Thought leader

By Karen Battersby, course director, Nottingham Law School

Measuring the value of knowledge and knowledge-management (KM) initiatives is the holy grail for law firms. Doing KM requires an investment in terms of time, people (both professional support lawyers and fee earners) and equipment (such as IT systems). Those making the investment therefore wish to see tangible benefits from their efforts, usually either financial cost savings, or increased profitability.

However, it is difficult to measure something as intangible as knowledge, which will largely be embedded in the heads of the firm’s employees or collected into its systems and procedures. We instinctively know that enhancing and harnessing the brain power of individuals in the organisation and creating collective organisational know-how, which they can then access in carrying out their work, will benefit the firm’s performance and sustainability. However, making a direct link between KM efforts and measurable financial benefits is very difficult.

Often, the effect of KM initiatives is longer-term benefits, which emerge over time as the knowledge base, and with it the brand and reputation of the firm, are gradually enhanced. Very rarely is there an income stream that can be directly attributed to KM (although where internal KM resources are now sold direct to clients, as is happening in some firms, this may well result). KM acts as a risk-management mechanism to avoid additional costs that would arise from operating with poor quality know-how, rather than enabling savings from specific budgets to be identified.

Nevertheless, measuring KM is rightly a key focus in many firms – particularly where they have mature KM systems and have employed dedicated personnel – where the aim is to justify the investment and leverage greater value from it. Firms such as Freshfields are at the forefront of seeking to demonstrate the overall business value of KM by establishing key measures into a single management dashboard. Other measurement methods used include the Balanced Scorecard by Kaplan & Norton, which can capture both financial and non-financial returns on investment.

Measuring the positive and hidden benefits of KM is critical for gaining buy-in to the discipline in the firm. It is widely recognised that embedding a culture of knowledge sharing and an acceptance of the need by everyone in the firm to participate in KM is crucial for its effective implementation. Yet this is a major stumbling block in firms that rely solely or largely on traditional financial measures of performance, such as profit-per-partner, hourly charging and fee-earning levels. These measures review only historical performance and place emphasis on fee-earning time to the detriment of other activities like KM, which have more subtle, ongoing effects on the firm’s profitability.

As well as looking to measurement systems that examine a wide range of benefits, firms are also likely to focus in the future on putting a specific value on their accumulated know-how or intellectual capital. Some industrial companies have long done so, and the value of their intellectual capital can form a large part of their market capitalisation. With the legal services legislative reforms, which enable law firms to attract external investment, potential investors may well seek a value on law firms’ intellectual capital during their decisions whether or not to invest.