Friday, October 23, 2009

KM and ROI

I'm at an international knowledge management peer group meeting today, under the terms of which speakers and affiliations are not identified.

My subject line acronyms, standing of course for "knowledge management" and "return on investment," all too rarely appear together either in discussions or strategy. This was in some ways an introduction to ROI at a fairly basic level, but given the relatively woeful state of business analytics at most law firms, investigating ROI may be a real opportunity for KM programs.

People want to believe there is a way to comprehend any puzzling or momentous force. Convince them you are the key to comprehending it and you will gain great status.

Having a basic grasp of finance can give you a leg up in law firms over most people at the firm except perhaps the CFO or COO.

ROI was a misunderstood term of art. KM people took it mean "show us what you are likely to do and how it will help."

We are starting to see a trend of relating KM to profitability or even revenue generation.

As firms have begun to embrace professional managers, it's become much more important for KM managers to establish ROI.

ROI, defined as earnings per dollar of investment, compares solution cost to monetary benefits. Measuring ROI varies between industries. There will always be some black magic behind it. It does not take into account work-life balance. An ROI of 25% means that investment cost plus an additional 25% of the investment is returned.

ROI is calculated first by identifying the solution benefits, less the total costs (not just cash investments), x100 expressed as a percentage.

Utilization rate is the actual hours billed divided by target. So an associate who bills 900 hours with an 1800 hour target has 50% utilization rate.

Realization is collections divided by billings. So a matter in which $200,000 was billed but $100,000 collected would have 50% realization rate.

As KM managers are integrated more and more into the business discussions we need to have a better understanding of the language of business.

Process improvement helps cost savings when a better-articulated, well-documented, more accessible, and standardized best practices reduces the time required for a person to accomplish a goal or complete an activity.

For example, ask attorneys how much time they spend sorting / dealing with email.

It is not as simple as saying that an hour saved is an hour that would have been billed. Tie rather to a firm initiative such as business development investment time. Look for firm initiatives that set goals for new business acquisition, client outreach, cross-selling, and so forth.

Sales metrics; one large legal market vendor tracks sales activity down to the level of clicks in a demonstration. This is not inappropriate but rather is the type of business process necessary to survive in a global economy.

At one firm, five of six projects needed no ROI. On the sixth, the KM manager identified hours that could be used for something else with the new project and used that to successfully sell the project. Another firm will be requiring ROI analysis but has not identified how to do that.

Few firms have assessed ROI on business development.

Value can be defined in a lot of different ways.

The discipline that the "ROI game" imposes helps us better find the business objectives, articulate the goals and objectives of KM work, and communicate better to lawyers about it.

KM taking over the risk management at one firm led to cost savings in not hiring a general counsel. If practice area is servicing more clients in the same amount of time, then you've helped the business of the firm because the firm didn't have to hire more people.

"You will spend less time searching" or "you will spend less time doing X" gives the direction and lawyers intuitively understand that working more efficiently means more time for managing the business or delegating more. Firm leaders may not have spent the time identifying how people should be spending their time.

It drives smart people crazy when business processes are handled poorly. Setting a good example of doing something better proves your value.

One way to get some return on invesment is to do a survey about people's pain points and degree of contentment.

Another way to tie to think about ROI is saving moeny for the client.

One firm has a "precedents" library with metrics about popular precedents, popular users, and unpopular precedents. The parallel "research" library doesn't have comparable metrics. The KM manager's CIO from an accounting firm is asking for an ROI, although the project is required to be in place before metrics measurement can really be done (chicken-egg).

The "wild card" KM managers can play in ROI discussions is risk.

One financial measurement is risk and cost of being sued. Making substantive legal mistakes due to poor precedent or absence of search is a risk and potential cost of having a poor research collection.

KM managers can trace ROI by looking at usage of precedents, derivative works, number of searches, etc.

We can estimate software cost by figuring implementation and consulting may take about 1/3 of the annual cost. Focus on three year period as implementation costs drop off quickly.

Doing calculations can help you identify if your assumptions are incorrect. You won't actually get an ROI of 71% from implementing metrics assessment.

ROI analysis ties well into matter management and alternative fee arrangements.

A major benefit of ROI analysis is a more rigorous business approach.

One commentator said that our firms do not apply rigorous analysis to major business decisions. Most don't even do profitability analysis.

1 comment:

Mike said...

Some great points here, David. This is a set of questions I am asked relentlessly, and even as a "recovering CPA," I find myself taxed (pun intended) when trying to help clients calc ROI on "fuzzy" things like KM.

An excellent resource on this topic (esp. as relates to SharePoint) is Paul Culmsee's fine blog at (scroll down to "return on investment" section on home page for great trove of tools).