Why knowledge management?

Justifying KM investment in a legal practice

Knowledge management can be an expensive business that requires careful justification, particularly considering the difficulties associated with rating return on investment. John Hokkanen considers a four-pronged justification for implementing a KM strategy in a legal firm, leading with the crucial question: why KM?

Knowledge management has really taken hold in the last five years, and many law firms have funded KM initiatives and hired people with ‘knowledge’ titles. Firms have not only seen some amazing successes, they have also seen first-hand that KM can be expensive and that project success can be hard to predict. Particularly in this economic climate, law firm management properly asks, why KM? There are four answers to that question that in turn help to prescribe each component of a KM strategic plan, and firms are well advised to consider taking a blended approach in creating a portfolio of KM activities.

Instead of offering a theoretical definition of KM, pragmatically defining KM as ‘the leveraging of firm knowledge across time and geography’ explicitly focuses KM strategies on achieving this leverage, recognising that its benefits accrue over time. The traditional justifications for KM programmes have largely fallen into two categories: business expense and return on investment. As will be discussed, these two categories are quite meaningful for certain classes of KM activities, yet they do not explain others. Consequently, two additional justifications are proposed: attention management and the proactive building of strategic skills. Together these four justifications explain why law firms should invest in KM, and prescribe the scope and implementation of such efforts.

KM as business expense

Justifying KM as an unavoidable expense of doing business is based on the premise that law is a knowledge enterprise with its raw materials and final result being pure knowledge products. Since law firms are inherently predicated on the leveraging of their knowledge – and not their relatively small capital investments – knowledge management is an inherent part of their business. Done well or done poorly, all law firms are engaged in different forms of knowledge management, and because knowledge is the firm’s only competitive asset, the firm had better manage it well. A formal KM programme is designed to help it do that. The alternative is comparative ignorance, and a firm should not ignore how expensive or strategically debilitating that can be. Many large firms have moved forward with KM on the simple view that the alternative, ie, not managing knowledge and not knowing what the firm knows, becomes pretty distasteful when a certain size is achieved. In short, if a firm has more than 50 lawyers, knowledge management is likely to be a real imperative within the organisation.

While KM expense versus the cost of ignorance may be unavoidable, practical experience suggests that KM expenses may often be postponed. For example, a firm may have many clients with reliable sources of work, and as long as the work is performed reliably, the firm remains on sound financial footing. In this case, strategies of all sorts, including strategic programmes to collect, organise and leverage the firm’s knowledge can collapse into operations as the focus turns to satisfying work flow. Though clients may expect greater efficiency in the future, today they simply want the work done, and while lower cost is a good thing, few firms are hired on that basis alone. Under such circumstances, management can reasonably conclude that it is best to put off KM investments until another day. Doing so keeps the eye on the ball and the revenue figures up.

Such delays, however, apply less to a firm’s technical platforming since clients expect deal lawyers to exchange documents electronically and litigators to use case management software. Though clients may ask KM questions on their requests for proposals, it is technical platforming (eg, the ability to exchange Word documents or issue bills electronically) that usually gets the teeth. The leveraging of the firm’s knowledge is ultimately left to the firm, and that strategic issue may even run counter to the traditional hourly billing model.

The notable exception, however, may be the customer relationship management systems that many law firms have recently put into place. These are clearly KM systems in a sense, as they seek to capture, maintain and leverage the knowledge of the firm’s lawyers about current and potential clients. By knowing who knows whom and who has talked to whom, the firm is better able to manage its relationship(s) with a client, cross-sell its services and connect with other prospects. There is somewhat of an arms-race quality to these systems: if a firm’s major competitors have committed to CRM systems, can a firm afford to forego one? Maybe it can, but these systems, like fax machines and e-mail, drive up service levels to clients and thereby become unavoidable business expenses.

Return on investment

KM practitioners have sought to supplement the business expense explanation with a justification based on return on investment (ROI). ROI analysis has been used for years to justify major IT capital expenditures, and it was natural to extend it to KM. Like the leveraging of capital assets, the investment staff and attorney time on KM work generates returns through the leveraging of knowledge assets.

Firms have been able to point to specific examples where an unambiguous return has been obtained from KM applications. Firm ‘facebooks’, summer associate work tracking systems, firm newsletter applications, conference room schedulers and associate/staff evaluation tools all help to collect and distribute information and can all be analysed from an ROI perspective. While the foregoing systems may not share prized legal know-how, they provide efficient frameworks for sharing and collaboration around administrative tasks that are well defined and where results are relatively easily estimated and calculated. Savings, whether in copies avoided, mail expenses prevented, staff hours saved or long distance charges incurred, can be estimated and compared to the cost of implementing the application.

Though ROI analysis may be a powerful tool for identifying worthy administrative projects, it encounters numerous difficulties when applied to core legal practice systems. The problems include the conflict that these systems may have with hourly revenue models, the problem of being able to take relevant measurements and objectively calculate returns, and the difficulties of successfully executing KM projects to achieve theoretical returns. Consequently, an actual ROI may be impossible to calculate, leaving the analysis to turn on anecdotal evidence. While success stories might suggest that the benefits are worth the cost, a true calculus of costs and benefits is probably impossible, thereby converting ROI justification into ROI speculation. In the end, such speculation may be all that can be reasonably carried out.

A review of recent news articles discussing KM shows how dominant ROI analysis has become in thinking about these issues. The compelling financial nature of ROI analysis seems to drown out other considerations, and in dominating the discussion, it can collapse complex, strategic questions into a one-dimensional inquiry of profit and loss. Though such a singular dimension might work well for administrative functions (eg, which copiers to buy), the benefits of legal practice systems are likely to be much more complex and to impact many other business factors. The benefits are, therefore, much harder to capture and quantify in an ROI model.

Beyond ROI

Legal KM practitioners have long had the gut instinct that KM in a pure knowledge profession ‘just must be right’. However, if both the unavoidable business expense and ROI justifications are insufficient, then alternative justifications need to be supplied to answer the ‘why KM?’ question. Attention management offers one such explanation.

This insight comes from the book The Attention Economy, Understanding the New Currency of Business by Tom Davenport and John Beck (Harvard Business School Press, 2001). The authors persuasively argue that many business people have reached or exceeded their capacity to deal with the demands upon their attention. For example, in law firms, partners’ work lives are consumed not only by profitable client work and meetings, but also by internal committee and governance meetings, client marketing efforts, associate work load management, attorney recruitment and reviews, associate mentoring and training, charitable and community activities, board responsibilities, continuing legal education, and finally client and industry developments. Messaging activities like telephone calls, e-mail, voicemail and in-person meetings break up people’s attention to the point where people must come in early or spend the weekends to get any work done. Davenport and Beck observe that some see the IT revolution as the source of the problem, not the solution, and those offering to solve these problems with yet more technology seem to offer a solution analogous to a folk cure for a dog bite where one uses the ‘hair of the dog that bit you’.

The argument that we have reached a zero-sum attention environment seems right. Focusing our attention on something new means that something else must go unattended. For a knowledge profession in a zero-sum attention situation, knowledge management then becomes the means to better manage and extend the attention of lawyers. The tangible benefits that accrue have tremendous value even if a project cannot sustain strict ROI scrutiny. In short, investments for attention management may be one of the few methods we have available to maintain focus on the great goals that we have for our firms in an environment where focus is becoming diluted. Where partners have reached the limits of their attention capacity, systems that allow partners to do more gives their minds some room in a crowded mental space.

In one sense, this is hardly a new argument. For years, large law firms have paid assistants to make copies, dial phone calls, deliver faxes, run legal documents, deliver lunch, file documents, prepare marketing materials, operate technology systems, etc. These service expenses have been justified because they allow lawyers to stay focused on the most important tasks, which include revenue-generating work, client development and firm management. While these prior services have been administrative, knowledge services, on the other hand, differ because they are concerned with practice-related attention. Instead of removing a task from a lawyer, knowledge services aim to assist in focusing the lawyer’s involvement. The fact that knowledge services engage attorneys themselves rather than run in parallel (as in the case of administrative services) helps to explain why knowledge services can be more difficult to get off the ground.

Framing KM as extending lawyers’ attention directly explains many of the knowledge management initiatives of the past ten years. Consider the ongoing dilemma of what to do with new associates. Due to write-offs, their costs can exceed their produced revenue. The pressure to get them up to speed to increase overall billings is counterbalanced by the cost of partner involvement. In a zero-sum attention environment, a partner may tend to his own billable and client activities rather than give attention to the associate’s needs. This is only exacerbated by associate turnover, which Hildebrandt International estimates to cost $300,000 per lost associate.

Knowledge management activities can help reduce this predicament. Work product retrieval systems, internal treatises, form and example banks, practice treatises, best practice checklists, and document assembly all serve a training function. Indeed, in one firm, an antitrust group offloaded the updating of the internal treatise’s case citations to new associates so the new lawyers could learn about the field while supporting a key asset. Partner time invested on a KM project targeted at making new lawyers more effective gets leveraged across numerous associates. Thus, the attention of the new associate is focused on relevant guides while the attention demands upon the partner are eased through leverage.

Other projects have focused on taming the onslaught of information. Lawyers must stay abreast of legal developments as well as trends in industries and particular clients. In an ideal world, every day or week attention can be spared for thoughtful review of relevant information. However, in an attention-deficit world, proactive review of important but not urgent materials can be put off indefinitely.

Enterprise portals and content publishing systems represent attempts to solve these problems by presenting third-party and internal content through a consistent interface. Rather than having each lawyer spend hours scanning the same materials, the task is centralised and a lawyer or non-lawyer content specialist subscribes to, scans, categorises and prioritises the information and publishes it in ways that are appropriate to the item’s value. Some information may be so critical that it is e-mailed, important items may take a prominent place on a subject matter intranet site, and less important content may be archived into a repository to be accessed via search technology on an as-needed basis. Lawyers thus get pre-filtered and pre-digested information that becomes far more valuable the more attention-stressed the environment becomes.

At some busy firms, work processes can push training aside. KM activities allow a firm to shoehorn them back into an already busy workflow. By providing the distilling, filtering and organising functions, the KM system can provide just-in-time rather than just-in-case training. Such systems provide benefits to both associates and partners: the associate’s attention is focused through higher quality knowledge and shielding him from numerous requests protects the partner’s attention.

Better attention management and enabling the creation of non-obvious value also underlie the development of the so-called ‘attorney desktop’ software applications. The attorney desktop is a client and matter-centric view of related electronic resources. These resources might include e-mails, documents, project plans, task lists, contacts, discussion threads, status reports, research results, budget and billing data, and potentially client and industry-related news. The resources would likely be categorised by subject matter taxonomy, by lawyer or by informational type. On a single screen, an attorney sees the forest and the relationships between its constituent parts, and, by drilling into a particular area, the details of the individual trees may be examined.

Whether or not the work is done efficiently, the real benefit comes from the creation of value through the better management of lawyer’s attention. By presenting previously disconnected information together in a related context in the same visual space, lawyers can see connections that otherwise may not have been obvious, improving client service and quality control. These are the sorts of value propositions that allow premiere firms to charge higher fees.

Contrast that model with the ‘discrete application’ approach used today in most firms. Instead of seeing related information in a related way, organised by matter or subject, items are disconnected into content types (eg, e-mails, documents and billing data) to be serviced by differing applications. Though filtering may extract a subset, that information remains disconnected from all other islands of information. According to Kingsley Martin, inexperienced associates have not yet assembled a complex understanding of the processes involved in their projects. This lack of process context further disconnects information and, as a result, a new associate may have no clue about why a problem is being researched or where that research fits into the larger picture. Martin suggests that the attorney desktop helps place that content into a context of the stage of the process in which one is involved.

One of the great benefits from thinking about KM in this attention framework is that it forces knowledge management personnel, lawyers and librarians involved in such projects to ask the right questions. When you work on this kind of matter, how do you connect different kinds of information? How can pre-processing and pre-relating of information be useful? How can we describe the processes that are used for a matter and connect the knowledge components to their relevant context? Over numerous transactions, how might we begin to ‘templatise’ the process to further focus attention as well as improve efficiencies? In short, how can we give the lawyer the component pieces and relate them in ways so that the lawyer can perceive and add non-obvious value?

Building a KM skills platform

The three preceding approaches to thinking about KM investment focus on its results and the justifications for those results. In thinking strategically about KM projects, these criteria should provide solid value analysis for the vast majority of projects. However, long experience in this field has led the author to conclude that continued knowledge management efforts create lasting effects that transcend specific projects in the same way that a firm is about much more than the legal advice and documents that have been delivered under its name. This other dimension is the law and technologies ‘skills platform’ and it is a strategic asset that may justifiably be promoted in its own right.

A skills platform is like a technical or geographical platform. A network infrastructure of wires, servers and software creates the capacity to create documents, send e-mails and create invoices. Likewise, a large geographical platform can add much to a firm’s value proposition, especially if it wishes to engage in cross-border work or appeal to multinational clients’ desire to minimise their legal sourcing. Consequently, both platforms are enablers without which certain activities simply cannot be performed.

In the same vein, firms that implement projects in terms of knowledge management services (as opposed to knowledge management technologies) develop an internal network of people who understand how to implement practice systems within that particular organisation. This internal value network includes all the lawyers, technologists, content analysts, paralegals and other staff members who collectively know how to efficiently implement these new capabilities. Individually, and as a team, they develop skills in understanding what intellectual assets are available internally and externally, what kind of assets are subject to re-use, how projects move through the development and implementation cycle, and what it takes to model knowledge efficiently and systematically with technical tools. Critical value comes from their understanding of how to act in concert within the particular processes of the organisation that constitute the firm’s value chain. Developing these kind of skills assets is no small feat as neither law (or at least the features of law and how lawyers work and what they expect) nor technology (or at least knowing what may be accomplished easily or not and how to explain needs in ways that your technical people understand what is wanted) nor their combination are easy subjects.

Today, many of the AmLaw 100 have pilot projects in place to test new technologies and develop expertise in them. In the ’90s, these might have involved intranets and extranets. Today, the work continues to centre on creative use of intranets and extranets as well as on collaborative online workflow systems, business intelligence systems, collaborative filtering, virtual legal advisors/new business models, data mining of internal or subscription information, or document assembly. Somebody in a firm has an idea, and the point of the project is to see whether in practice the idea can add value, and, if not, to learn from the experience. Some may describe such activities as ‘emerging technologies’ or ‘research and development’. Both terms are unfortunate in that they place primary emphasis on the end product of the project rather than the skills and processes that are developed.

The author has observed that law firms often try to develop a skills platform through three mechanisms that need not be discussed in this context: client-funded projects; informal skills acquisition; and ad hoc skills development. Occasionally clients are willing to pay for innovation in integrating technology with law or wrapping some new technology around traditional work to make it more usable. Firms are well advised to be aware of (and even seek out) and seize such opportunities when they are presented since the client funds them. Informal skills acquisition would describe efforts where technologists, lawyers and others allocate personal time because of their respective interests. Finally, ad hoc skills development is the use of personnel who are assigned to other budgeted projects during lulls in other work. In all three of these categories, the firm never confronts the hard issue of budgeting for such skill platform development. Though each is a valuable source of innovation and the skills platform grows, the efforts are hit-and-miss in each category and it is difficult to form any long-term strategy based on this methodology. Moreover, mixed messaging about the value of the KM initiatives can occur if care is not used in detailing how lawyers with insufficient billable work have been chosen to make KM contributions.

The hard decisions and need for frameworks come in deciding whether or not to affirmatively and systematically explore how knowledge management and legal practice technologies might alter a firm’s practice, and then to develop the skills within the firm to handle that exploration. Because it can be hard to estimate in an entirely new area the amount of time required to research, experiment and test ideas, these initiatives can get expensive unless closely controlled. A low-level programme might involve at least one full-time equivalent (FTE), and anecdotal evidence suggests that a few of the AmLaw 100 may make an investment of two to three FTEs per year spread out over their knowledge management, lawyer and technical population. A few UK firms have reportedly committed more than ten times these resources to their knowledge management and e-business initiatives. What, then, is the justification?

Top firms that focus on the highest service levels have a good reason to consider developing their practice systems skills for the following rationale. Clients select top law firms because of a firm’s reputation for quality or service as well as the simplification in the management of large-scale or geographically dispersed matters. Once a substantial supplier relationship is established, a client may also make non-standard requests with a firm taking substantial steps to oblige the request even if it is not within the traditional lines of service.

Funding projects that develop key skills (in addition to their other project-based benefits) allow a firm to be proactive in developing expertise in the methodologies and tools needed to meet future client requests. For example, a client might ask, ‘Can you implement an online legal advisor for our compliance practice?’; ‘How would you apply document assembly on this line of work?’; or ‘Do you have an example of a vertical portal that you delivered for another client?’ If it were only technology that mattered, then the firm could (as could the client) hire a vendor. Added value comes from having expertise in having done similar projects before and bringing that expertise to the current project. Firms with experience in implementing practice systems have an expertise platform (much like a geographical platform) that allows them to respond with, ‘Let us tell you about what we did for another client and how we can use that experience for your benefit.’

Though projects chosen to achieve this skills platform goal will likely align with another of the three dimensions, the success of such projects may be assessed largely in terms of the skills acquired. Developing expertise among a mixture of lawyers, technology personnel, librarians and support staff allows the firm to assign people quickly, like a swat team, on a future client request. Consequently, this kind of combined legal services/technology systems training is equivalent to buying insurance for meeting future client needs. By diversifying investment into a portfolio of projects, the law firm ensures that one or more of the projects will prove valuable in the future. When a client request is issued, premiere firms that have a skills platform can shape a request that would not otherwise be easily satisfied, avoid disruption to existing work, and compete with consulting MDPs who have hybridised offerings.

Placing skills acquisition as a formal strategic goal need not be extravagant and a measured approach allows a firm to build tomorrow’s skills while keeping the overheads low and distractions to a minimum. Consistency in proactively pursuing projects that develop skills, even at a relatively low level, is likely to be more successful than extravagantly funding projects that are in ‘code-red’ status. This vision suggests certain key dimensions to such a programme:

It should be publicly recognised that such skill acquisition projects must add tangible benefit to the firm, but are not governed by short-term ROI imperatives;
The scope of every skills acquisition project should have partner oversight and direction to ensure that the tail does not wag the dog;
The choice of who gets which projects of this sort should be made on the basis of what skills and expertise need to be acquired and how those people ought to be distributed;
The new capabilities arising out of such projects should be broadcast to all lawyers in the firm;
The KM team needs people with ears to the ground to discover opportunities where the lessons learnt and skills acquired from projects can be put into practice to generate revenue;
A ‘swat team’ culture from the KM team needs to be agreed upon and understood from the outset as otherwise revenue opportunities may otherwise be missed;
Candor and buy-in at the top is critical because the sending of mixed messages to act strategically one moment and operationally the next will derail these efforts;
Team members should actively participate in international networks of legal knowledge management groups, like the artificial intelligence and law community.

Recommendations

Knowledge management strategies, like the business propositions of the firms that develop them, will differ. Smaller firms may reasonably focus on business expense and ROI approaches, while mid-sized and large firms are likely to include attention management as well. The top firms will likely want to engage in some level of proactive skills development. For large firms, implementing a variety of initiatives with differing justifications to create a balanced portfolio makes good sense. The strategy and goals for each can be thought out differently and will create some projects with short-term results while others may not show benefits for years. Better attention management of the firm’s lawyers and the capacity to offer new services upon client demand yield benefits unique to their respective efforts. The goal should be for all lawyers in a firm to be able to point to specific benefits from the KM programme. Firms considering their KM strategies and portfolio are well served to consider the following:

Have candid conversation within the power centres of the firm and identify the views, opportunities and realities of firm consensus;
If the primary consensus in the firm is to proceed only with projects that have an immediate ROI, stay focused on administrative applications and measure costs before and after system deployment. Staying true to the agenda will keep heads from rolling;
Develop a set of strategic objectives for each of the four justifications to be pursued. Departmental directors can develop budgets and personnel requirements. Identify how interdisciplinary tasks relating from these objectives can avoid impacting the firm’s existing resources, and explain how the departments will co-ordinate their work in practical terms. Assembling all of this strategic thinking into a document will require each department head to confirm the connection between the strategic goals and the methods that will be used to implement those goals;
Educate the partners about the firm’s KM strategy. The effort will be quickly undermined if the partners have no idea what the initiative is and how it will bring them any immediate or long-term value;
Ensure that the KM strategy is used as a sword to define the programme as much as it is a shield against budget cuts. Accordingly, if attention management goals are established, then projects should be implemented in accord with that expressed goal. For example, if attention is the objective, then usability analysis and lawyer feedback are critical;
Because implementation issues will often centre on having personnel appropriate for the work, clear thinking about objectives can benefit decisions about personnel. For example, a technical person developing the IT-side of a distributed knowledge sharing system is likely to be quite different from the egoless content manager who would help build a community of practice. Knowledge engineers working on new-fangled legal publishing technologies like legal advisors are likely to be true hybrids, combining technical depth with communication skills and legal knowledge.

Increasing understanding within a firm about knowledge management and the firm’s goals is no small feat. Buy-in from senior management and commitment by the technology team to work hand-in-hand with lawyers are both critical assets to the process. Clarity of objectives and solid execution will result in projects that will leverage the firm’s key differentiating asset – legal knowledge.

John Hokkanen is knowledge manager at Latham & Watkins. He can be contacted at: articles@hokkanen.com.