The effect of tacit knowledge on firm performance

Purpose – The purpose of this paper is to propose the use of the tacit knowledge index (TKI) to assess the level of tacit knowledge within firms and its effect on firm performance. Design/methodology/approach – A sample of 108 US and Canadian firms that are using knowledge management was surveyed to determine each firm's TKI. This measure includes both the degree of usage and the tacitness of the knowledge management method. Regression and correlation were used to statistically analyze the innovation and financial outcomes. Findings – Significant relationships were found between a firm's level of TKI and the firm's innovation performance. Less clear is the relationship between a higher TKI and financial measures. Research limitations/implications – This research gives managers a way to structure their use of knowledge management methodology and use of resources in a way that may maximize performance, either as stand alone systems or as part of the Balanced Scorecard. Practical implications – The use of this research could greatly reduce the uncomfortable gut feeling that many managers have in funding so‐called soft tacit‐based knowledge management systems rather than invest in easier to assess hardware systems. Originality/value – This pioneering research develops tacit knowledge as a measurable quantity and links this metric to firm performance.