Knowledge Management and organizational performance in professional services firms: Developing a theoretically grounded model for empirical investigation in law firms.

Abstract: The issue that how organization factors form knowledge management and their effect on organizational performance is being one of the most noteworthy subjects for researchers. Despite the wide implementation of knowledge management there is no standardized framework for measuring the performance within Organizations. The purpose of this paper is to fill the gap and propose a research framework that interconnects knowledge management enablers to knowledge management and organizational performance especially for professional service firms and in particular for law firms.

Key words: Knowledge Management, Professional Service Firms (PSFs), law firm, KM enablers, and Organizational performance

1. Introduction

Knowledge management (KM) is a critical issue in professional services firms (PSFs)

(Palte 2011). KM has become a strategic success factor and differentiator in PSFs

(Hansen 1999). PSFs are seen as models for an increasingly knowledge-based economy

(Nordenflycht 2010). Professional service firm is any firm reliant on a workforce with

substantial expertise— that is, a definition equivalent to knowledge-intensive firms or

knowledge-based organizations (Nordenflycht, 2010). The central characteristic

associated with professionals is their mastery of a particular expertise or knowledge base.

For professional service firms, such as consultants, accountants, lawyers, architects, and

engineers, knowledge is a capacity to act (Schwartz 2006). Nordenflycht (2010) has

identified three distinctive characteristics in the professional service firm i.e. knowledge

intensity, low capital intensity and a professional workforce. For professional firms the

main assets are intellectual capital, not physical, and they have to seek new ways to

leverage their professional intellect .The core business of these firms is to provide highly

developed knowledge- based services grounded on the existence of intellectual assets

(Schwartz 2006).

Law firms are a good example of knowledge –intensive service organizations (Swart and

Kinnie 2003, Alvesson 2000), where it is predicted that KM practices will impact

organizational performance (Carrion et al, 2004). There has been a significant surge in

investment into knowledge management within law firms (Disterer, 2005). Law firms, as

part of the professional service sector, are increasingly engaged in strategic thinking

about business growth and development. The management of partners, staff and their

knowledge is critical to the strategic development (Hunter 2002).A law firm can be

understood as a social community specializing in the speed and efficiency in the creation

and transfer of legal Knowledge (Nahapiet and Ghoshal 1998).In recent years; law firms

have been undergoing significant changes. The key asset of a law firm is knowledge, in

the form of working relationships senior attorney have established with clients. Although

such assets cannot be bought and sold like conventional capital, law firms can preserve

the value of assets by organizing themselves as partnerships in which senior attorneys

essentially hand-off key assets to succeeding generations of junior attorneys ( Rebitzer

and Taylor 2007).

2. Literature Review

2.1 Knowledge Management and Firm performance

The main objective of Knowledge Management is to improve organizational

performance. Most of the researches in this area are conceptual, anecdotal, survey-

based, or case- oriented. Researchers have empirically examined the relationship between

KM and organizational performance. The direct and indirect (through mediation or

moderation) influences of KM on various performance parameters have been studied in

literature. Research work analyzing the linkage between KM and organizational

performance have either related one specific KM process (like knowledge creation,

utilization or sharing) or a combination of KM processes to organizational performance

(Lee and Choi 2003, Gold 2001).

Similarly, researchers also differ in the set of organizational performance parameters

they have considered for analyses like overall performance (Choi and Lee 2003, Zheng

2010), innovation (Nicolas 2011), financial performance (Zack 2009), organizational

effectiveness (Gold 2001, Mills & Smith 2011). In their studies linking KM and

organizational performance, researchers have conceptualized KM using various measures

like KM capability (Gold 2001, Mills & Smith 2011), knowledge strategies (Choi and

Lee, 2003) and KM practices (Zack 2009).

Forstenlechner (2009) has empirically studied the impact of knowledge management

(KM) practices on the financial performance of a multinational law firm and to refine the

KM balance scorecard being used by the organization.

Previous research in this area highlights the positive influence of KM on organizational

performance. All the research works have been carried out in different contexts and

researchers have conceptualized KM and organizational performance using different sets

of variables.

2.2 Knowledge Management enablers

Knowledge management enablers are the mechanism for the organization to develop its

knowledge and also stimulate the creation of knowledge within the organization as well

as the sharing and protection of it. They are also the necessary building blocks in the

improvement of the effectiveness of activities for knowledge management (Ichijo et al.,

1998; Stonehouse and Pemberton, 1999). KM, like any other management tool or

intervention requires certain enablers to be effective. Researchers have identified various

enablers for both in general terms (as applicable to all KM processes) and specific to KM

process like knowledge creation, sharing or transfer). Many researchers have analyzed

the direct and indirect influences of enablers on organizational performance. Some

scholars have analyzed impact of the culture (Denison and Mishra 1995) and technology

(Gold 2001) on organizational performance.

In related researches, knowledge management enablers include the methods of

knowledge management, organizational structure, corporate culture, information

technology, people, and strategies (Bennett and Gabriel, 1999; Earl, 1997; AABC, 1999;

Arthur Anderson and APQC, 1996; Zack, 1999; Davenport, 1997; Long, 1997; Bose,

2004, Lee and Choi 2003, Zheng 2010).

There is a large collection of research analyzing the influence of enablers on KM, and

organizational performance. Researchers have considered the effects of various

components of enablers such as people, technology, structure and culture. The positive

effects of various enablers have been empirically ascertained in the literature. In our

research on professional service firms, culture, people, KM strategy and information

technology are considered as key enablers.

2.2.1 Culture

Organizational culture is defined as a set of commonly held values, beliefs and

assumptions within an organization, which influences employee’s perceptions and

behavior. It represents the value system of the company and will become the employees’

behavioral norm. Organisational culture is another imperative factor for successful KM

(Davenport et al., 1998; Pan and Scarbrough, 1998; Martensson, 2000). Several academic

and the experience of the practicing professionals have shown that organizational culture

has an influence on knowledge management or the effectiveness of knowledge sharing

(Chase, 1997; Demarest, 1997; Davenport et al., 1998; Pan and Scarbrough, 1998;

Holsapple and Joshi, 2000; Martensson, 2000; Gold et al., 2001; Bose, 2004). In general,

culture highly values knowledge, encourages its creation, sharing, application, and

promotes open climate for free flow of ideas. The development of such culture is the

major challenge for knowledge management efforts. Many studies conducted to

investigate the causes of knowledge management initiative failures, have found that

organizational culture is the main barrier to knowledge management failure (Tuggle &

Shaw, 2000). This has been further established by a survey conducted by Chase (1997)

repeated that culture was the main obstacle that organizations deal with in order to create

a successful knowledge-based business (Wong 2005).

Owing to the highly influential nature of a culture to the success of KM, Davenport et al.

(1998) asserted that companies should ensure their KM initiatives fit into their

organisational culture, or else they should be prepared to change it. The importance of

matching a KM initiative with the culture, style and core values of an organisation was

also highlighted by McDermott and O’Dell (2001). An effective culture for knowledge

management consists of norms and practices that promote the transfer of information

among employees and across department lines (Yeh, Lai and Ho, 2006). Building an

effective culture where people operate in an organization is a critical requirement for

effective knowledge management (Gupta & Govindarahan, 2000). Culture is a broad

concept that consists of many aspects. Two key elements of culture are collaboration and

trust (Goh 2002).

2.2.2 People

People are the core constituents that create organizational knowledge (Chase, 1997;

Holsapple and Joshi, 2001; Ndlela and Toit, 2001), because it is people who create and

share knowledge, and therefore, it is crucial to manage those who are willing to create

and share their knowledge (O’Dell and Grayson, 1999). Since, knowledge is kept within

the individual, the most important thing for knowledge management is the way to let the

hidden knowledge within an individual be transferred to other members within the

corporation in order for them to share, utilize, and then convert it into knowledge within

the organization. Therefore, a key element for an enterprise to be successful in pushing

knowledge management is the process to encourage people to communicate and share

their knowledge with others (Nonaka and Takeuchi, 1995). Hence, organizations should

view employees as their most important knowledge resource and must blend in the

concept of knowledge management into their employee management policy, because it is

crucial for an employee to be willing and enthusiastically motivated to participate and

engage in the obtaining and sharing of knowledge (Szulanski, 1996).

Knowledge is held by individuals and the process of transferring this hidden knowledge

to other members within an organization is very important. In other words, to share, use,

and convert individual knowledge into organizational knowledge is a crucial procedure of

outmost importance. Thus, a key factor for an organization to meet KM success is to

support people communicate and share knowledge with others (Nonaka and Takeuchi,

1995).

2.2.3 KM Strategy

According to Hansen, Nohria, and Tierney (1999), a professional service employs two

very different strategies. The authors used the consulting business example, but pointed

out that the approaches can be generalized across all professional service firms (Schwartz

2006). Hansen et al.’s (1999) typology of knowledge strategies distinguishes between

personalisation and codification of knowledge. This classification is based on the

distinction between tacit and explicit knowledge, and the distinct use of IT (Martini &

Pellegrini, 2005). In the codification strategy knowledge is extracted from the person who

developed it, made independent of that person, and reused for various purposes. The

personalisation strategy focuses on dialogue between individuals.

2.2.4 Information Technology

Information technology of knowledge management enabler mainly refers to the

fundamental building block of information technology that supports and coordinates

knowledge management; for example: database, knowledge platform, performance

evaluation management system, and integrated performance support system, etc.

(Beckman, 1999). Hence, information technology can enable rapid search, access and

retrieval of information, and can support collaboration and communication between

organizational members. In essence, it can certainly play a variety of roles to support an

organization’s KM processes (Alavi and Leidner, 2001; Lee and Hong, 2002;Wong,

2005).

Based on the previous studies we know during the process of knowledge management

and through the use of multiple information technology that we can lower the cost of

information usage, increase the speed of knowledge flow (Demarest, 1997; Davenport et

al., 1998), and also aid in the creation, integration, and transfer of knowledge (Alavi and

Leidner, 1999). Therefore, in building the model of knowledge management, information

technology appears to be one of the key factors of influence (Earl, 1997). In addition,

Hendriks (1999) and Hedelin and Allwood (2002) have found out that information

technology has a direct and indirect influence on the motivation of sharing knowledge,

due to the fact that it can accomplish four different functions: eliminate obstacles, provide

channels to obtain information, correct flow processes, and identify the location of

knowledge carrier and knowledge seeker. Some studies have shown that proper use of

information technology can accelerate knowledge management (Mohamed, Stankosky &

Murray, 2006).

3. Law firm and Knowledge Management

The demand for KM in law firms is derived from the following four inter-related areas:

efficiency, new competition, poor communication and retirement. According to Kay

(2003), KM allows lawyers to be more effective and productive lawyers who provide

better service to their clients. While the advantages of employing a KM program in a law

firm are obvious but there are many barriers that a firm must overcome before a KM

program can be successfully implemented. The key barriers to knowledge management in

law firm are culture of individual practices, resistance to technology, lack of time,

inability to measure returns and incentive structure. Weiss (1999) has highlighted the

need for alignment of incentives and knowledge sharing.

4. Research Gap

Previous studies have examined the relationship among variables such as KM enablers,

process and firm performance (Lee and Choi 2003, Gold 2001, Zheng 2010). However,

many empirical studies have not investigated the relationship of people and KM strategy

as enablers on firm performance through KM processes. Most of the studies are

conducted in manufacturing companies. There is a scarcity of empirical studies in

Professional Service Firms (PSFs) or Knowledge intensive firms (KIFs). Researchers and

theorists in the knowledge management have struggled to identify organizational enablers

that link knowledge processes with firm performance.

5. Research Question and Objectives

The Key research question this study tries to address is “Does KM contribute to

professional service firms performance” and if so to what extent?

The objective of this research is to empirically investigate and test the most critical

enablers that influence KM within professional service firm (law firm), which in turn

influences positively the overall performance of the firm.

6. Proposed Theoretical Model and Propositions

An integrated research model to study the KM and organizational performance through

different sets of enablers has been developed. Suitable propositions are developed based

on the existing literature of KM enablers, Knowledge Process and organizational

performance.

Fig 2: Framework of study

EnablersKnowledge

Creation ProcessOrganizational Performance

Fig 3: Theoretical Research Model

Corporate culture not just defines the value of knowledge and explains the advantage that

knowledge creates for the organization (Long, 1997) it also influences the efforts that the

employee is willing to share and put into the company. Therefore, being able to build a

culture with easily accessible knowledge is necessary for management during the

implementation process of knowledge management. Alavi and Leidner(2001) in their

survey of the application of knowledge management have shown that the majority of the

success of knowledge management in their experiences of knowledge sharing is closely

related to culture. Davenport et al. (1998) also point out the eight factors that contribute

to the success of knowledge management projects with many that are related to corporate

culture. Some scholars believe that the standard of evaluating the success or failure of

carrying out knowledge management is through the measure of whether or not the

organization has established a culture of sharing (Skyrme and Amidon, 1997; Davenport

CultureTrust Collaboration

PeopleKnowledge SharingReward

KM StrategyCodificationPersonalization

IT InfrastructureIT Support

Knowledge Creation Process

SocializationExternalizationCombinationInternalization

Organizational Performance

et al., 1998; Ruggles, 1998; Hauschild et al., 2001). Culture is important for facilitating

sharing, learning, and knowledge creation.

Proposition 1: Culture in professional service firm (Law firm) is positively related to KM creation process

Trust is a fundamental aspect of a knowledge friendly culture (Stonehouse and

Pemberton, 1999; DeTienne and Jackson, 2001; Lee and Choi, 2003). Without a high

degree of mutual trust, people will be sceptical about the intentions and behaviours of

others and thus, they will likely withhold their knowledge. Building a relationship of trust

between individuals and groups will help to facilitate a more proactive and open

knowledge sharing process. According to Swowden (2000) trust is the most crucial

requirement for knowledge transfer. Davenport and Prusak (1998) believe that without

trust, knowledge initiatives will fail, regardless of how thoroughly they are supported by

technology. The absence of mutual trust, will lead people to be sceptical about the

intentions and behaviours of others and therefore they will possibly withhold their

knowledge. Building a trust relationship among individuals and groups will facilitate

knowledge sharing process, while the lack of trust can undoubtedly hinder the sharing of

knowledge. Without trust, the knowledge management program will fail. The creation of

new, useful, and lucrative knowledge is impossible without trust.

Proposition 1a: Trust in professional service firm (Law firm) is positively related to KM creation process

Other cultural aspect which is crucial for KM is collaboration. Goh (2002) asserted that a

collaborative culture is an important condition for knowledge transfer to happen between

individuals and groups. This is because knowledge transfer requires individuals to come

together to interact, exchange ideas and share knowledge with one another. Collaboration

has been empirically shown to be a significant contributor to knowledge creation (Lee

and Choi, 2003). Sveiby and Simons (2002) argue that collaborative climate is one of the

key factors that influence the effectiveness of knowledge management.

Proposition 1b: Collaboration in professional service firm (Law firm) is positively related to KM creation process

There is a major role of people in knowledge management success. According to Leavitt

(1965) people are actors and the persons that carry out work within an organization.

People create and share knowledge, and for this reason managing the persons who have

the intension to create and share their knowledge is considered very important. Since,

people are the exclusive creators of knowledge, managing knowledge is managing

people, and managing people is managing knowledge (Davenport and Volpel, 2001).

Proposition 2: People in professional service firm (Law firm) is positively related to KM process creation

Knowledge sharing refers to the provision of task information and know-how to help

others and to collaborate with others to solve problems, develop new ideas, or implement

policies or procedures (Cummings, 2004; Pulakos, Dorsey, & Borman, 2003).

Knowledge sharing can occur via written correspondence or face-to-face communications

through networking with other experts, or documenting, organizing and capturing

knowledge for others (Cummings, 2004; Pulakos et al., 2003).The success of knowledge

management initiatives depends on knowledge sharing. Knowledge sharing between

employees and within and across teams allows organizations to exploit and capitalize on

knowledge-based resources (Cabrera & Cabrera, 2005; Damodaran & Olphert, 2000;

Davenport & Prusak, 1998).

Proposition 2a: Knowledge sharing in professional service firm (Law firm) is positively related to KM process creation

Many scholars when focusing their researches on the key factors for the success of

knowledge management have not just found the importance of organizational knowledge

contribution and sharing, they have also discovered that incentive program plays a major

role in the activity of knowledge management as well (Davenport 1998; Jarvenpaa

1998; Liebowitz 1999; Massey 2002; Schultze and Leidner, 2002; Alavi and Leidner,

2001; Eisenhardt and Santos, 2002). Such incentive program not just positively

influences the amount of support that the members of the organization are willing to give

for the activities of knowledge management; it also increases their willingness to

participate in the creation and sharing of knowledge.

Proposition 2b: Reward attitude in professional service firm (Law firm) is positively related to KM creation process

KM strategies typology by Hansen et al. (1999) are adopted because their work is well-

known and accepted in the field of KM, and has been used for other studies. Second, it

includes previous significant classifications (exploration vs. exploitation by March (1991)

or human-orientation vs. system-orientation by Choi and Lee (2003)) and relates to the

distinction between tacit and explicit knowledge (Davenport & Völpel, 2001). Third, the

concepts of personalization and codification of knowledge are easily understood by

academics and practitioners. The two approaches, codification and personalization are not

mutually exclusive (Hansen et al, 1999; Earl, 2001; Zack, 1998)

Proposition 3: KM Strategy in professional service firm (Law firm) is positively related to KM process creation

Knowledge is carefully codified and stored in databases, where it can be accessed and

used easily by anyone in the organization is codification strategy (Hansen et al 1999).

According to Hansen 1999, some professional service firms concentrate on the codifiable

knowledge of their employees and try to capture, store, and reuse it. codification

approach, also called “ people – to - documents” approach, knowledge is made

independent of the individuals who developed it and reused for various purposes, for

example within other consulting projects, for other industries, or in other countries. The

application of this strategy results in a repository of systematically encoded knowledge

for subsequent distribution and usage. Codification focuses on identifying and explicating

knowledge into knowledge objects in order to give access to knowledge to all employees

of the professional service firm.

Proposition 3a: Codification in professional service firm (Law firm) is positively and significantly related to KM creation process

Knowledge is closely tied to the person who developed and is mainly shared mainly

through direct person to person contacts. The chief purpose of computers is to help

people communicate knowledge, not to store it is personalization strategy (Hansen et al

1999).In professional service firms, the most valuable knowledge is believed to be

closely tied to the person who developed it. This knowledge is mainly transferred by

direct person- to- person contact; the approach is therefore called a “personalization”

approach (Hansen et al 1999). The approach is anchored in organizational learning theory

and aims to build up organizational memory by facilitating learning processes.

Personalization fosters communication and conversation between employees of a

professional service firm- across time, space hierarchy (Schwartz 2006).

Proposition 3b: Personalization in professional service firm (Law firm) is positively and significantly related to KM creation process

Information technology and knowledge management are closely tied together, because

both help the propagation of structured knowledge vertically as well as horizontally

within the organization. They also make searching and using knowledge much easier.

The goal of many enterprises is to use the advancement in information technology so as

to conduct knowledge management (Skyrme and Amidon, 1997; McDermott, 1999;

Alavi and Leidner, 2001). Lin and Tseng (2005) propose enterprises should have a well-

developed technology that is accessible and easy to leverage knowledge management.

Davenport et al. (1998) believe that generally building knowledge management into the

fundamental building of information technology in the organization can create a common

controllable environment so that knowledge can be shared within the organization,

helping ease its success. Information Technology is a powerful enabler of knowledge

management success. It is generally accepted that databases, intranets, knowledge

platforms and networks are the main blocks that support knowledge management.

Information Technology facilitates quick search, access of information, cooperation and

communication between organizational members (Yeh, Lai, & Ho, 2006). It is

indisputable that Information Technology is one of the key factors that influence

knowledge management implementation (McCampbell, Clare and Gitters, 1999). There is

an extensive collection of information technologies such as data warehousing, intranet,

internet, which can be implemented and integrated in an organization’s technological

platform and work together as knowledge management system.

Proposition 4: Information Technology in professional service firm (Law firm) is positively related to KM creation process

A number of studies have addressed knowledge management processes; they divide

knowledge management into several processes such as creation, storage transfer and

application (Alavi 2001). These processes are often occurring in parallel and rarely in a

linear sequence (Beckman 1999).

According to Lee and Choi (2003), the following reasons are given to use the SECI

model in their studies. First their work has been widely accepted, it has been used in

many research areas such as organizational learning, new product development and

IT.SECI model includes both knowledge creation and knowledge transfer.KM creation

amongst the KM processes is important because knowledge creation is more important

for an organization to gain competitive advantage and without knowledge creation a

business will become outdated (Lee and Choi 2003).

Proposition 5: KM creation process in professional service firm (Law firm) is positively and significantly related to organizational performance

6. Discussion and Implications

The study will help Professional service firm (Law firm) to understand the impacts that

different enablers have on the KM successful implementation and how the effectiveness

of KM affects firm performance. The relations between the constructs will help in taking

better KM resources investment decisions. The questionnaire developed can be used to

assess the knowledge maturity of the law firms.

7. Limitations

There are some limitations of this study. First of all, there is focus only on the knowledge

creation process and the other KM processes like storage, transfer and application have

not been considered. Secondly, knowledge management is applicable only if there is

certain number of people in the organization and hence it is assumed that the model is

valid only for professional service firms (Law firms) which have more than 5 associates/

partners. Thirdly, other enablers like leadership, structure, measurement etc. are not

considered in the present study. Finally, the proposed theoretical model is not tested or

supported by empirical data. Further survey and/or experimental research should be

conducted to extend our understanding of the relationship between KM enablers, KM

process and organizational performance of Professional service firms.

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