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.
Mary–I certainly agree with you that KM ROI has been a tricky subject for those beholden to the billable hour. KM remains a potential selling point, allowing firms to demonstrate (and sustain) a competitive edge, and also hopefully reducing writeoffs through better access to quality sample work product. I would argue as well that clients have come to expect a certain level of efficiency, and simply will not pay for poorly-run, inefficient services, even if billed by the hour.Still, KM is far easier to justify in a fixed-fee or project basis billing approach. I thought you might be interested in my two posts from the ILTA conference on ROI and project management(from the IT perspective);http://caselines.blogspot.com/2008/08/follow-up-on-it-payoff-and-project.html and http://caselines.blogspot.com/2008/08/cios-on-it-payoff-and-project.html