A performance measurement system aligns a firm's daily activities with its strategic planning process. The key is measuring critical success factors across the firm. Would your firm benefit from a performance tune-up?
"If you can't measure it, you can't manage it." That's the word from The Conference Board in its report on strategic performance measurement.
The nonprofit management research organization concluded that the most successful companies use a full array of performance measurements that report not only on past performance, so-called lagging indicators, but that also provide insight into the future by considering leading indicators.
What does this mean to law firms? To be successful, law firm managers must evaluate how the entire organization is performing at any point in time.
Traditional performance measurements, however, focus on a financial perspective with little or no objective data on three other core areas: the firm's people, its clients and its internal processes. Only by monitoring all four perspectives can a firm ensure that it is operating at peak performance. Here is a look at the whys and hows of implementing a system that will address all the critical areas that can ensure your firm's long-term success.
Knowing the Limitations of Traditional Measurement Systems
Knowledge-based workers such as lawyers are not overly motivated by a myopic management slant focused only on financial results. By definition, professionals are motivated by excellence in their work product and in their client relationships. They also want to be well supported with good technology and staff, and to ensure their long-term future by developing junior staff in the standards of their profession.
While these aspirations are true for almost every law firm, few use objective measurements to assess how well they are performing in these softer areas. The reason is that these areas are harder to measure, so rather than measuring the performance that they want, managers confine objectives setting to the areas that they can measure--read financial.
But financial data is an inherently poor indicator of future results--akin to driving a car by looking into the rearview mirror. Actual results are historical in nature. Add to that the fact that financial reports are often prepared up to 15 days after month's end, and some key indices may be reporting on events that occurred a month and a half earlier. Although historical results are not completely devoid of predictive value, leading indicators such as client satisfaction and employee loyalty are far better predictors of future results.
Another limitation of financial data is that it is often voluminous, with little or no analysis. Law firm managers are left to filter through a plethora of data trying to find the proverbial needle in the haystack--the truly strategic information that requires top-level management intervention. Besides the typical indices such as available cash, accounts receivable and work-in-progress aging, billable hours, collections and realization, little else is reviewed on an ordinary basis. While the strategic plan may call for the development of a new area of law, improved mentoring, improved client satisfaction and the like, these objectives are rarely part of the present measurement system. Thus, progress in these critical areas is not evaluated as part of the standard reporting process.
In addition, a limitation of many financial reporting systems is the financial data's incompleteness. For example, firm managers will typically conclude that an area of law with high billing rates and high billable hours is a profitable area. While that would often be the case, firms that have implemented sophisticated profitability analysis (such as activity-based costing) systems have sometimes found that previous assumptions are not supported under empirical scrutiny.
The du Pont model as applied to professional services firms expresses per-partner profits as a formula with five interrelated parts, each of which contribute to partner net income:
Billing Rate x Realization x
Utilization x Leverage x Margin
A conclusion about profitability of a practice area, client segment or originating lawyer based on only two or three of these factors is incomplete and, therefore, inconclusive. Net income in its most basic form is revenue less expenses. Any assumption of profit by looking only at revenue is looking at but half the equation.
Limiting performance measurement to only financial criteria also presents a risk of creating horizontal and vertical silos. Horizontally, practice areas compare their results and vie for influence based on a limited number of indices. Vertically, the linkage between people, internal processes and client perspectives are not measured and are relegated to low-priority status-to the detriment of achieving breakthrough results.
Improving Alignment and Focus
A comprehensive performance management system will help align day-to-day activities with strategic objectives, providing a clear definition of priorities at every level of your firm. How does it work? Heeding the adage that "what gets measured gets done," a comprehensive performance measurement system should evaluate the firm's ability to achieve best-in-class results in key areas such as these:
- Your People
Ability to attract and retain the best and brightest
Enthusiasm, commitment and loyalty
- Internal Processes
Quality of work product
- Client Perspectives
Client retention in strategic areas
Client growth and profitability
Net income per partner (from the perspectives of billing rates, realization, utilization, leverage and margin)
Revenue or contribution per client
Revenue growth in strategic segments (such as clients, areas of law and the like)
These 12 success factors are intended to be illustrative, not comprehensive. The critical success factors chosen by any firm will come from its strategic planning process and be consistent with the firm's unique vision and mission statements. Your success factors should emphasize firm strengths with only a few, if any, addressing known weaknesses. Also, the factors should balance short-term and long-term objectives.
Performance measurement in the softer areas is often best achieved through surveys. If you set a goal of maintaining strong client relationships, for example, ask your clients how well you are doing. If you set a standard of excellence in work product, do what your clients do--test it under a quality assurance program. If you want highly motivated and loyal staff, conduct periodic climate surveys. Some measurements, such as staff satisfaction, will require that you introduce new processes, like firmwide surveys. Others, such as profitability analysis, may simply require that current data be compiled in ways not previously contemplated.
In establishing performance measurements, it is important to set them against specific goals. Goals are best set by benchmarking current results against internal or external (when available) data. Practice area profitability, for example, can be benchmarked against other practices or against published law firm finance surveys.
Whatever benchmarks you use, the goals should set "stretch targets" that are achievable but will require a concerted effort.
Building Organizational Focus and Efficiency
As part of their groundbreaking work on The Balanced Scorecard: Translating Strategy into Action (Harvard Business School Press, 1996), Robert S. Kaplan and David P. Norton determined that 85 percent of corporate management teams spend less than one hour per month discussing strategy. The authors cite this as a key reason that strategy, although well conceived in most cases, is rarely implemented effectively. Performance metrics, tied to your strategy and part of the regular reporting mechanism, will not only focus nonmanagement staff, it will also help focus senior management on strategic issues.
Many firms will want to take the opportunity to move to a Web-enabled desktop when introducing performance measurement. The benefit is that everyone in the organization can get real-time information that is aligned to the strategy, allowing them to take appropriate action more quickly and effectively than under a paper system. Many systems are also designed with built-in alerts that advise specific users when intervention is required. For example, if a client is late with a promised payment, the client-relation lawyer can be automatically notified by an e-mail. Or, similarly, if a survey reveals that a client is not totally satisfied, the system can alert a practice leader.
Efficiency through automation, as well as careful selection of critical success factors, should also reduce the number of ad hoc reports that your accounting department prepares. This factor alone often represents a major savings in time, which can either be realized through staff reduction or by allowing the accounting staff to focus more time in the value-added activity of analyzing financial data.
Decision making is also improved with an electronic desktop, because the volume of information is reduced to what is necessary and strategic. Variances can be examined by drilling down until the user gets to the source data that explains the variance. In addition, because electronic dashboards present all information in a consistent graphical format, the average learning curve is greatly reduced, adding to efficiency and effectiveness.
Proactive Planning and Enriched Communication
A comprehensive array of performance measurements encourages and facilitates proactive analysis by controlling all aspects of the business, ensuring that nothing falls through the cracks. Moreover, because information is available on a real-time basis, it helps ensure that corrective action is taken sooner. In essence, a performance measurement system aligns daily activity to the firm's strategy by identifying and measuring the critical success factors prioritized as part of the strategic planning process.
Such a system clearly defines and communicates firm objectives through every level of the organization. It creates a nonconfrontational performance dialogue and communication mechanism, fostering business-unit teaming. As another vital benefit, it encourages individuals to take corrective action and provide meaningful feedback on performance.
Is Your Firm Ready for Performance Measurement?
If your lawyers are saying that practicing law is not as much fun as it used to be, it may be that the firm is not focusing on the issues that motivate them. Partners in many firms complain about the single-minded focus that management has on financial criteria. They feel that success can also be achieved through a more holistic approach to firm management, which performance measurement advocates.
The Conference Board has concluded that firms employing performance measurement are much more likely to achieve industry-leading positions and are twice as likely to have handled a cultural or operational change successfully. Could performance measurement be what your firm is seeking?
Steven J. Campbell ( email@example.com) is a CPA and lead business intelligence consultant for Elite Information Systems, Inc. He has more than 15 years' experience as a COO in law firms. He can be reached at (763) 208-1741.
TIP: Knowledge Is a Performance Enhancer
The Conference Board is a nonprofit public-interest organization that creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performances. It conducts research, convenes conferences, makes forecasts, assesses trends, publishes information and analysis and brings executives together to learn from one another. Learn more at www.conference-board.org.