Monday, September 26, 2005

Legal KM Economics & Realization Rates (Some Questions...)

I'd like to discuss law firm KM economics for a moment, as I have some issues I'd like help understanding.

If you read Matthew Parsons book, which cites David Maister's 4 drivers for professional service firm profitability (Realization rate, Leverage, Margin, and Utilization), he describes one of the more difficult conundrums for KM - justification & ROI. If we make lawyers more efficient in a time based billing model, we are reducing the firm's billings. It's not that simple, as Matthew points out, but that's the argument we're up against.

One of the best arguments going the other way, towards KM's value, is that by helping the firm to leverage (driver #2) the work down to the most appropriate person, we are helping improve the firm's PPEP (Profit per Equity Partner). The obvious goal here, as Matthew describes, "is to deliver the same quality (or better) legal services with a smaller share of partners time". This is an excellent justification for KM (in my mind), and probably the first one I'll cite when discussing how KM can help in the provision of legal services.

My inquiry today centres around another another of Maister's profit drivers mentioned in Matthew's book, specifically, KM's lack of impact for the firm's Realization rate. The Finance Director he quotes states: "The only way that I can see that knowledge strategy can simultaneously increase PPEP and average realized rate is where there is a shift away from hourly rate billing for particular types of work to fixed fees, and we make investments to make that fixed-price work more efficient".

I'd like to discuss this issue moving beyond the Value-vs-Time based billing debate, and see if we can find a better connection between KM and Realization rates. Why? First of all, I think KM can effect Realization. And secondly, many firms are still holding onto the hourly rate business model, and I have my doubts that it will ever entirely dissapear. Simply put, I think that KM practitioners have to find a better supporting argument, and I think I have one...

Realization is calculated by dividing total billings by the number of hours billed. But what about when time is written off a file? For example, an Associate takes 15 hours to do prepare a contract, where it should have been done in 4 hours. Regardless of how the mark down is handled on the bill, that time simply disappears - a big black hole. A very rough measure of those hours could be found by comparing prebill value -vs- the firm's fees billed or received. Could it not? Obviously there are a number of reasons why time can be written down or off of a file, but what if we were able to reduce that number? Could KM lay any claim to that billing efficiency?

KM (or any other process efficiency) adds value to the firm by reducing those lost hours - especially with Associates who likely suffer the worst reductions. Better training, access to firm knowhow, automation, and quality research support, are among the many factors that should help law firms reduce the number of unbilled hours.

Time is not an unlimited resource in a law firm, and it's likely the most complex factor a firm must manage. People can walk out the door, and they're not cheap to recruit or bring up to speed. Helping Lawyers work more efficiently can make the bottom line better, and create happier employees. I believe this. Now I just need some help proving it.

So here are my questions (any help would be greatly appreciated):

1) Do firms consider this 'lost time' as part of their realization rate? (My firm does, but is this common?)

2) How significant is this gap? Is this a small factor in our evaluation of KM? or an important argument?

3) How can this be measured to get at KM's value? Are gross measures good enough, or must it be done at a matter level?

4) Does this not get back to the 'Leverage' driver? Good training (both formal and KM resource based), and building the skills of Associates, in order to reduce Partner time in delivering legal services.

5) What am I missing?


Blogger Connie Crosby said...

An interesting discussion, Steve. I'm no help in answering your questions...perhaps someone over at Slaw would give you some feedback if you point to this discussion?


7:44 PM  

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