Partners’ Capital + Information = Knowledge Capital

November 1, 2001

Partners are naturally emotional about the equity returns on their capital. The legal market is obsessive, and rightly so, about fees per capita, equity spread and profits per partner. No other profession is so openly transparent year on year in revealing comparative performance information for benchmarking. Many a potential merger has probably stumbled as a result of divergent profits per partner and capital requirements of the merging firms. Managing staff productivity and new business generation are high on the agenda of all successful law firms to support the profit goals.

But what really drives profits? Productivity levels and new business metrics may mark the pace of the metronome but they are not the essential components that make the firm tick.

In simple terms, the law is about knowing the right information and how best to apply it. When partners invest their capital, they are investing in a unique bank of information compounded over the years and enhanced by the capabilities of the current partners and staff. The true potential and wealth of the firm lies in this knowledge capital.

The real challenge of today’s managing partner is how to realise the potential of the firm’s knowledge capital and to continue to develop and build its bank of information for maximum payback.

The accessibility of information through the Web and rapid growth in providers of low cost online legal information and documents has sharpened the need for law firms to differentiate their information services and to provide knowledge which the consumer will value highly and buy in preference to another provider. Equally the strength of internal competition at regional and national levels, exacerbated by the threat of overlapping services offered by the other professions, means that law firms need to define themselves through their unique knowledge capital if they are to stay in the forefront and not fall into the mass.

Marketing and client contact programmes will continue to influence new business achievement but each firm’s long-term success will depend on how well it manages and develops its knowledge capital and applies it to the current and future needs of the consumer.

This challenge requires a different perspective from the traditional approach to practice management, where information tends to be the product of the business rather than the driver and is segmented around groups of people and not by its inherent content or themes.

Many firms may not realise the extent of the knowledge within their own organisation, or be able to make connections between teams or across offices. Interestingly, many firms will undertake legal research using Internet services for searching and retrieving essential information to support case management. However, often no such search tools are used to retrieve information from the firm’s own bank of data which may be held in a structured or unstructured format. The opportunity to reduce substantially research time (and therefore cost) by retrieving information already captured is an obvious starting point in maximising the potential of a firm’s knowledge capital.

However the bigger opportunity lies in the firm’s ability to turn knowledge into competitive business advantage, taking content to the consumer to meet or create market demand and to establish new service lines. An incidental piece of work could become a reference point or collateral for business development, alternatively a recurring theme could indicate market space to exploit. Successful firms will align their knowledge capital with business development activity. Understanding of the client and prospect database and knowing how to segment it for the best-fit profile of services and products are integral parts of knowledge management. The objective is to target campaigns to particular groups for maximum gain, using existing client data, cold lists or external demographic information and to have the resources and technologies in place successfully to handle the campaign response.

A knowledge capital audit for merging firms which analyses and visualises the underlying themes in the information of each using theme maps and which segments the combined client base using selected campaign criteria, may be as beneficial as the financial due diligence in looking at the fit of the businesses.

Partners need to be as emotionally engaged in their knowledge capital as their financial capital.

Tony Sadler is a chartered accountant and Head of Business Development, Professional Services for the Cedar Group, which specialises in Knowledge Management and CRM solutions for business.