Knowledge Returns

June 30, 2005

How would you measure the performance of vicars? It was a question discussed in an interesting article in the Observer in February 20051 and in so doing demonstrated both the pressure to measure return on investment and the problems arising. The article noted that a Norwegian hospital chaplain had performance measures that counted not only bedside visits but the number of last rites he performed – are these the right metrics to use? Should the success of traffic wardens be measured on numbers of tickets issued? The CPS on the number of successful prosecutions? The maxim ‘what gets measured, gets managed’ can lead to adverse consequences.

The long-term, sustainable success of a law firm relies on knowledge embedded in people, their relationships and their skills. Measuring the return on investment in these knowledge assets can be achieved in part by quantitative metrics, but in the main relies on other, qualitative measures. This article reviews how knowledge returns can be measured, how such knowledge produces financial income and how it is being viewed by clients.

In the previous article in this series on Knowledge for Successful Law Firms – Profiting through Knowledge (April/May 2005) – the potential of knowledge products and techniques to increase profitability was explored. In a knowledge business such as a legal practice the capacity of knowledge management to have a positive effect on profitability and other aspects of the organisation may sometimes be taken for granted. But how can these benefits be proved? How can the success of knowledge management initiatives on firms’ business goals be measured? In a business sector where justification of resources is crucial, the issue of measurement has been described as the Achille’s Heel of knowledge management programmes.

Efforts have been made to ascribe direct financial returns to the provision of knowledge management initiatives. Certainly measurements can be devised to analyse cost-cutting and revenue generation. Cost-cutting measures measurements may involve assessing the extent to which knowledge management approaches have cut costs in areas such as: substitutes for physical meetings, reducing training costs, encouraging remote working, reducing the need for the distribution of paper, or reducing risks from using outdated materials. Interesting analyses on the revenue created by know-how work have also been performed.2 However, a focus purely on directly attributable monetary return on investment can miss the significant effect that knowledge management has across the business.

Larry Prusak, founder of the IBM Institute for Knowledge Management commented, “It’s a mistake to use some false quantification, like an internal rate of return, on knowledge. No one can measure knowledge – you can only measure knowledge outcomes, like customer retention, patents and innovative work practices”.3 Applied to the business of legal practice we can see that knowledge involves itself in almost every aspect of the operation and output of a law firm. This holistic way of considering the impact of knowledge management reveals a truer picture, but requires a more complex measurement model.

In addressing this, some seek to focus on how knowledge management influences the effectiveness of each employee in their role – whether it makes their job easier or more efficient. In so doing, measurements may be made of employees’ use of an intranet, or how many precedents are accessed or whether and how many online communities have formed. Another approach is to focus on the impact of knowledge management on organisational effectiveness, exploring whether knowledge management has increased productivity or client satisfaction, or has perhaps led to service innovations.

A good solution is to link measurement to strategy. Where a firm-wide strategy is in place and articulated then the impact of knowledge management initiatives can be measured against the contribution to strategic goals. A useful tool for this purpose is the ‘balanced scorecard’ – judging the impact of initiatives within a wider, more balanced framework but seeking out tangible, measurable components on which to assess progress.

These components will often be quantitative measures detailing, for example, statistics on usage of, and contribution to, know-how systems or progress in the roll out of technology. However, as important are the use of qualitative measures like feedback, interviews and focus groups to provide a human perspective on how well knowledge management programmes are meeting the firm’s strategic aims. Perhaps the most useful reports on the impact of initiatives combine numbers with feedback and anecdotes to provide the story behind them.4

Billing models

Measuring return on investment in knowledge management often entails attempting to measure increased efficiency of practice. Without an ability to capitalise on increases in efficiency of practice, many knowledge management initiatives are under-valued and potentially doomed. In today’s competitive legal market place, most law firms have a myriad of billing models to offer their clients depending on their requirements for particular types of work. The hourly rate remains the lynch-pin in most firms, with a recent survey of 100 partners carried out by Legal Week estimating that approximately 60% of work is still billed using this method. However, attention should be focussed on what fees are collected rather than those that are billed. Many smart clients refuse to pay for ‘re-inventing the wheel’ or staff ‘on the job training’.

A combination of downward pressure on fees and clients demanding greater transparency and accountability from their legal advisers requires that firms be ready, willing and able to offer other pricing models. These alternative pricing models can incorporate value for the efficiencies gained from successful knowledge management. Examples of such billing models may include any or a combination of the following:

  • Value added – where the firm demonstrates additional value through ever expanding methods including secondments, provision of training and current awareness services, giving access to standard forms and precedents

  • Blended rates – where all time is billed equally regardless of lawyers’ seniority

  • Fixed/capped rates

  • Volume discounts

  • Tiered discounts

  • Risk sharing/success fees

  • Rebates

At their seminar in May 2005, the SCL Knowledge Management Group discussed the comparative advantages of the two most common billing methods and Table 1 below summarises attendees’ thoughts on hourly versus value billing.

Value billing

Hourly billing

  • Pre-agreed certainty

  • Enables the firm to obtain value from the efficiencies it has invested in

  • Supports more flexible working patterns – the move away from the culture of long working hours may lead to improved staff retention

  • Enables firms to showcase distinctiveness in areas where services are commoditised

  • Greater opportunities for relationship building with clients leading to improved client retention

  • Greater satisfaction for lawyers

  • Process broken down

  • Clients get frequent updates

  • Predictable income for law firms

  • Clients pushing back on costs driven by inefficiencies

  • Easy way of benchmarking law firm rates for clients

  • Firm better able to defend what it has billed client

  • Enables more effective allocation of resources

Table 1: Developed by the SCL Knowledge Management Group during the “Managing Performance through Knowledge” seminar (May 2005).

Value-added services

When negotiating fees, clients are continually pushing the boundaries by looking to see what else firms are prepared to offer in addition to advice on a particular transaction or deal. In a climate where clients are less inclined to pay high rates for what they see as broadly similar, commoditised services, these value-added services are a way for firms to demonstrate their distinctiveness and help deepen the client relationship. Firms also derive significant internal benefits through increased job satisfaction, with lawyers feeling they are being rewarded for their expertise and the possibility of greater flexibility in working patterns once the hourly billing culture is diffused. In times of increased competition for high-value work, it is important that firms do not succumb to the temptation of under-valuing the services they provide. A vital part of developing and sustaining profitable client relationships is ensuring that both sides regard fees as fair and reflecting the value of the work performed. They must also be predictable for both parties, reward firms for any efficiencies introduced and include an element of risk-sharing where appropriate.

Management tools to support the billing process

As fixed-cost businesses, it is imperative that law firm costs are covered by the income they generate. At the same time they must also deliver competitive annual profits to their partners. For years the hourly rate model enabled firms to predict income with relative ease. As firms enter into more complex billing arrangements and provide more value-added services, it is vital that appropriate management tools are in place to ensure that firms are not undervaluing their services. Some of the tools listed below can aid the billing process. These tools often act in a cycle as information gleaned from billing and monitoring can be fed back into improving the future accuracy of quotes.

Quotes – Understandably, it can be difficult to predict accurately the cost of some transactions at the outset. However, tools which scope similar deals to see the breakdown of work undertaken by partners, associates and other staff and/or use historical data to provide a range of fees charged for this type of work can help firms to provide more accurate information on the likely cost of a particular deal.

Bills – Bill tracking tools give clients and partners access to detailed, real-time billing information. These can be coupled with transaction management tools that predict expenditure at particular stages of a transaction and help identify whether or not it is within budget.

Monitoring tools – These are required to identify the actual cost of doing work and can be refined to show the impact of individual decisions made during the transaction or deal. Any discounts or write-offs must be recorded and may be presented to clients either as an additional discount or as demonstrating value. Firms can also monitor the profits generated by client, transaction and practice group and use this information to improve the accuracy of the rates charged for particular types of work.

Effective utilisation of these tools can ensure that firms successfully combine competitively priced, innovative and flexible methods of working without losing sight of the bottom line or slipping down the league table of partner profitability.

Client perspective

At the SCL Knowledge Management group seminar in May, Charlotte Russell-Hargreaves, the professional support lawyer at Reuters, shared some of Reuters’ thinking behind their recent review to select their ‘panel’ law firms to service Reuters’ legal requirements. As with all panel reviews, it was hoped that the successful firms would offer better service and lower rates in exchange for a steady stream of business. The process was designed to produce panel members who would share Reuters’ values, in particular, its emphasis on focus, accountability, service and trust. The Request for Proposal (RFP), which was sent out to all firms tendering for work, asked for suggestions from firms as to how they would provide a value-added service and promoted the use of IT and knowledge management to augment the quality of legal advice. The RFP also gave examples of how Reuters hoped IT and knowledge management would be used to provide a better service. This approach illustrates the need for firms constantly to review and update the services they are prepared to offer clients. In addition to the more commonplace services, such as secondments and providing training, Reuters was also interested in whether firms offered dedicated account managers, partnering opportunities for charity events and pro bono work, a single KM co-ordinator, and access to professional support lawyers and the firm’s library (within agreed limits). Reuters was also keen to promote the use of a client-hosted extranet to share standard forms and precedents online and encourage a collaborative approach. In the area of billing, Reuters asked firms to propose creative fee structures alongside more traditional methods so that, as far as possible, direct comparisons could be made.

Although, this is just one case study, demands for depth and breadth in this area are likely to continue growing. This process will be aided by the willingness of in-house counsel to share their ideas via networking groups as a means of encouraging similar thinking. Examples of such networking groups are listed in Table 2.

Legal IT Innovation Group –

General Counsel Round Table –

American Association of Corporate Counsel –

The CLO Programme –

Table 2: Networking groups for in-house counsel

The future

Charlotte was quick to point out that not everything on Reuters’ wishlist was obtained. However, the willingness of firms to engage with the client on these requests suggests an appreciation of the role that knowledge management can play as a differentiator in the marketplace. If anything is going to speed the development of knowledge management in legal practice, it is likely to be client demand and competitive pressure. The ability to capitalise on the efficiencies produced by good knowledge management and the measurement of these investments will be vital to the future profitability and management of law firms.

Ben Horton is a PSL for the Technology Group at CMS Cameron McKenna in London. Linda Maynard is responsible for information and knowledge services in the London office of Howrey LLP.

1 Caulkin, S. (2005) When the devil is in the details, Observer, 20th February

2 Muris, C. (2003) Revenue created by know-how work, PLC, April, page 91

3 Garner, R. (1999) Please don’t call it knowledge management, Computerworld Inc.

4 CMS Cameron McKenna (2005) People report, CMS Cameron McKenna