A fellow who does internal blogging for a Magic Circle firm (I'm not at liberty to say which one), and who is working on a Ph.D. in knowledge management, just asked me these questions via email, and I thought the subject matter would actually be of interest to many of you.  His Q's and my A's:

Q:  Do you believe there is a direct relationship between KM and firm profitability?

Yes.

Q:  If yes, what would be top three reasons why?

1. KM can provide a credible and "ownable" distinction for a firm vis-a-vis its competition if the firm is thus enabled (by KM, that is) to provide more rapid, thorough, and focused responses to client issues.
2. From the perspective of professional development, one of the biggest drags on firm profitability is having to write off or discount associates' billable hours when the client perceives (often rightly) that little value was provided.  To the extent associates can be brought up to speed more quickly--through "continuous learning" made possible by KM--the realization rate on their billable hours will increase, which provides a direct bottom-line gain for the firm (i.e., overhead/expenses increase zero, revenue increases > 0).
3. IF a firm is able to do "value billing" rather than hourly, a robust KM platform can help make creation of deal documents, etc., extremely efficient and productive, yielding very high margins.

Q:  If no, what are the top three things why firms "do" KM anyways?

(Realizing this is a counter-factual so far as I view things)

1. Because everybody else does it (don't discount this as a motivator for lawyers!).
2. Because they have a vague notion that it will help them with professional development--but may not have made the precise connection outlined above.
3. Because they paid some consultant a lot of money for advice and KM was one of the recommendations (the fallacy of sunk costs,* but how many lawyers have had meaningful training in economics?).

Q:  How would you rank the following means to get lawyers to share knowledge by efficiency? (and would you rank them differently for partners and associates?)

[Note that I rank them 1—5, from most effective to least effective.]

Technique/Incentive	Partners	Associates
A one-time incentive or reward	4	3
Authority or direction from partner/immediate supervisor to contribute	5	1
Contributions to KM recognised as part of the appraisal process	2	2
Peer recognition and respect	1	5
Provision of a charge code to record the time used for KM	3	4

We shall see what he makes of this (he's polling other people as well, I am greatly relieved to report), and to the extent any of his work becomes publicly available, look for it here.

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*The "fallacy of sunk costs" is a tempting psychological trap of the general form, "We've spent so much already, we can't back out now."  The fallacy is in letting your past expenditures, which are unrecoverable no matter what you elect to do, influence your future course of action.