In Rethinking ROI: Managing Risk and Rewards in KM Initiatives (LLRX, Feb 23, 2004), Bryan Cave partner John Alber makes a compelling case that law firms must have appropriate business intelligence analytics in place before undertaking a knowledge management program. 

Alber writes that return on investment (ROI) analysis has become popular, if not essential, to justifying KM and IT projects. He points out, however, that ROI is easily manipulated, both arithmetically and substantively. To counter this problem, he suggests measuring leverage, the “effective” (that is, blended) hourly rate, and profit contribution. To do so he says, firms must invest in business intelligence (“BI”) solutions first. BI refers to software and processes that allow quantifying the leverage, effective rates, and profits. Without proper BI discipline, the ROI is too easily manipulated.

I agree with Alber’s argument that firms should use BI to analyze their business and apply rigorous metrics to KM initiatives. I would, however, both temper and extend his argument. On the tempering side, BI has two limitations. First, even with careful analytics, it may not be possible to separate the impact of a KM or other new initiative from other changes occuring simultaneously (e.g., a business up- or down-turn or a change in the mix of matters). And second, firms facing decisions must still predict impacts; BI may help limit losses, but it does not guarantee that the predictions will be true. That is, any business decision carries inherent risk that cannot be managed away.

On the extending side, firms should apply the same analytic approach to any new initiative. Firms make all types of decisions – create a marketing department, hire a lateral partner, open an office, lay off associates, or invest in professional development. Why not apply the same strict analysis to all investment decisions? Were firms to do so, they might find that many cherished decisions are not easily supported by the data. Moreover, they might find that, when applying the same yardstick all around, justifying KM is no easier or harder than any other decision.

I applaud Alber for raising this important point and encouraging firms to quantify their thinking. I think that is the first step in rationalizing law firm decision making generally.