The importance of knowledge management

There has been an explosion in knowledge-management activity, particularly in UK law firms over the past ten years. Typically, firms have employed dedicated lawyers (professional-support lawyers) to carry out knowledge activities, such as the creation of precedent-legal documentation and keeping fee earners updated on new aspects of the law.

They have also acquired sophisticated IT systems to store and retrieve accumulated knowledge. However, market conditions are now tougher, and law firms often see any non-fee-earning activities as overheads, which need to be cut to maintain the firm's profitability. But, viewing knowledge management as a non-essential activity that can be dropped without causing harm to the firm is not the right approach. Knowledge management goes to the very heart of a firm and produces a range of benefits that can help firms survive in difficult times and thrive in better ones.

What is a knowledge-management system?

Before looking at how knowledge management benefits the firm, it is important to understand what a knowledge-management system is. Unfortunately, definitions vary.

If you accept that knowledge is the principle economic resource that businesses such as law firms have to offer their clients then knowledge pervades every aspect of the firm, and a knowledge-management system can encompass many differing aspects of knowledge. There are numerous definitions of what knowledge itself is and how it differs from data and information. However, in practice it is important to share all relevant forms of knowledge, know-how and information that enhance the firm's business.

When thinking about setting up a knowledge-management system, firms often focus on IT, but this is only a conduit for housing and disseminating the knowledge around the firm. Those setting up the system need to identify the type of knowledge the firm should share to benefit its business. Generally, there are four sources of knowledge in law firms:

• Published material, such as library resources, including online material (the key characteristic is that this material can be bought);
• Personal knowledge and experience of the lawyers and others in the firm (this is contained in people's heads and expressed through their behaviour);
• Knowledge contained in a lawyer's work product, for example, letters of advice, agreements (this can be located in the word-processing system and paper files, and can often be collected and computerised);
• Specially created knowledge, for example, precedents created by professional-support lawyers.

The knowledge-management system should focus on creating, capturing and disseminating knowledge and information from the above sources that support the firm's strategic aims. Always remember that managing such knowledge may not necessarily mean codifying it onto a computer system, for example, tacit knowledge (that is, knowledge in people's heads) is often best transferred between people directly. In this situation, the knowledge-management system could facilitate putting people in touch with each other. It is better to think of knowledge as a flow between the four sources, rather than as a static object, and this will help identify the appropriate actions to manage it. For example, published material may inform personal knowledge and experience, which manifests itself in work products and which may then be incorporated into specifically created material.

Also remember that useful knowledge for the firm's business is not restricted to technical legal knowledge, but the same principles can be applied to client knowledge or financial and marketing information to help the firm achieve the benefits it desires. So what are the potential benefits?

The knowledge economy

We are now living in a knowledge economy where the principal economic resource businesses have to offer their customers is knowledge. While most businesses can now claim to be knowledge businesses, this is particularly true of law firms that sell the knowledge and skills of their lawyers to their clients.

A large part of the value of managing knowledge, for example, collecting fee-earner advice/work documents and making it available to all members of the firm, lies in preserving knowledge that would otherwise be lost when individuals leave the firm. Particularly in recessionary times, when there is likely to be a higher turnover of staff, the firm does not want to lose all the valuable investment it has made in individuals if it can help it. 

Some writers, such as Sveiby and Lloyd1 argue that knowledge businesses' ability to survive depends on their ability to transfer knowledge between their members to counter the effects of key individuals leaving. Repositories of collected and combined knowledge become part of the firm's organisational memory and can become an asset that belongs to the firm, outlasting the original contributors of knowledge. It is important to keep such repositories fresh with constant contribution to and updating of the shared knowledge. Both professional-support lawyers and fee earners play an important role in this.

Not only can knowledge be preserved for continuing members of the firm, but it is also a resource to help new recruits bring themselves up to speed more quickly with the firm's work. This highlights the next set of benefits associated with knowledge management.

Efficiency and quality

Most firms have recognised that the key benefits of knowledge management are increased efficiency and quality. Many law firms undertake knowledge-management projects, particularly when they become larger, to prevent their lawyers from reinventing the wheel when they can re-use work that other lawyers in the firm have already carried out. This efficiency has knock-on benefits, such as allowing senior lawyers to delegate more work to junior lawyers and concentrate on higher-value work themselves. This increases realisation (because less time is written off, for example, on research activities that can't be charged to the client due to the pressure on fees) and indeed can increase profitability on the work.

This latter benefit depends on the firm being able to realise that it carries out work faster and more cheaply due to the re-use of knowledge by appropriate charging methods, such as fixed or market-based fees. These take into account the time saving, but leave a greater margin of profit than charging by the hour. This is quite a change for a lot of firms who still rely on hourly charging, although the signs are that more clients are requiring fixed or value-based charging. With yearly increases in fee rates becoming more difficult to achieve, efficiency will become a key driver of profitability.

Quality is regarded as one of the most critical factors in the successful delivery of legal services and most clients now take technical quality as a given. Knowledge management facilitates the sharing of knowledge and helps provide a consistent high-quality legal service across the firm. Law firms are also focusing more on risk management, particularly in post-Andersen days (not least to reduce insurance premiums). Maintaining quality of advice through up-to-date knowledge is an important tool for this.

Knowledge management can also be used as a marketing and retention tool for new and existing clients by showing the behind-the-scenes investment the firm puts into its practice. Client satisfaction can, therefore, be another important by-product of knowledge management.

Client satisfaction

Many law firms are moving towards sharing at least part of their knowledge resources direct with clients, either as an added-value extra to maintain a profitable relationship or as a new product sold to clients in its own right. For example, Linklaters's Blue

Flag service is an example of know-how resources being sold to clients over the internet. Innovation arises out of the cross-fertilisation of knowledge so knowledge management can lead to the creation of new products and services.

Internal benefits

Not only does knowledge sharing help with a range of decision-making processes due to the capture of past experience, but as knowledge-management systems become more prevalent in law firms, they are likely to become selling points for the recruitment and retention of lawyers. Where it is difficult for an individual to keep abreast of the increase in European legislation as well as their own national legislation, a good knowledge-management system gives lawyers comfort in the support the firm offers them. It is also likely to be regarded by lawyers who grow up with such systems as an essential element of their professional lives. It serves as a training tool in that an individual lawyer's stock of personal knowledge can be increased by tapping into the shared knowledge resources. It can also motivate fee earners in their work by removing the more repetitive elements of legal work, for example, through use of standard precedents, and allowing them to concentrate on the more interesting and novel aspects of practice.

Establishing knowledge management as a key function of a firm can also have an effect on the culture of a firm as a whole, predicated as it is on people sharing their knowledge. It can, therefore, foster a sharing environment where lawyers are more willing to work together in teams and combine their knowledge for the benefit of the firm's practice and its clients.

Measuring the benefits

As one might expect with such a wide range of potential benefits and an asset as intangible as knowledge, there can be difficulty showing management the causal link between knowledge management and benefits such as improved firm performance.

This is an area with which knowledge-management professionals must grapple if they are to avoid general management questioning the tangible value of the initiative.

The difficulty arises as knowledge management does not stand alone in relation to realising benefits. As noted, knowledge management converts efficiency benefits into profitability, but this depends on other actions such as ensuring the right level of people are carrying out the work to match the knowledge and setting pricing policies that realise the benefit. Retaining lawyers, and thereby reducing the costs of staff turnover, may be partly due to the firm's knowledge-management system, but may also rely on other factors, such as rates of pay. Law firms still rely heavily on financial measures of success, such as direct return on capital, but knowledge capital is not easily susceptible to such measurement.

Nevertheless, to avoid senior management regarding knowledge management as a pure overhead activity, knowledge managers need to collect as much evidence of the effect of the systems as they can. This will often present itself in the form of anecdotal evidence, for example, someone who can say that having a document on the system saved them two hours of research. These success stories and measures of the growth of knowledge resources should be captured to justify and encourage investment in this area.

At the end of the day, knowledge management, despite its name, relates to some very basic aspects of good law-firm management, which is essential for the survival and growth of a firm. Nor is it just an activity for large firms. Small firms may not be able to invest in expensive IT infrastructure or employ dedicated professional-support lawyers, but the size of their firm may enable their knowledge management to be based around sharing knowledge among their members and housing it in folders on their standard IT systems, for example.

For those firms wishing to get through recessionary times in the best possible shape, maintaining their knowledge-management systems will pay dividends both in the short and the long run.

Reference:

1. Managing KnowHow, by Karl Erik Sveiby and Tom Lloyd, Bloomsbury, 1986

Karen Battersby is course leader of Nottingham Law School's postgraduate diploma in knowledge management for legal practice. She can be contacted at: karen@dbattersby.fsnet.co.uk