Does KM Improve Profitability?

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.