Why Worry About Law Firm KM ROI?

From time to time, law firm knowledge management junkies twist themselves into knots trying to determine the best way of calculating the return on investment (ROI) of knowledge management efforts. I'm as guilty as the rest for engaging in this exercise. A few have suggested that thinking about ROI is not helpful to KM since knowledge management done properly should create client work product more efficiently, thereby reducing the number of billable hours required and the size of the bill presented to the client. For these folks, that's reason enough not to talk too loudly about ROI.

Jordan Furlong has a better approach. In his post, Never mind the billables, he points out that we shouldn't be conflating the cost to the client with the cost to the firm. The client will pay what the client is willing to pay. Therefore, the best way for the firm to protect itself is to reduce its own cost. Then, as the client imposes more constraints on the amount the law firm may charge, the firm can maintain or increase its profit margin by carefully containing its own costs. This is where knowledge management can help. Here's how he describes this:

Every time you reduce your costs, you create an equivalent opportunity in your profit column, because the amount you spend to render a service to your clients has no effect on the value of that service to the client. (It never has.) Your client doesn’t care how much profit you make for yourself; the client only cares that you delivered excellent value in a cost-effective (to the client) manner. How you bill your services is between you and your client; how much it costs you to deliver those services has to be your number-one business priority.

So let's take another look at knowledge management ROI in this context. Granted, for firms that can't think beyond the billable hour, this may seem premature. But for firms with foresight, separating (at least for planning purposes) client cost from firm cost should help open a competitive advantage.

Envious of ROI

A newly-published article on knowledge management began with the following example to illustrate why organizations should even bother with a KM program:

Siemens, the global telecommunications giant, recently won a $460,000 contract in Switzerland to build a telecommunications network for two hospitals in spite of the fact that its bid was 30% higher than the competition. The secret to Siemens success was its knowledge-management system. This system allowed Siemens people in the Netherlands to draw on their experience and provide the Swiss sales reps with technical data that proved that the Siemens’ network would be substantially more reliable than the competition’s.

I can't remember seeing a public report of an instance where a law firm was able to document a success like this attributable to KM.** Can you? Is this because law firms are hyper vigilant about confidentiality and, therefore, don't tend to talk about how they work? Or is it because law firms don't have comparable success stories? Or worse still, what if law firms do have similar successes, but they don't know it or don't know how to document it?

While envy is rarely a good thing, I suspect most law firm knowledge managers would be envious of their counterparts at Siemens. I can't say I blame them.


** To be fair, several law firms have impressive KM technology. What I haven't seen is published evidence of the ROI resulting from those tools.

Getting Your Money's Worth Out of KM

Lately I've been thinking about whether law firms value knowledge management and how to measure knowledge management ROI. The underlying concern is that law firms don't know how to measure and value knowledge management activities. (If you ask most law firm knowledge managers if their firms are doing a good job valuing KM, I suspect you'd receive only negative answers.) And, allied with this is the concern that knowledge managers don't know how to assist this effort in a meaningful way. We often just throw up our hands and say that it is impossible to measure the ROI on knowledge management. Or, we bury law firm management in an avalanche of useless statistics regarding our activity rather than demonstrating true productivity. And then, we slink back to our corners and feel sorry for our undervalued selves.

Stepping back from that a little, I wondered whether there was a way to separate some basic human tendencies from the economics of law firm life. For example, is it a basic human tendency for all but the most arrogant of us to feel as if we are not properly valued for all the wonderful contributions we make to our organizations (and the world, the universe, etc.)? After all, how many of us actually ever have our egos stroked sufficiently??? If so, how does this color our assessment of our KM contributions? From the perspective of the organization, does the firm even know what it is spending on knowledge management? Does it know what it ought to expect for that investment? And, does the firm know how the lawyers value the results of that investment?

All of this came into sharp focus when I read a report of a recent airline initiative to charge $15 for the first checked suitcase and $25 for the second. Suddenly, the cost/value of having extra clothing and gear options on a trip became very stark. What if we were to charge $150 (or some other amount appropriate for the purposes of this exercise) for the first use by a lawyer of the KM system and $250 (or some other amount) for each subsequent use? Assuming we priced this correctly, and made these personal charges rather than client billable charges, would we then see what value lawyers placed on the KM system?

As long as KM systems are free to users, will those systems always be taken for granted, undervalued, and criticized? Conversely, if these systems are expensive to the user, will we have a better way of judging their true value in the firm's internal market? Now let's slink off into our corners and ponder those questions rather than feel sorry for our currently undervalued selves.

Measuring Knowledge Management ROI

We've achieved unprecedented levels of unverifiable productivity! That's the punch line from a fabulous Dilbert cartoon I saw last year. And, it sums up so much of what passes for measuring the Return on Investment (ROI) of knowledge management. All too often knowledge managers report on their level of activity because that is concrete, but have a much harder time determining the true impact on their organizations of their KM activities.

In the context of law firms, the ROI of KM conundrum becomes even more vexing. When value to the organization often is summed up by the amount of billables realized, it isn't always clear how a particular how-to guide or model document made a financial difference to the firm. Sure, having that KM content probably allowed a lawyer to work more efficiently (reducing billables, which may not be seen as a good thing), thereby permitting that lawyer to provide service to more clients (expanding the client base) or get home earlier (improved work-life balance) and maintain better morale (increased retention levels and decreased recruitment costs). But exactly how do you reduce this to dollars and cents?

Given this perennial problem, it's worth taking a look at the commonsense advice contained in the European Guide to Good Practice in Knowledge Management -- Part 4: Guidelines for Measuring KM. This guide proposes the following starting points:

1. define your goals -- the clearer the goal of a KM initiative, the more obvious the measures

2. identify the stakeholders for your measures -- each stakeholder defines KM success differently

3. define the measures -- they need to be valid and reliable, and must yield actionable information

4. decide what data will be collected and how it will be collected

5. analyze and communicate the measures -- communicate your findings in a way that helps the reader understand the value of the KM initiative -- don't just present raw data

6. review your combination of measures -- finding the right measures comes through a process of trial and error, so you need to monitor and evaluate your measures regularly -- adjusting them as your goals develop.

7. "measuring for the sake of measuring is a waste of time" -- measure for a specific purpose

8. be sure that useful action will result from the measures

9. don't measure everything -- focus on what's important

10. to the extent possible and productive, use measurement systems that are already in use within your organization -- presumably, these measures exist because they relate to something important for the organization, and this piggybacking allows you to integrate your results within organizational reports.

[Thanks to the UK National Library for Health for pointing me to this guide.]