How knowledge management leads to more profit

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How knowledge management leads to more profit

At HeadStarterz we advise law firms and other service providers in the area of knowledge management, among other things. (Potential) clients have often asked us: "Knowledge Management? Why is this important for our company?"

To answer this question, one must first understand what the clientele is striving for. Like other companies, service companies are also looking to maximize (or at least increase) profits. Many companies have a "top line" approach and work hard to increase their sales. It is often forgotten that more turnover in partnership structures (such as those found in law firms) does not necessarily lead to added value for the individual partners. In order to increase the profit per partner, a firm must increase its profitability.

We agree with David Maister* that companies can use the following tactics to increase profitability (with decreasing effect from the top down in the list)

1. raise prices

2. reduce variable costs

3. fix unprofitable projects/clients

4. increase volume

5. reduce fixed costs

That sounds simple - every company would like to write higher invoices or reduce variable costs. But this does not happen often. Nevertheless, it is possible - with successful knowledge management and team-based knowledge processes. Two examples:

1. how law firms can raise prices and thereby increase profitability through knowledge management

A law firm, for example, usually charges on a time and material basis. The price of the hour to be charged is based on the skills and experience level of the employees. The rule is: the better the lawyer, the higher the hourly rate.

It is obvious that companies that teach skills to their employees faster can also raise the prices for the respective employees faster. Of course, decades of experience cannot simply be passed on or copied to others in a short space of time. Nevertheless, knowledge management supports the skill-building process and thus contributes directly to a company's ability to increase prices.

By the way: If you are wondering what kind of skills a Legal Knowledge Manager has to have, we recommend this article.

2. reduce variable costs through knowledge management

Variable costs are the variable expenses that flow into the successful completion of a project. For law firms, these costs consist almost exclusively of their own personnel expenses. If these costs can be reduced while at least maintaining the price level, it is obvious that profitability will increase.

The effort is reduced, for example, when companies stop reinventing the wheel every time. Multiple efforts for the same clarifications or other work steps can be avoided. This avoidable effort increases the costs that flow into a project and thus limits its profitability. Knowledge Management means that team-based knowledge processes make use of existing knowledge and experience. Resources can be called up and experiences can be exchanged. A company achieves a result faster, the effort decreases and profitability increases.

These are only two simple examples of how knowledge management can help and why it is of central importance for the profitability of legal work processes.

At HeadStarterz we are specialized in knowledge processes in companies. We focus on people as knowledge carriers. In addition with the right technology, this knowledge comes into its own. We develop tailor-made knowledge management concepts for our customers and thus help companies to achieve healthy profitability.

By the way: another way to increase your own prices is to optimize your own marketing.

A functioning marketing strategy includes, among other things, a clean segmentation of the market, a clear positioning and the appropriate offer. Classic marketing, then. Today, of course, also digital! But not everywhere where the desired clients are missing, there is also a marketing problem behind it. Here you can find information on the distinction between marketing, business development and sales. Fix the problem you actually have!

We also help with the development of effective marketing strategies at HeadStarterz ;).

*David Maister is author of "Managing the Professional Service Firm"

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