Strategic Legal Technology 
From a private large law firm knowledge management gathering, here is a near real-time report on knowledge management (KM) and Return on Investment (ROI) by Joshua Fireman of ii3.
Here are some of the highlights I find most interesting:
- Given that law firms can barely do profitability analysis on their own matters, practices, or clients, it is odd that firms would ask about the ROI of knowledge management
- Firms focus today on cost cutting, profit improvement, and productivity enhancements. KM is a cost center and thus it is hard to link KM to profitability. So, can KM projects be tied to either cost savings or improve productivity.
- What do we mean by ROI though? It has different definitions across industries. For our purposes, we should view it as ‘earnings per dollar of investment’. Don’t focus on intangibles such as work-life balance or does it make our lives easier. So, for example, an ROI of 25% means that you get back your investment plus an additional 25%. Another way to define it is ‘(net solution benefits / solution costs) x 100′.
- How do you articulate cost savings from process improvements? This is an especial challenge where firms pay workers a fixed salary (exempt staff) and there is no marginal cost for an extra hour. So you need to view cost savings from process improvement as allowing knowledge workers to re-focus their activity to higher value activity.
- I ask whether this a game of “whack a mole” because how do you measure the value of hours freed up? If lawyers could bill they would. And most firms don’t do ROI on biz dev or other uses of time. Joshua argues that there is still good discipline in being more explicit in prioritizing time and allocating hours. [I agree with this.]
- Participant points out that if you free up enough hours, then you can avoid another hire. That’s real money. So if KM can avoid need to hire more PD or risk management professionals, that’s a real savings. But others argue that this too is just moving dollars and time around from one group to another. But if fee-earners are freed up to do billable work, they can generate more work. If, however, lawyers don’t have enough billable work, then “freeing them up” has no value.
My view is that trying to figure out ROI on KM in a law firm is a losing battle in a typical law firm environment that does not measure most of what it does. One audience member points out that firms spend huge amounts on marketing, hiring laterals, opening or closing offices, all without ROI. So why should KM be subject to ROI analysis. I agree. It’s not clear that much has changed over the last few years in dealing with this conundrum.
That’s like saying I speed on the highway so it’s okay to run red lights too.
Firms should put all of these choices through a decent ROI analysis. Unlike corporations, firms don’t have to please outside investors and thus make silly moves like for-show-to-raise-the-stock-price layoffs. They can get their investors (partners) together easily and have a reasoned discussion based on real numbers, not hand-waving.
Finally, you can indeed assign numbers to lifestyle-type issues. You need to do a bit of research and de-weight the numbers significantly, but corps have known how to do this since the advent of the spreadsheet (which turned 30 this week, BTW).
Firms should measure what they do; they practice law but they’re in business to make money. Keep in mind Einstein’s comment that not everything that counts can be counted, and not everything that can be counted counts. But do count the things you can. Don’t let metrics alone rule your business, but do use the information as one more data point in decision making.
Comment by Steven Levy 10/23/2009 @ 7:59 am