Rethinking ROI in KM initiatives

Rethinking ROI: Managing Risk and Rewards in KM Initiatives - a very interesting article about measuring ROI. Unlike many other articles I've seen on the subject, this paper gives some measures that might prove useful within a consulting / professional services environment:

Measure What's Important to the Firm and Clients

I suggest that in setting goals for knowledge management projects, we should strive to relate initiatives as closely as possible to the firm’s core business model and to clients’ interests. We should not accept vague promises of revenue increases. Rather, we should use measures of success that immediately translate into benefits for the firm and clients. Fortunately, there are such measures.

The three measures that accomplish this best in my view are:

(1) Leverage
(2) Effective rate delivered to the client, and
(3) Profit component⁵

Leverage

There are may ways to measure leverage. Perhaps the simplest entails creating a ratio of partner hours to non-partner hours. You can add many subtleties to this calculation, but the net result is still to determine the effectiveness with which work in a particular group is moved to younger or less experienced lawyers.

At first blush, high leverage sounds like a bad deal for clients. However, in a well-managed firm, quite the contrary should be the case. If associates and young partners are well-trained and provided with tools that make it possible for them to accomplish expert work to high standards of quality and to do so sooner than is the case at peer firms, clients benefit by having a larger pool of talent available to do their work. They also benefit by getting a lower effective rate for the work they have done (because of the lower cost of younger lawyers).

Effective Rate

Effective rate is an average of all hours billed to a client. To calculate it, simply divide total fees by total hours on an engagement or for work done by a particular group across engagements. If you agree to a blended rate when serving a client and you do a good job of managing the engagement, then the effective rate ought not to be higher than the agreed blended rate.

Profit Component

When an engagement is concluded (and probably before), it makes some positive or negative contribution to the profits of a firm. Allocate that on a partner basis, or a matter basis or a group basis, and you have a profit component. (See Laws 2003). This can be roughly equivalent to calculating earnings per product or per business unit in a publicly held corporation. Doing it successfully requires the ability to allocate costs very precisely. For example, if you want to look at the profit component for a group of lawyers using a new knowledge management tool, you will have to track costs across all the matters on which they use the tool and then arrive at a profit component for the group. That can be difficult, both technically and culturally (firms have to decide whether they want to know profit components by group).

If a knowledge management product is accomplishing something useful, it should have a positive impact on at least one of the measures above