Employee Know-How '101'

Definition:

Merriam Webster defines 'know-how' as knowledge of how to do something smoothly and efficiently.

Wikipedia says 'know-how' is a term for practical knowledge on how to accomplish something.

Business Dictionary goes into much more details and defines it as .... "expert skill, information, or body of knowledge that (1) imparts an ability to cause a desired result, (2) is not readily available, and is (3) outside the public domain. Know how may include tangible material (such as blueprints, formulas, instructions, patterns, specifications, and trade-secrets) or intangibles (such as manufacturing practices, marketing concepts, quality control, and testing techniques) which are not common knowledge. In technology transfer agreements, know how is the most valuable factor and may have an indefinite enforceable life. In legal terms, it may be defined as "any industrial information and technique likely to assist in the manufacture or processing of goods or materials." In the recent years, know how has come to be recognized as a factor of production in its own right, distinct from labor."

Another definition of 'know-how' is that it is expert skill, information, or body of knowledge that imparts an ability to cause a desired result, is not readily available, and is outside the public domain.

Another defines 'know-how' as ‘any industrial information and technique likely to assist in the manufacture or processing of goods or materials."

Dissecting it further:

For many companies, know-how refers to the information inside the heads of their employees. It consists of the the skills & competencies, expertise & prowess, and knowledge & experience residing within the heads of employees.

• The skills of an employee - an ability of an employee to do an activity or job well, especially because that individual has practiced it.
• The competencies of an employee - the ability of an employee to do something successfully or efficiently.
• The prowess of an employee - the exceptional skill or ability of an employee.
• The expertise of an employee - the broad and deep competence in terms of knowledge, skill and experience through practice and education in a particular field
• The knowledge of an employee - The facts and information acquired through experience or education together with the theoretical or practical understanding of a subject.
• The experience of their employees - The effects or influence of a subject gained through the employees involvement in or exposure to it.

This collection of skills & competencies, expertise & prowess, and knowledge & experience residing within the heads of employees is oftentimes referred to as the know-how of the employee.

Know-how is a term for practical knowledge on how to accomplish something, as opposed to 'know-what' (facts), 'know-why' (science), or 'know-who' (communication). However, I have also seen the term 'know-how' used to refer to all of the above.

Negative know-how:

'Know-how' can be negative in nature. Negative know-how is essentially what does not work. Negative know-how can include details of previously attempted, but flawed techniques or 'blind alleys' that did not achieve their intended results.

The biggest error that people make about failure is that it is all bad. But from an engineer’s point of view, a failure can contain all sorts of really useful information.

“Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.” - Samuel Beckett

Understanding what does not work is just as important as understanding what does.

Different types of employee know-how:

There are different types of employee know-how within an organization. One way to segment employee know-how is as follows …

Explicit know-how: This is knowledge that is relatively easy to articulate and share with others. An example is this type of know-how is how to install and configure a software application onto a computer.

Tacit Know-how: This is knowledge derived from personal experience that is more challenging to convey to others. An example of this type of know-how is how to properly and professionally deal with difficult people, for instance a challenging customer of the business.

Implicit Know-how: This is internally derived knowledge that comes from doing an particular activity. For example, the knowledge of how to type using a keyboard without looking down at the keys.

Where does know-how exist?

Know-how resides inside the head of the employee.

The brain is the CPU (central processing unit) of the body. It is located in the head, close to many of the sensory organs for senses such as vision, hearing, smell and taste. The brain is the most complex organ in the human body.

Recent models in modern neuroscience treat the brain as a biological computer, very different in mechanism from an electronic computer, but similar in the sense that it acquires information from the surrounding world, stores it, and processes it in a variety of ways.

The mind is the set of thinking faculties including cognitive aspects such as consciousness, imagination, perception, thinking, judgement, language and memory, as well as non-cognitive aspects such as emotion.

Cognitive scientists often say that the mind is the software of the brain.

The brain is an organ but the mind isn't. The brain is the physical place where the mind resides. The brain plays a key role in translating the content of the mind into complex patterns of nerve cell firing and chemical release. The brain is like the hardware while the mind is like the software of this fascinating computer.

Of course, the brain contains storage memory. This is similar but not identical to the memory inside a computer desk-top or lap-top machine.

For example, some general characteristics of human short-term memory resemble those of a computer’s random access memory (RAM). For example, human short-term memory is volatile and has a limited capacity. Long-term memory is something like a computer’s hard drive. Both of them take longer to respond, but can store a considerable quantity of data.

However, there are also major differences. Once some information is recorded onto a computer’s hard drive, it will not change. But human memories are totally different. Over the years, they will be continuously altered and reconstructed..

Another difference is that on a computer hard drive, each piece of information is saved in a specific location. Long-term human memories are not stored in just one part of the brain, but are widely distributed throughout.

Information is not stored in the brain like books on library shelves but must be actively reconstructed from elements scattered throughout various areas of the brain by the encoding process. Memory storage in the human brain may be seen as an ongoing process of re-classification.

Know-how vs trade secrets:

So far we have explored the definition of know-how, delved deeper into what constitutes know-how, and explored where this know-how resides.

I suggest that some definitions of know-how mistakenly talk about know-how having some secrecy associated, not readily available and outside the public domain. However, there is no such requirement as such associated with know-how. A person may share their know-how openly with others. Such an action does not then mean they no longer have such know-how.

I also suggest that some definitions of know-how that mention about such know-how having to possess value are mistaken. Yes some know-how may indeed be valuable but there are also lots of examples of know-how which have limited or zero commercial value.

The inherent proprietary value of know-how is embedded in the legal protection afforded to trade secrets in general law in most but all jurisdictions. However, one should not then assume that know-how and trade secrets are one and the same. Trade secrets by their very nature have to be secret. Trade secrets must have value. Reasonable administrative, legal and technical protection measures must be in place. As such, know-how can be said to proceed trade secrets, which know-how is sometimes converted into.

Employee know-how and Agreements:

Employee know-how may possibly be impacted by various provisions in the employee’s Employment Contract, in particular …

• the provisions protecting confidential information
• the obligations which are to apply to the employee upon termination, such as returning confidential information and company property;
• any restrictions which apply on termination, such as non-solicitation of clients and staff and non-competition

Employee know-how can also be the subject of an Agreement with a 3rd party, for example a License Agreement. Technical, production, logistical, support and marketing know-how can be licensed. Licensing know-how will only make sense insofar as this know-how has been kept secret, that there is an economic value to it and that there is a need for the licensee to gain access to that knowledge.

The challenge is often to firstly properly define the know-how to be licensed, secondly to explain how this know-how is to be transferred across (given that it is not documented), and thirdly to put a proper valuation on the know-how.

Licensing know-how can involve some risks linked to its potential, unwanted disclosure to other parties.

The documentation of employee know-how:

A person with know-how inside his or her head may opt to transcribe the know-how onto a document (paper or electronic).

A few companies have put processes in place to help capture valuable employee know-how, and in essence convert the employee know-how into company trade secrets

• Identification of the know-how of employees (leveraging a suggestion list if needed) / Alternatively using regular employee reviews to help identify know-how of potential interest and value to the company
• Analysis of this know-how to determine what know-how is worth transforming into documented trade secrets
• Determination of the best approach to achieve this documentation (interview of the employee on camera about their know-how / documentation of the know-how in the form of a Q&A using some template / formal documentation of the know-how using some documentation standard / video recording of the employee in action (e.g. if the know-how related to say operating a piece of equipment) / etc.
• Formal documentation of the know-how
• Treating the information as a trade secret going forward with regular reviews in case any updates are required

 If a company is interesting in converting (some) employee know-how into valuable trade secret assets owned by the business, then I suggest that it is essential to properly document the know-how.

This is an important step as it can provide evidence that the business viewed and treated the know-how information as a trade secret. Documentation shows the business has identified its trade secrets and is treated them as proprietary and secret information.

It is also an an important step as otherwise that know-how leaves the company when the employee resigns or retires and takes their brain with them.

It should be noted that formaldehyde and a glass jar is the only sure fire way to keep know-how from walking out the door. Only joking !!!

Know-how as an asset:

In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset.

The International Accounting Standards Board standard 38 (IAS 38) defines an intangible asset as: "an identifiable non-monetary asset without physical substance." IAS 38 specifies the three critical attributes of an intangible asset to be …

• identifiable
• control (power to obtain benefits from the asset)
• future economic benefits (such as revenues or reduced future costs)

IAS 38 contains examples of intangible assets such as customer lists, copyright, patents and franchise agreements. Know-how is not specifically mentioned in IAS 38 documentation but a number of Finance experts have indicated to me that some know-how may be treated as an asset from a finance and accounting perspective, although a few raised concerns.

Know-how is specifically included in the OECD BEPS definition of intangibles but lumped together with trade secrets.

OECD BEPS Action #5; Section A.1: Identifying Intangibles; Sub-section 6.20: Know-how and Trade Secrets is where know-how is defined.

“Know-how and trade secrets are proprietary information or knowledge that assist or improve a commercial activity, but that are not registered for protection in the manner of a patent or trademark.

Know-how and trade secrets generally consist of undisclosed information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise.

Know-how and trade secrets may relate to manufacturing, marketing, research and development, or any other commercial activity. The value of know-how and trade secrets is often dependent on the ability of the enterprise to preserve the confidentiality of the know-how or trade secret. In certain industries the disclosure of information necessary to obtain patent protection could assist competitors in developing alternative solutions.

Accordingly, an enterprise may, for sound business reasons, choose not to register patentable know-how, which may nonetheless contribute substantially to the success of the enterprise. The confidential nature of know-how and trade secrets may be protected to some degree by (i) unfair competition or similar laws, (ii) employment contracts, and (iii) economic and technological barriers to competition.

Know-how and trade secrets are intangibles within the meaning of Section A.1.”

So is know-how an asset from a general accounting, finance, transfer pricing and/or tax perspective? Well, it depends. The answer is not black and white.

Final thoughts:

Employee know-how is a key part of the intellectual property portfolio of a company. However, is a form of IP that I suggest needs much better understanding and appreciation. Too often is is taken for granted.

I trust that you found this short paper of interest and of value. I welcome any and all feedback.

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Donal O'Connell is the Managing Director of Chawton Innovation Services Ltd.

His company offers trade secret management tools to companies as well as to Legal & IP Firms to help with the management of these important but fragile assets.

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