Industries dealing with tangibles, such as oil or pharmaceuticals, lend themselves to traditional financial accounting methods. Knowledge managers in such industries can therefore link successful knowledge management programs directly to financial results, because a successful knowledge management program will directly result in tangible products being created and distributed more efficiently.

In addition, in industries where there is a clear delineation between the creation of the product and the product itself, those responsible for resource allocation and financial reporting will be well versed on the costs of creation and the expected levels of return on investment.

In law, knowledge, an intangible, is not only a law firm’s greatest asset, but its only product. This means that those responsible for financial reporting will be more likely to see the cost of product creation, including knowledge management, as a cost that is not directly linked to financial return, and will be less likely to offset the cost of creation against the value of the product (that is, the fees paid by clients).

Traditional financial accounting methods have difficulty valuing intangible assets and the valuation of intellectual capital for knowledge-based organisations is a specialist field in itself. It is hardly surprising, then, that those who manage those intangibles struggle to demonstrate that the management costs produce bottom line value. For example, even if a knowledge manager can show that:

it is unlikely that those responsible for financial reporting would attribute a proportion of the subsequent fees as being generated by the knowledge management function and then express this as a financial return on investment indicator against the costs of the know-how system and know-how quality control processes.

While the most visible and public indicator of a law firm’s success is the profit per equity partner figure, financial results are past performance indicators and do not guarantee an organisation’s future success or health.

Many organisations in other industries have implemented an approach that allows them to assess the organisation’s health and the likelihood of achieving strategic goals. The most famous of these approaches is Kaplan’s and Norton’s “balanced scorecard”, which includes not only traditional financial reporting but also indicators such as critical internal business processes. Currently, the scorecard approach seems to come the closest not only to assessing the past performance of an organisation but assessing the likelihood of future success. I know of only one Magic Circle firm using this approach, alongside traditional accounting methods, to assess its health.

It will be some time before the formal assessment of a law firm’s health will routinely include the valuation of intangibles and intellectual capital. In the meantime, legal knowledge managers will have to demonstrate the value of their knowledge management programs without necessarily being able to include a figure for financial return. There are a number of different tools that knowledge managers use to measure the value of their programs, and a comprehensive value assessment will include a blended approach using both quantitative and qualitative measurements.

Quantitative tools can include, for example:

Measurement should be taken throughout the life of an initiative: at the beginning, to enable proper benchmarking; during implementation, to assess the health and relevance of the initiative; and after implementation, to ensure that the program remains relevant. Before any knowledge management project implementation, knowledge managers can also use qualitative and quantitative measurements to develop criteria to trigger a reassessment of the project.

For example, if business processes for know-how maintenance are hitting the predetermined measures for success (for example, reporting evidence shows a high rate of access to precedents) but time sheet analysis shows that senior lawyers are spending too much time involved in maintenance, these measurements should trigger discussions about adjusting the program to avoid this problem. Solutions might include reducing the number of precedents to only the 20% most used, or ensuring that most maintenance is carried out by trainees with a senior lawyer’s sign-off.

In the absence of hard financial data, it is important for legal knowledge managers not only to communicate the measurements and display the value of the knowledge management programs, but also to explain the processes used to collect the measurements and the steps that will be taken if those measurements show that the value is not being achieved.

This will go some way toward alleviating any concerns of decision-makers and those responsible for financial reporting, and will demonstrate that knowledge management programs are not pursued for their own sake.

Modern law firms are the ultimate knowledge and information organisations. Business methods for the assessment of organisational value have not developed at the same pace as the technological and economic landscape that has created global knowledge-based organisations. This makes it almost impossible for legal knowledge managers (and law firm accountants) to provide hard data directly demonstrating financial return for the spend on knowledge management programs. While the theorists are developing appropriate tools, legal knowledge managers can in the meantime use the simple qualitative and quantitative tools readily available to communicate value.