Tuesday, March 19, 2002

Law firms and Knowledge Management: There is Hope

Originally published: March 19, 2002
Edited: April 16, 2002
by Rick Klau

Six years ago, I was in the main conference room of a Top 100 law firm. I was trying to convince the managing partner of this 400 lawyer firm that the firm needed an intranet. “Strip away the technology, the bells and whistles,” I said. “What we’re talking about is making your firm more efficient.”

He paused, then looked at me. He smirked. “You do that, Rick, and this firm goes out of business.”

In retrospect, it wasn’t the smartest thing I’ve ever said. But I was less than a year out of law school… I didn’t know any better.

Today, I know better. But the legal profession – and other professional services firms, for that matter – have not yet embraced efficiency. Why? The roots run deep: the business model, the compensation structure, and the clients themselves.

Business Model
Law firms operate on a “write once, sell once” model. Because they bill based on the amount of time they put into the matter and not the value of the finished product (whatever that “product” might be), there is no incentive to reduce the amount of time it takes to produce the finished product. The irony is that lawyers all went to law school – where the ultimate measure of accomplishment (the grade) was tied not to the amount of time you put into your work, but in the finished result: the exam. (If only all those 18 hour days could have earned me an A on their own…!) But once the lawyer graduates, she is compensated on the amount of time it takes her to do her job. That just doesn’t make sesnse.

The law school example bears more discussion: the purpose of law school isn’t to teach you how to find information. The purpose of law school is to teach you what to do with the information once you find it. Then – and only then – do you acquire knowledge about the subject matter. Because law firms reward individuals for finding information (which, after all, represents the majority of time spent on a matter), there’s less reason to actually turn that information into knowledge, and that knowledge into strategy.

Compensation Model
As long as lawyers are paid based on the number of hours they bill (or the amount of business they individually generate), there will be little or no incentive to actively pool resources in the firm. In the UK, where compensation in law firms is based on the “lock-step” compensation model (individuals are compensated partly based on seniority with the firm and generally make the same as others with similar seniority), firms have been far more interested in leveraging technology to replace manual processes.

The Clients
Clients are demanding more from their law firms, but not enough. DuPont made waves in the early 90s by reducing the number of firms they dealt with from more than 300 to just over 30. The price to be in the game? You had to commit to being part of the “DuPont Legal Network” (a Notes-based knowledge sharing network), agree up front to a fee structure that would provide predictability to the law firm but would be controllable by DuPont. (Both sides agree to discuss any “unusual circumstances” where the flat-fee arrangement might not work.) The results? DuPont controlled its legal budget, and the law firms developed a much deeper relationship with their client. Others have followed suit, but the number of clients exercising this amount of effort with their law firms is still small.

Law firms today have the applications inhouse to analyze how much they bill on types of matters – so it is theoretically possible to see how much it costs the firm to provide the service on a patent prosecution, or a trusts and estate matter or a merger. And yes, there are variables in each case: but the variables aren’t beyond definition, or measurement. If the firms know how much it costs to provide the service, they can figure out what it’s worth in the market, and set a price for the service. This goes on every day with other industries – pricing is an art. Law firms shouldn’t be immune from it. And once they establish a value for the client, then there will truly be an incentive to do everything possible to lower the cost of providing the service: the result will be higher margins and greater profits.

Which brings us to KM. If such an incentive did exist, how can the firms deliver on the promise of KM?

In his post titled “Law, Technology… and what really matters“, Ernie (a practicing lawyer) writes that “computers and fancy software will not automatically make lawyers more articulate, or more responsive to their clients’ needs.” In this, he’s absolutely right. But go back to the point I made above: a lawyer’s job should not be to simply find (or manage) information. Finding information is something that individuals are inefficient at: it takes time and they can’t manually process a lot of information at once. If the finding of the information could be improved, then the lawyers could free up time to focus on the stuff that matters: synthsizing the information that they find and strategizing about how it applies to the client.

In the end, synthesis is impossible until you have all the information. Today’s practice ends up devoting an inordinate amount of time to the discovery of information – to the detriment of the real valuable role a lawyer brings. If I’m the client, I want the lawyer thinking, not looking. (True story: I once spoke on a panel with an Alabama defense lawyer named Davis Carr. He showed the audience a copy of a recent invoice he sent to a client. The largest line item on the invoice? “Thinking: 14.2 hours.” He said he never had a client reject a bill.)

Last week, Ernie wrote about weblogs and KM at his firm using the example of a secretary who handles the filings for her firm. In it, Ernie suggested that perhaps that individual would maintain a Radio weblog so that others in the firm could access her knowledge about recent changes, updates to procedures, and so on. John Robb expanded on this, by pointing out that Radio allows “her expertise to bubble to the surface” through categorization and institutional “awareness” of her value.

There’s really two issues here: the first is capturing the useful information. Ernie rightly points out that a DMS is a crude KM system at best (I come by the opinion honestly: I used to work for a company that sells DM solutions and had a fair percentage of the legal market), since it’s a highly structured system that requires a fair amount of awareness on the part of the user: unless you know what you’re looking for, it is going to be hard to find. A structured approach to KM is counter-productive, and probably doomed to failure. (See my post from January titled “Cancer and DNA“ where I explore this in more detail, and speak specifically to Robb’s vision of K-Logs: “K-Logs shift the synthesis back to the people, and make the systems simply a mechanism for the collection of the information.”)

The second issue raised above is how to encourage the “bubbling” of information that Robb talks about. In order for it to work, the system should be capable of making certain inferences about information that I should be interested in (“You read Alice’s posts a lot, you should be interested in Bob’s”) as well as telling me about what sites and/or pages are most popular among my peer group. Add to that a flexible search interface (Google), and you’ve got a powerful tool for capturing and disseminating knowledge throughout an organization. Elements of this are what the Radio Community Server is all about.

As for law firms, in order to benefit from the scenario above, they’ll need to first align compensation with the firm’s objectives: they will need to reward sharing of information. (And if that’s not possible, at the very least they need to not discourage the sharing of information.) Then, put in place a system that can easily capture useful information and handle the publishing and distribution of that information. Only then will a firm be capable of being the sum of its parts.

Will we get there? Absolutely. This all ties back to Ernie’s real question: When will the billable hour die? Fortunately, I think the pressures are too great to ignore and too pervasive to go away without effecting real change on the profession. Within 3-4 years, firms will have moved away from a revenue model based on effort (which measures time committed to the case) and towards a model based on results. (And no, this doesn’t mean it’s a get-paid-when-you-win model. It just means that the focus is on the result of the lawyer’s synthesis – the strategy – not on the time it takes to get there.) This is no doubt a scary model to imagine for many practicing lawyers. But the law, like accounting and financial services before it, is facing dramatic change. Firms can either choose today to embrace these challenges – and invest in their future – or risk committing themselves to a business model and a strategy that will eventually fade, leaving them with declining revenues and fleeing clients.

The ultimate goal has to be to develop a stronger, more sustainable business model. KM promises to help a law firm transform itself into an efficient, profitable organization that is benefited by – not threatened by – increased cooperation among its members.

For more on this topic, check out this article in the March, 2002 issue of Global Counsel: Knowledge Management and Professional Development. While the focus is on large, multi-national law firms, the issues it addresses are broadly applicable and address a number of points raised in this piece.

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