetings, pouring millions into group-ware such as Lotus Notes, staging video confer-ences, and mailing client proposals and reports tonumerous recipients. Though these solutions havecontributed something, centers of excellence haveemerged as an organizational innovation thatbrings greater focus to the effort to harness world-wide learning.

Figure 1 illustrates the concept of a center ofexcellence. Traditionally, many global servicefirms adopted one of two basic organizationalmodels. One was a center-driven approach inwhich the foreign affiliates were seen as adaptingcentrally-created services to their local clients'needs. The other was a country-focused approachin which the various foreign units shared a corpo-rate name, but undertook their work with little orno interaction with their affiliates around theworld.^ As firms moved toward a more global or-ganizational model, an informal network typicallyemerged in which individuals developed contactsthrough their work in international teams and theirattendance at group-wide events. Such networkswere invaluable as a means of spreading ideas,but the spread was restricted to existing relation-ships. Thus, when John in London won a telecom-

1. Center-driven knowledge development

3. Knowledge development throughemergence of iniormal network

2. Country-focused knowledge development

4. Knowledge development usingcenter of excellence

FIGURE 1Models of organization in global service firms

84 Academy of Management Executive November

munications contract, he would call his old ac-quaintance, Deborah, in New York to find out abouther experiences with similar jobs. But his counter-parts in Stockholm or Tokyo might have had farmore relevant and valuable expertise in that area.Most service firms have recognized that relying oninformal networks is not sufficient and that moreformalized approaches to knowledge managementcan enhance both the quantity and quality of theknowledge flows throughout the firm.

What is a Center of Excellence?

A good example of a center of excellence is a majorengineering company's center for airport construc-tion. This small unit, based in London, comprisesthe firm's leading experts in airport constructionand the records of all previous airport projectsundertaken around the world. The unit has no for-mal authority over the activities of other affiliates,but it is frequently called on to help with newprojects, such as the new airport in Hong Kong. Asa senior manager explained:

When there are markets that require quite ahigh degree of specialized knowledge, to ac-cess clients, to bring presentational skills ortechnology know-how in, then we create cen-ters of excellence.

We identified three distinct types of centers of ex-cellence in our research, but all shared a numberof common themes. First, centers were establishedonly in areas that top management felt to be ofstrategic importance to the firm. Second, the heartof each center of excellence was the leading-edgeknowledge of a small number of individuals {be-tween one and ten) responsible for the continualmaintenance and upgrading of the knowledge inquestion. Third, the centers of excellence all hadan implicit dual role—to leverage and/or transfertheir current leading-edge capabilities, and to con-tinually fine-tune and enhance those capabilitiesso that they remained state-of-the-art. Clearly thebalancing act that stems from managing these tworather different activities is far from easy, but it isprobably more difficult still to separate them.

Finally, many centers of excellence were not—despite their name—fixed in a single geographiclocation. Some consisted of a small number of in-dividuals living in multiple locations but regularlymeeting on projects and at conferences. Othersconsisted of a larger number of individuals con-nected primarily through their firms' groupware orIntranet. While there are clear drawbacks to suchconfigurations, the firms in our study saw the geo-

graphical dispersion of their centers of excellenceas a great strength, because it allowed them toexploit their global reach. Group members, it wasargued, can learn from one another, tap into op-portunities in multiple markets, and quickly com-bine their resources in ways that less globally-minded firms cannot.

But the centers of excellence we studied werealso rather different from one another on a numberof dimensions. Each firm had to some degreeadopted its own approach, but we were able todiscern three generic types of centers of excellence(Table 2} that we have labelled Charismatic, Fo-cused and Virtual.

Charismatic Centers of ExceJJence

Charismatic centers of excellence are simply indi-viduals who are internationally recognized fortheir knowledge or expertise in a certain area.These individuals can be brought in from outsideor they can emerge as experts in the course of theircareers with the firm. In two consulting firms westudied, senior professors had been hired from ac-ademic positions to provide visionary concepts

Charismatic centers of excellence aresimply individuals who areinternationally recognized for theirknowledge or expertise in a certain area,

and greater legitimacy to the practice area inquestion. By contrast, two investment banks pre-ferred to identify their stars internally, and assignthem as centers of excellence. At Chase Manhat-tan Bank, for example, the approach was describedas follows:

One concept we're pushing is centers of ex-cellence. We're breaking down the varioustechnologies into categories. Within eachgroup will be what we call top guns. Theseare the individuals who are recognized lead-ers in their discipline, who can be called on toanswer questions or provide advice in theirarea of expertise . . . A top gun would thenevaluate a new product, and share the resultsof the analysis within the bank's technicalcommunity.^

The objective of the charismatic center is to le-verage the expertise of the key individual as effec-tively as possible. He or she typically travels agreat deal, performing advisory roles in a rela-

1998 Moore and Biikinshaw 85

Table 2Characteristics of Four Types of Centers

Charismatic Center Focused Center Virtual Center

Nature ofknowledge/capability

Manifestation ol center

Primary purpose oi center

How is center formed?

How is center utilized?

One "guru," internationallyrecognized for his/herknowledge

One person plusadministrative support.Based in one place, buttravels frequently

Leverage the individual'sexpertise on a global basis

Individual speciallydesignated or hired forleading expertise

Individual is called upon toadvise on projects anddisseminate his/herknowledge

Leading edge practicedeveloped by small team ina single location

Small group (3-10) people plussupport. Based in one place,but travel frequently

Identify emerging practisesand make them availableglobally

Emerges from project work

Individuals in center transfertheir practice to others

Leading edge practice held bya larger group in severallocations

Large group of people inmultiple locations. Access tocommon database, andproprietary tools.

Build and leverage leadingedge practice through aformalized system

Designated by topmanagement, often as aresult of project work

Knowledge is codified androutinized; people draw fromcollectively held body ofknowledge

tively large number of projects, but not gettinginvolved in the details of any. For example, weobserved that it is common at McKinsey to haveconsulting directors attached to projects who actas expert advisors to the project team. Charismaticcenters will have support staff at their home officelocation but usually no professional staff otherthan the key individual.

Charismatic centers have another objective,namely the transfer of the star individual's knowl-edge to other professional employees. Especiallywhen an individual has been brought in from out-side, the objective is clearly to build a capability inthe firm that had been lacking. Rather than a cod-ification process,'^ however, the transfer is muchmore likely to be achieved through the key individ-ual's working with colleagues on projects, almostin a master-apprentice relationship.

Focused Centers of Excellence

Focused centers of excellence, the most commontype, are typically based around a single area ofknowledge, also called a capability or best prac-tice. The objective, broadly stated, is to identifyand build on emerging knowledge and make itavailable globally. Andersen Consulting, for ex-ample, has a multimedia center of excellence inWindsor, UK, consisting of a small group of con-sultants who are responsible for building the firm'scapability in multimedia technology. Electra, asmentioned earlier, has focused centers in London,Paris, Stockholm, and Milan for various corporatemarketing services. These centers have a clearlyidentifiable physical location, but it is understood

that the individuals that are part of the center willtravel frequently, to ensure that their expertise ismade available to other affiliates around theworld. It is also possible that focused centers willattract individuals who do not actually live in thehome base for the center, though such cases typi-cally end up becoming more like virtual centers(see below).

Focused centers of excellence typically emergethrough project or client work. In one insurancefirm we studied, the South African operation haddeveloped a center of excellence in direct market-ing through its efforts to get around the country'sweak infrastructure. In McKinsey, the Business toBusiness marketing center of excellence grew outof a set of techniques that were developed over aseries of client projects." It appears that the pro-cess in the early stages is usually somewhat hap-hazard, but at a critical juncture the decision ismade to recognize the center, and to put someadditional resources behind it.

Once established, focused centers appear to beused in two distinct ways. One approach is to le-verage the core individuals' expertise by bringingthem onto related projects around the world asadvisors. As one respondent explained:

We encourage people throughout the organi-zation to go to (the key people in the center ofexcellence) to seek their advice on a client, onhow to put a proposal together, on pricing, ontechnical jargon, on other firms with whom tocollaborate. They will try to be leveragingtheir skills through people in the other partsof the company.

Academy of Management Executive November

The other approach is for individuals in the centerto disseminate their capability to others in the firmthrough the development of materials and trainingcourses. This approach appears to work betterwhen the capability can be routinized. Howeverthe two approaches are also somewhat comple-mentary, and in most cases the center of excel-lence managers we spoke to appeared to be lever-aging their capability and disseminating it at thesame time.

Virtual Centers of Excellence

In Virtual centers of excellence,'^ the core individ-uals live and work in different cities, and whilethey all know one another and meet intermittently,their principle means of interaction is throughelectronic media. Of necessity, virtual centers relyto a large degree on the codification of their knowl-edge base. Unlike focused centers, in which thecore individuals work together to build a mutuallyheld but tacit body of knowledge, virtual centerscan function effectively only if knowledge isshared through computer databases and certainproprietary tools.^^

What does a virtual center look like? The mostobvious manifestation is actually the codified ele-ment: the systems, tools and methods that the vir-tual center has developed over its lifetime. At thesame time, it should be clear that a computer sys-tem is not a virtual center, unless the system inquestion is maintained, renewed and owned bythe individuals who have the leading edge knowl-edge. In other words, it is not the system pei se thatis the virtual center, it is the individuals' collectiveknowledge coupled with the codified part of theirknowledge in the system that constitutes the vir-tual center.

Virtual centers offer two important advantagesover focused centers. The first is that they repre-sent a system through which key individuals livingin different parts of the world can keep in touchand share their knowledge. From the interviewswe conducted, it seems this function works onlyonce the individuals in question know one another.As one respondent observed:

It is possible to work electronically withsomeone you have never met, but once youhave got to know the other person you can befar more effective. The quality of the interac-tion improves by an order of magnitude.

The second advantage of virtual centers is thatthey bring in more individuals than could possiblywork together as a single team, and eventually

institutionalize some of the knowledge developedin the virtual center. Taken to its natural conclu-sion, in fact, some elements of knowledge becomeso widely known and well understood that theybecome common knowledge—part of the firm'sstandard operating procedures, or routines.'''Andersen Consulting, for example, talks about theshift from competence to capability, where compe-tence refers to a group of 15-20 people with a cer-tain skill, and capability to a group of 300-500.

Andersen Consulting, for example, talksabout the shift from competence tocapability, where competence refers to agroup of 15-20 people with a certainskill, and capability to a group of 300-500,

Not all virtual centers follow this evolutionarypath towards a firm-wide institutionalization ofknowledge. Some types of knowledge are, by theirnature, hard to codify and thus remain the naturalproclivity of a few experts. But other types ofknowledge, such as the tools and systems devel-oped by consulting companies, are well-suited tothis cycle of discovery, development, fine-tuning,formalization, and institutionalization, and thuslend themselves very nicely to the evolutionarymodel described here. The virtual center of excel-lence has a very special role in such cases, be-cause it has to develop a body of knowledge, grad-ually include more and more individuals in thefine-tuning and formalization of that knowledge,and then be prepared to let go once its usage hasbeen institutionalized in the firm.

Comparing the Three Types of Centers ofExcellence

We can compare the three types of centers in termsof the characteristics of their knowledge bases.Figure 2 maps them according to, (a) how codifi-able their knowledge is, i.e. the degree to whichthe knowledge can be written down in procedures,manuals and models, and (b) the specificity of theknowledge to the firm, i.e. the extent to which theknowledge is proprietary and specific rather thangeneral and widely held.

Both focused and virtual centers represent ex-tremely firm-specific knowledge. Their knowledgebases typically emerge through client interactionsand they are therefore embedded in a firm's par-ticular way of doing business. The difference be-tween the two, as we have already noted, is that

1998 Moore and Biikinshaw 87

High

Specificity oftnowledga to

the Firm

Low

( FOCUSED \I CENTER r

1

r\

\\ CHARIS- \

MATJC\ CENTER /

/ ^ — ^

J VIRTUAL ]I CENTER j

^ - - ^

Ik1

V\ 1

\ J _

;' Publicly-held ';~"''. Databases

Low HighCodifiability of Knowledge

FIGURE 2Comparison of four types according to knowledge

characteristicsNB: Arrow indicates possible evolutionary trajectory.E.g., focused centers could evolve into virtual centers

virtual centers involve more people and are moregeographically dispersed, which leads to a greaterdegree of codification of the underlying knowl-edge. In our experience, virtual centers tend toevolve out of focused centers along the evolution-ary lines discussed earlier, but one could also seethem evolving from charismatic centers as well.

Charismatic centers have a very low level ofcodifiability and, typically, a low level of firmspecificity. A clear indicator of a low level of firmspecificity is to ask: could this individual be asvaluable to a competitor as he/she is to us? Incases where independent consultants or profes-sors are brought in to head up a new center in afirm, the answer would certainly be yes. In caseswhere the individual is internationally recognizedand well connected to the firm's internal network,the answer is only partially yes. Thus, we canenvisage some breadth to the positioning of char-ismatic centers on figure 2. In terms of evolution,one would expect a charismatic center's knowl-edge to become more firm-specific over time, butprobably not codified. However, the expectation inmany firms was that charismatic centers shoulduse their expertise to inform and build focusedcenters, for example by transferring some of theirknowledge to a number of other key individuals.

What sort of center lies in the lower-right quad-rant of figure 2? These are essentially public-source databases, such as those that can be foundon the Internet or on CD-ROMs. These databasesare not firm-specific, but the knowledge they con-tain is highly codified. Of course, such knowledge

bases can be extremely valuable to the mainte-nance of charismatic, focused, and virtual centers.At the same time, they are clearly not centers ofexcellence because they are not proprietary to thefirm.

When should a firm use a particular type ofcenter? As the above analysis indicates, the threetypes of centers represent different but comple-mentary approaches to managing knowledge. Fo-cused centers represent an effective way of lever-aging existing knowledge bases by raising theprofile of specific groups of individuals and mak-ing their knowledge available worldwide. Charis-matic centers are very effective when a firm wantsto leverage the unique capabilities of its star per-formers; they can also be used as a means of rais-ing the profile of a practice area by bringing in awell-known outsider. Virtual centers represent aneffective way of bringing together the knowledgeof a group of dispersed individuals, integrating itinto a coherent whole, and disseminating itthroughout the firm. More broadly, we suggest thatfirms need to think in terms of their entire knowl-edge profile—what they have, what is needed, howcodifiable it is, how firm-specific, and so on. Aswith most of the firms in our study, some combina-tion of different types of centers is usually neededto cover the breadth of knowledge demands firmsare dealing with.

Other Manifestations of Centers of Excellence

Before finishing this section, we have to acknowl-edge one other common manifestation of centers ofexcellence, namely physical centers with an im-portant knowledge-development role. For exam-ple, the Swedish Insurance firm Skandia built aFuture Center just outside Stockholm with com-pany exhibits, future concepts in insurance ser-vices, and facilities for planning meetings and de-velopment courses. The Future Center is usedinternally, as a place where new ideas are devel-oped and tried out, and externally, as a placewhere potential customers can see Skandia's vi-sion of the future. Other companies have estab-lished various learning centers. One consultingfirm we spoke to had created a Thought Leader-ship Center in California. The Bank of Montrealbuilt a Learning Center just outside Toronto.

Such examples, however, do not fit our definitionof centers of excellence. While many leading-edgeideas are developed at these centers, it is thegroups that did the developing, not the building inwhich they were developed. Physical entities likeSkandia's Future Center may provide the stimulusfor the emergence of virtual centers of excellence.

Academy of Management Executive November

but they cannot be considered centers in their ownright.

Physical centers do offer one important insightinto the center of excellence phenomenon. A cen-tral feature of such centers is that they are createdthrough a top-down decision to build new knowl-edge, rather than the more bottom-up process ofidentifying and recognizing existing bodies ofknowledge that is typical in focused and virtualcenters. If physical centers do indeed inspire theemergence of genuine centers of excellence, theycan perhaps be seen as strategic investments inthe future, perhaps as a means of building knowl-edge areas that senior management have judgedto be lacking. When thinking in terms of the firms'entire knowledge profile, then, physical centersprovide a useful complement to charismatic cen-ters of excellence as a means of stimulating thedevelopment of new knowledge.

The Center of Excellence Life-Cycle

For most of the firms we talked to, centers of excel-lence were seen as living organisms that emergedto fill a specific need and that would one dayevolve or die out. In the words of one manager,"there was no intention to create a permanentsomething, because this is where the skills are . . .(Rather) we see it as a transitory four to five yearphenomenon." Our study found cases of birth,death, and evolution, and a number of importantsuggestions about how the cycle should be man-aged.

Establishing New Centers of Excellence

Most firms have gone through a process of devel-oping informal networks with de facto centers thatlead the knowledge accumulation and dissemina-tion process. The question here is really whetherand when a more formalized center of excellencemodel be adopted. As we see it, a center of excel-lence requires both recognition and resources for itto move beyond an informal system. Recognitionmeans communicating to staff worldwide that thecenter in question has an important strategic role.Resources means building the appropriate supportsystems and gaining access to the necessary staffto make the center viable.

Centers of excellence, we suggest, should beestablished on the basis of strategic importance.Firms need to focus their resources where they aremost valued. As one manager explained: "If themarket place says infrastructure projects are bignow, we will develop a center of excellence forinfrastructure projects. If nobody is doing theme

parks, then that goes to go to the bottom of the list."Particularly in cases where the level of resourcescommitted to a center is high (e.g., making severalprofessional employees full time center employ-ees) the strategic payoff has to be substantial. Fur-thermore, there is a question of focus. Centers ofexcellence need to be visible if they are to beeffective, and visibility will obviously be compro-mised if they are fighting for space in the firm'snewsletter or there appear to be several centersdoing similar things. One way of circumventingthis problem, of course, is through powerful infor-mation systems that help employees to target theknowledge they need.

Centers of excellence need to be visibleif they are to be effective, and visibilitywill obviously be compromised if theyare fighting for space in the firm'snewsletter or there appear to be severalcenters doing similar things.

Centers of excellence are formed through twodifferent processes. The more common is a bot-tom-up emergent process, in which top manage-ment formally recognize the importance of an ex-isting knowledge base. Such cases rely on theentrepreneurial spirit of the core individuals, andthe mentorship of a senior manager, to get noticed,rather than any sort of central-planning system.This process is most often seen in focused centers,and to a lesser degree in charismatic centers.

The alternative process is top-down, in that it isdriven by senior management's recognition thatcertain knowledge areas need to be actively devel-oped within the firm. Some charismatic centersemerge in this way, in that they are industry ex-perts hired by the firm for their specific knowledge.Virtual centers also exhibit a top-down process to alarge degree, because it takes a conscious andsustained effort to make them work. The more ad-vanced process of knowledge institutionalizationis, in particular, one that is likely to occur onlythrough top management sponsorship.

Building and Maintaining the Center ofExcellence

The center's primary role is to leverage or makeavailable its distinctive knowledge base through-out the firm. It also has the less visible but equallyimportant role of continuously sharpening itsknowledge to ensure that it stays on the leadingedge. Unfortunately, the former role tends to drive

1998 Moore and Birkinsbaw 89

out the latter, simply because most center of excel-lence managers are very busy. It is much easier toput off a conference or a planning retreat than thedemands of colleagues from around the world.Building the center of excellence thus becomes afrequently neglected duty.

In all three types of centers, the key individualskept their knowledge sharp through project andclient interaction. In many cases they also at-tended international conferences, read the rele-vant journals, and built up networks of outsiders toensure that they were on top of the latest trends.Virtual centers, in addition, were maintainedthrough the continuous updating of their commondatabase, and through the enhancement of the ex-isting set of tools and concepts.

How much time should be spent on exploitingthe existing knowledge base and how much onexploring new ones? In charismatic and focusedcenters the emphasis should clearly be on exploit-ing, given that a certain amount of exploration willhappen naturally in the course of project work. Invirtual centers, however, the level of explorationshould be much higher, because the objective ofsuch centers is to bring together and integrateknowledge. Even in virtual centers, however, peo-ple we spoke to were happy if they could devoteeven one quarter of their time to the more forward-looking part of their job.

The End of the Life-Cycle: Renewal or Closure?

The third stage of the life-cycle has not yet re-ceived much attention, even in cutting edge ser-vice firms that have used centers of excellence fora few years. As is the case in any organizationalform, it is perhaps harder to end something thenstart it. Empires are built, resources are committedand a sense of identity develops around the center.But over time, the value of the center is likely todiminish, In some cases, the knowledge in ques-tion may have been disseminated throughout thefirm, in which case the center will have workeditself out of a job. One engineering firm explainedits philosophy on the center of excellence life-cyclethus:

How long do they last? About 40 years. Thereare one or two that basically have just diedout. Tall buildings was one . . . its not that wedon't do any tall buildings, its just that wehave enough experience globally that wedon't need it as a center of excellence. Be-cause what made it a specialist is now com-mon knowledge, it's widely dispersed.

In this case, the tall building center of excellenceceased to exist, and the staff transferred its atten-tion to other projects. In other cases, focused andcharismatic centers evolved into virtual centers.Interestingly, we saw no cases of virtual centers'dying out, despite the earlier logic that they couldlose their reason for being if their knowledge basebecame widely disseminated. Perhaps no exam-ples had existed for long enough for us to see theprocess run its course.

The other reason for centers to die out is whentheir knowledge base is eclipsed by others or be-comes less relevant in a new competitive environ-ment. Where centers are set up according to indus-tries or technologies, it is to be expected thatdemand for services in the various industries andtechnologies will vary over time. New centers aretherefore established to meet emerging client de-mands, and old centers are allowed to die out.

Managing the closure of a center of excellence isactually far easier than it sounds, simply becausethe center is typically a small number of profes-sionals, most of whom have adaptable skills thatcan be transferred to other areas of the business.

Managing the closure of a center ofexcellence is actually far easier than itsounds, simply because the center istypically a small number ofprofessionals, most of whom haveadaptable skills that can be transferredto other areas of the business.

Moreover, rather than thinking in terms of closure,the preferred model we identified can best betermed renewal. Here, the individuals in the centerwere actively looking ahead, and seeking out newareas into which the existing center could evolve.The comments of one consulting company respon-dent exemplify this issue very effectively:

Each of the competencies and market units(i.e. centers) are responsible for constantly re-energizing their capability. There is a con-stant pressure to look for new areas of prac-tice and to look for and create an investmentprogram for taking them from initial ideasinto substantial capabilities around theworld.

In the firms we studied, little attention had beengiven to the center of excellence life-cycle, presum-ably because most were still in the very earlystages of using the concept. But clearly this will

90 Academy oi Management Executive November

have to change. For most firms, the best approachis probably to actively manage the life-cycle, totarget new areas of knowledge that need to bedeveloped or disseminated, and to identify thosethat are no longer a strategic priority. The alterna-tive is to let the birth and death of centers of ex-cellence take care of itself, almost through a com-petitive process of natural selection. We have seenthis work in a couple of firms, but it is risky be-cause it can engender the development of a secre-tive, noncooperative culture.

Motivations and Incentives

A consistent and recurring problem in managingcenters of excellence appears to be one of motiva-tion. Most of the individuals we talked to had anexisting responsibility that was measured, for ex-ample, in terms of billable hours, and a center ofexcellence responsibility on top that was not for-mally measured. These individuals obviouslyknew that their center of excellence was important,but if the compensation and reward system fa-vored their existing responsibilities, it was veryclear which part of their work would get neglectedwhen time was short.

A consistent and recurring problem inmanaging centers of excellence appearsto be one of motivation.

How can firms get around this motivationalproblem? We heard conflicting stories during theresearch. Some respondents saw the center of ex-cellence model working as it is, with no changes toincentive systems. They argued that the motiva-tion comes from within:

They get a little bit in the newspaper, theydon't get paid any more . . . They are thoughtof as having superior knowledge or experi-ence in that particular area, and people wantto talk to them.

The more usual view, however, was that systemsneed to be created to build individual motivation.One approach, in theory, is to manipulate the hardsystems, such as reporting structures, appraisalsystems, and bonus packages. However, we sawno evidence for this occurring, presumably be-cause firms are worried that such structures woulddetract from the primary responsibilities of profes-sional employees. The only structural change weobserved was where one individual was given full-

time responsibility for managing a center—for ex-ample, McKinsey's industry specialists. This wasattempted only in cases where the center in ques-tion was broad enough in scope that it could with-stand the cost of full-time professional staff. Inmost cases, centers were deliberately kept lean.

Most firms, instead, preferred to work on the softsystems, those relating to the social community ofwhich the employees are part. As explained by onerespondent:

. . . We need to understand what creates thebehavior of knowledge sharing . . . This is thesocialization of people actually knowing eachother. Because I am more likely to respond toa request (from a colleague) if I know him, ifhe's a good guy. I am going to respond be-cause I know he'd do the same for me, but ifI've never heard of him, maybe I'll get to ittomorrow . . .

I

Such an approach may not be entirely satisfactoryeither, but in essence it is the direction most firmsseem to be going. Firms are making small conces-sions to the hard elements of the organization,such as formal acknowledgment of centers of ex-cellence elements on annual appraisals, but work-ing primarily on the softer elements. These firmshad developed organizational cultures in w^hichmany professionals appeared to be willing to con-tribute with virtually no formal recognition. Whatseemed to be encouraging them was a sense thatthey needed to put something back in the systembecause they had taken a considerable amountout. There was also an intangible desire to berecognized by their peers around the world.

The extent to which there were motivation prob-lems varied between the types of centers. Individ-uals in virtual centers appeared to have the hard-est jobs, both because they had a substantialexploration-oriented component to their work andbecause their support groups were dispersedaround the world. Individuals in focused centerssuffered from motivational problems but to a lesserdegree than those in virtual centers, perhaps be-cause their identity with the center was more con-crete. And charismatic centers suffered very littlefrom motivational problems; their center of excel-lence role was usually closely aligned with theirday-to-day work, and the high profile nature oftheir work resulted in a lot of peer recognition.

The Role of Senior Management

While we have focused on the centers of excel-lence themselves, because we believe they are an

1398 Moore and Birkinshaw 91

important but under-recognized model for helpingservice firms to manage their worldwide knowl-edge assets, there are also a number of importantimplications for how global services should be runin their entirety. Although senior managers in ser-vice firms typically play a much less intrusive rolein the day-to-day activities of their employees thantheir counterparts in the manufacturing sector,they nonetheless have an important part to play inshaping the overall direction of the firm and build-ing an organization in which knowledge is createdand disseminated effectively. Below we identifythe three key issues for senior managers to con-sider if they are currently using the center of ex-cellence model, or thinking of doing in the nearfuture.

Managing the Firm's Knowledge Portfolio

Focused centers capture emergent capabilities;virtual centers represent more codified capabili-ties; charismatic centers often represent capabilitygaps that the firm is trying to fill. Senior manage-ment's responsibility, is to make the strategic de-cisions about what sorts of centers to build, and thespecific knowledge areas or capabilities that thecenters are expected to manage. Most centersemerge over time through a rather haphazard pro-cess that is shaped by senior management only inits latter stages. But there is an opportunity forsenior managers to become more involved in theearlier stages of center evolution, and even to be-gin to set priorities on what sorts of knowledgeareas should be developed in the first place.

Senior managers also have to think about thewhere of centers of excellence. When establishingcenters, most firms have a natural bias towardsidentifying excellence in the home country or inthe largest market. A thorough investigation, how-ever, might well reveal hitherto-unknown exper-tise in distant parts of the organization. Such latentcenters are a valuable source of expertise, andsend the important signal that all parts of the firmhave an important role to play in knowledge de-velopment.

Managing the Center of Excellence Life-Cycle

One of the primary risks in using centers of excel-lence is that the life-cycle is not managed, and thefirm ends up with too many centers, some of whichare strategic but most of which are not.

Some centers of excellence will die out natu-rally, perhaps because they were not well-re-sourced in the first place, or perhaps because in-ternal competition pushes the individuals behind

them into other areas. But in other cases, particu-larly when there are dedicated resources attachedto a center, the center of excellence will likelyendure for longer than it is needed, unless decisiveaction is taken by senior managers. The process,then, involves an ongoing assessment of what rolethe centers of excellence serve, and whether thatrole can be better fulfilled through other means.

Motivating Employees to Build and Use theCenters of Excellence

Incentive and motivation issues are central tomaking the center of excellence model effective.Structural changes are probably not appropriateunless the center has a broad-based knowledgedevelopment role (e.g., a learning center). Resourc-ing centers with full-time individuals is effectivefor managing the centers of excellence, but it cre-ates unwanted overhead. Soft management tools,such as building a cooperative culture, createstrong social networks, and enhance the overalllevels of communication in the firm. Related to thedevelopment of social networks is the need tobuild strong internal information networks such asLotus Notes. Because many firms we spoke to werestill struggling to build up-to-date and reliablecomputer infrastructure, they were severely ham-pered in their ability to manage their centers ofexcellence effectively. Managers should ensurethat the proposed center of excellence solution isbacked up by the appropriate technology before itis introduced.

Conclusion

The center of excellence model is attractive be-cause it provides the focal points for knowledgedevelopment and dissemination, rather than rely-ing on old-fashioned, informal, word-of-mouthmechanisms. However, we should acknowledgethe emergence of Internet/Intranet systems as onepossible way that the center of excellence modelcould be eclipsed. The Intranet offers a low-costforum for worldwide information exchange. Cen-ters that emerge there need not rely on top man-agement to identify and broadcast their abilities.But Intranets are unlikely to ever be the wholesolution to the problem of management of tacitknowledge, which by definition needs human in-teraction to be transferred. And on a practicallevel. Intranet usage in large firms is still patchy,and the software is of variable quality.'^ But itseems likely that an increasing amount of in-trafirm communication will take place over theIntranet, which will in turn lead to changes in

92 Academy of Management Executive November

structural approaches to knowledge managementlike centers of excellence.

We should stress that many firms function quiteeffectively without centers of excellence. Centersof excellence are most appropriate: (a) when thekey source of competitive advantage for the firm istacit knowledge (rather than knowledge embodiedin technology or physical assets); and (b) when theactivities of the firm are so large or so dispersedthat professional staff members cannot possiblyknow all their colleagues. These conditions holdfor global service firms, and they probably hold forthe service side of a great many multinationalmanufacturers as well. But we are wary about gen-eralizing too far. If either of these conditions isabsent, the center of excellence model may addrelatively little value, and indeed be very costly toadminister. In which case a firm can function bet-ter without it.

Endnotes

' Electra is a disguised name,^ While we use the term center of excellence exclusively in

this article, it should be clear that the firms in our study used aplethora of names to describe the same phenomenon. Theseincluded: center ol competence, community of practice, bestpractice, capability center, and future center.

•* We define service firms as those whose primary value-added to customers is in the form of an intangible service.rather than in the transformation of inputs into a physicalproduct. In terms of service firms studied in this research, ourfocus is on the consulting, insurance, banking, shipping, engi-neering, publishing, and information technology industries.

* Though there are certainly opportunities even within ser-vice firms to benefit from cost differences between countries.Back-office activities are frequently located in low-cost coun-tries, and even in professional activities there are benefits to begained from tapping into well-educated but relatively low-sal-ary countries such as Ireland.

^ Knowledge management is currently receiving a lot of re-search attention. See I. Nonaka and H. Takeuchi, The Knowl-edge Creating Company. 1995, Oxford University Press; G. Hed-lund. A Model of Knowledge Management and the N-FormCorporation, Sfrafegic Management Journal. Vol. 15, 1995,

^ Knowledge can also be gained through external non-clientrelationships and through conferences and journals, but muchof this knowledge is essentially a public good, so it offers nopotential for competitive advantage unless it can somehow betransformed by the firm.

^ See C, A. Bartlett and S. Ghoshal, 1986, Tap your subsidiar-ies for global reach, Harvard Business Review.

^ These two models parallel the ethnocentric and polycentricmodels described in: Perlmutter. H. 1969. The Tortuous Evolutionoi the Multinational Corporation. CoJumbia Journal of WorldBusiness, 4: 9-18. The next two are variants of his geocentricmodel.

^ ABA Banking Journal. 1992. An interview with Craig Gold-man of Chase Manhattan. March 1992; 62.

'''Codification is a process through which tacit knowledge,that which is personal, context-specific and hard to formalize,becomes explicit, i,e, transmittable in formal, systematic lan-guage,

" Bartlett, C.A, 1996, McKinsey and Company. Harvard Busi-ness School Publishing, Case study 396'357.

'̂ It is interesting to compare virtual centers to communitiesof practice, which are emergent bodies of professionals drawntogether by common interests and experiences. In many waysthe two are quite similar, but they differ in two important ways:(a) virtual centers have a clear deliverable, while communitiesof practice do not; and fb} communities of practice are by defi-nition unformalized learning groups, whereas virtual centersare an attempt to structure interaction between people. See:Stewart, T, 1997. Intellectual Capital. Nicholas Brealey: London.

'̂ In this regard, virtual centers could perhaps be bettercalled spheres or webs of excellence, in the sense that they areinterconnected, flexible, and quickly adopted to new demands.

*̂ Nelson, R. and Winter, S. 1982. An evolutionary theory ofeconomic change. Cambridge. MA: Harvard University Press.

'̂ One consulting company we studied, for example, had animpressive project database, but when anyone tried to use ittheir search typically resulted in a deluge oi mostly uselessmaterial, or none at all. Quality control in such databases isstill very hard to achieve.

About the Authors

Karl I. Moore is on the faculty of Templeton College. OxfordUniversity, where he teaches international business strategy,primarily to executives. He has also taught at McGill Univer-sity, Dartmouth, and the London Business School. The author oimore than 50 books, chapters, articles, and papers, his researchfocuses on global competitive advantage and emerging issuesin high tech industries. His book, the U.K. Venture Capital Mar-ket, was published by Wiley & Sons in 1997.

Julian M. Birkinshaw is an assistant professor at the Institute ofInternational Business. Stockholm School of Economics. His re-search is centered around issues of strategy and organizationin large multinational firms, and in particular on how firms caneffectively manage their geographically dispersed resources.His research has been published in Sfrafegic Management Jour-nal, Journal of International Business Studies, Sloan Manage-ment Review and a number of other journals.