Extracting Tacit Knowledge in the Financial Services Industry

Jenna Doucet (2009).


Extracting Tacit Knowledge in the Financial Services Industry

The financial services industry directly affect a country’s economic integrity and is thus a highly regulated industry where organizations and professionals alike are confronted with a continuous flow of complex rulings and must successfully implement compliance systems in order to report relevant information back to regulatory agencies. Much of the information that is reported back from agency to industry and industry to agency is in the form of explicit knowledge which is often articulated through formal documentation. However, both the financial services industries and their regulatory agencies are often confronted with issues regarding the sharing and communication of tacit information. The tacit information that is relevant to the financial investment services industries are generally related to undocumented knowledge of the ins and outs of approval processes or the best methods to resolve issues in different provinces or states (Andrews, 1998). Another form of tacit information in the investment industry are the closely guarded secrets of trading platform technologies and more specifically algorithm or black-box trading. Not only is technology in organizations a large function that contains much tacit information, but technology itself can play a role in decoding tacit information. Lastly, the present state of the economy is causing many financial services companies and investment companies to merge, which renders the transfer of tacit knowledge between individuals from institution to institution crucial.

The first example of tacit knowledge involved in the financial services industry occurs in the investment banking sector whereby an employee maintains knowledge and understanding of a firm’s approval process for taking risks and regulatory issues across different provinces and states. The types of firm-specific skills required to successfully function as an investment banker require that an individual not only be familiar with explicit knowledge of trading policies and underwriting risks, but a thorough grasps of the firms communication policies, that is one must come to understand how to communicate to executives why a particular investment is worth risking the firm’s capital over. As Morrison and Wilhelm (2007) state, much of these skills are tacit and may require “ an understanding of a private company language” (p.285), and that “ this type of knowledge is hard to acquire, and is notoriously hard to write down. We refer to it as the firm’s culture” (p.285). The best way to extract this type of tacit information is through mentorship, the most effective way to gain from the experience of a mentor in a firm is from participating in an internship, which in itself is a competitive task.

The importance technology plays for financial institutions cannot be overemphasized. A good trading platform is one of the core components of any successful investment firm. While some Banks such as BMO Financial Group choose to licence their software from companies like Bloomberg, other financial institutions such as First New York Securities develop their own trading platforms internally. The key to their competitive advantages rest in closely guarding trade secrets so to speak. Many papers have been published about trading algorithms, time series and other relevant material that expert developers and programmers can use and refer to in developing complex trading platforms, however successfully combining efficient market hypothesis, market heterogeneities, forecasting, data filtering, scaling laws, time series, volatility models, Bayesian estimation theories, distributed processing, and other complex processes into meaningful software that allow traders to accurately interpret market information involves a great deal of tacit information. Extracting tacit information from professionals in the field of technology requires a great deal of technical knowledge to begin with and individuals who have achieved such levels of expertise are not eager to give it away.

Although there is a great deal of implicit information in the creation of technology, some technologies exist specifically to help organizations extract tacit information and record it for the internal use of employees. An example of such technology is the Knowledge Management (KM) System. These systems privately track the expertise of individuals within the organization and conveniently store the information into a database or a “network of experts”, who can later be probed (Boghani, Long, and Jonash).Mergers render the transfer of tacit information important because each of the different companies undergoing the process have accumulated different expertise and tacit employee knowledge over the years. In order to benefit from each other’s areas of expertise such information needs to be transferred to and from each organization. There is no protocol manual on how to best accomplish this task, however it certainly requires the willingness of key employees to share information and collaborate with others to take effect. A Knowledge Management System would certainly be an asset.

Conclusion

In conclusion the financial services industry is very complex and involves many facets of tacit information. In some instances organizations and individuals benefit from protecting the knowledge they have require, but at the expense of their competitors or others seeking to enter the workforce. In some instances, for example with mergers, the extracting of tacit information is crucial and can be accomplished through networking, the willingness of employees to share information and with the aid of a Knowledge Management System.

References

Andrews, L. (November, 1998). Regulatory Information Overload. KM World Magazine. Retrieved on September 8th 2009 from: www.kmworld.com

Ashok, B. & Boghani, D. & Jonash, R.Technology intelligence and monitoring

System (TIMS). Retrieved on September 9th 2009 from ProQuest database.

Morrison, A. &Wilhelm, W. (2007). Investment banking: institutions, politics, and law,Volume 10. New York: Oxford University Press.