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Certain performance indicators can provide law firm management with the information necessary to make informed decisions and adjust direction as needed. But no one number tells the story—instead, the data must be viewed collectively so that you can measure progress toward the firm’s goals. Context is critical.
There’s a wide variation among firms in the type and amount of financial information that firm management receives on a monthly basis. Moving from one extreme to the other, we know of one firm’s management committee receiving so much monthly information it came in a banker’s box and another firm where the managing partner was getting all the information he felt he needed on one page.
Of course, with the advent of computerized accounting and billing systems, most law firms now have far more financial data available to them than ever before. The struggle for most is figuring out which elements of that data firm management should absolutely pay attention to and why. The answer is to focus on your firm’s key performance indicators, or KPIs.
12 Key Performance Indicators
What is a KPI? It is any measurement or statistic that a law firm tracks that meets all three of the following characteristics:
The following highlights 12 KPIs that, when viewed collectively, can provide law firm management with the information necessary to make informed decisions about the firm’s financial performance and what adjustments can be made to improve that performance.
First, though, it’s important to note that law firms are as unique as the lawyers who work in them, and different firms will look at different KPIs depending on their current situations and the goals they have set. These 12, however, will be useful starting points at most firms:
1. Associates-to-Partners is the ratio of associates to partners for the most recent 12 months. It measures leverage, one of the important drivers of firm profitability.
2. Percentage of Partners’ Hours is the ratio of partners’ hours worked to the total hours worked by all timekeepers. This measures whether partners are working harder or smarter.
3. Billing Realization measures the percentage of lawyers’ time that is actually billed. It is the ratio of the value of time actually billed to the value of that same time had it been carried in the firm’s work-in-progress.
4. Net Realization takes it one step further and captures the percentage of lawyers’ time that is actually collected and the time that is written off. It is the ratio of the sum of the value of time actually billed minus the amount written off after billing as uncollectible, versus the value of this same time had it been carried in the firm’s work-in-progress.
5. Unbilled Days measures the length of time it takes to bill the work you do. It is the ratio of the fee portion of unbilled work-in-progress to the average fee billings for the past 12 months.
6. Uncollected Days is the ratio of the fee portion of accounts receivable to the average fee billings for the past 12 months, or the length of time it takes to collect your accounts after they are rendered.
7. Billable Hours per FTE Timekeeper is an indicator of utilization, another lever of profitability. It is the gross number of billable hours worked by timekeepers in a particular category, such as associates, partners or paralegals, divided by the number of full-time equivalents (FTEs) in that particular category. (Note: FTE reflects how many actual lawyers you had for the month, quarter or year and is a critical denominator in several KPIs. For example, a lawyer who was with your firm for 6 of the past 12 months would be treated as one-half of an FTE in determining your lawyer count.)
8. Billings per FTE is the gross amount of fee billings by lawyers or timekeepers in a particular category, such as associates, partners or paralegals, divided by the number of full-time equivalents in that particular category.
9. Growth in Work Hours is the percentage change between the aggregate hours worked in the current period (month, quarter or year) over the same period in the prior year. This can be measured by individual timekeeper category and is an indicator of the overall growth in the firm’s work flow.
10. Average Worked Rate is the gross value of time worked for a timekeeping category as entered into work-in-progress divided by the related hours entered.
11. Average Billed Rate is the gross value of time billed for a timekeeping category divided by the related hours billed.
12. Average Billed-to-Average Worked Rate is the ratio of the average billed hourly rate for a timekeeping category to the average worked hourly rate. This can assist in extrapolating what the likely effect of potential rate increases would be on your billed fees.
As noted earlier, this is by no means an exhaustive list, but rather examples of some of the more meaningful indicators in law firms. As you consider which among these and other KPIs to track, remember this: All that can be counted may not count, and bad data will simply give you useless KPIs. Further, there are no best-in-class KPIs. The ones that measure progress toward the specific goals set by your firm are the best KPIs for your firm.
The Dashboard: What Gets Measured Gets Done
In recent years the term “dashboard” has been introduced into the conversation dealing with indicators in general and KPIs specifically. A dashboard is a snapshot, presented in graphical form, of important indicators from your financial statements and related reports, which can help you see how the various elements relate and form patterns. Many law firm accounting applications offer a module that can produce dashboard reports, providing a focal point that makes information from a variety of sources readily accessible to management.
Law firm dashboards can run the gamut in sophistication and real value, but in its basic intent, a dashboard for a law firm follows the same principle as the dashboard in your car. Perhaps the more important analogy is that you can’t drive your vehicle by solely watching your dashboard—rather, it helps you know how well you are progressing toward your destination.
Developing a dashboard for your firm will help your management team pull away the long grass and pay attention to what is important. For example, if your firm develops a strategic focus on specific client relationships and supports that focus with client teams, measuring the breadth of the relationship by (1) the number of matters per client, (2) the number of practice areas that serve these clients, and (3) the number of lawyers with time on matters connected to this client are all good KPIs to track. Here’s why:
All of these are quantifiable and measure progress toward the firm’s goals.
Overall, while it is important to know why people do what they do and how to motivate them to alter their course, it is equally important to know the direction the firm is headed and when to alter that direction. Most firms have been tracking indicators of one type or another for a number of years, but the most successful firms use these indicators to assist in making important decisions, in motivating and aligning behavior, and in adjusting to new realities.
A Note about Benchmarking
At a recent meeting of a midsize law firm, one partner put it like this: “Our only benchmark is our own past experience.” For many firms that is true—but putting a firm’s experiences in the context of the wider legal marketplace, and specifically your competitors, is critical to the effective use of KPIs, too. One way to accomplish this is through benchmarking, which, in a nutshell, means measuring your firm against a group of similar firms so that you compare specific performance measures across the members of the group.
Some national sources of benchmarking data include Lexis Firm Insight BI Companion, Incisive Legal Intelligence’s Annual Survey of Law Firms and the Hildebrandt Peer Monitor Economic Index.
In addition, there are likely formal and informal local sources for benchmarking in your region, although you would need to make sure that the included groups are comparable to your firm (i.e., size, location, type of firm and the like); that the indicators measured are consistently calculated; and that a third-party conducts the process so the results are not skewed to the goals of the initiator of the benchmarking exercise.
Use Liberal Doses of Common Sense
While the KPIs highlighted earlier will help you better assess your firm’s performance, you also need to consider your specific firm’s goals and identify other KPIs that will enable you to measure success in achieving those goals. Remember, too, the importance a firm places on specific performance indicators can, and will, change over time as a firm evolves and grows.
Finally, make sure that you measure your firm’s performance with good and timely information and that you manage it with liberal doses of judgment and common sense. As valuable as they are, KPIs are simply measurable inputs—they are no substitute for considering all information with common sense and good judgment when it comes to the management and leadership of your law firm.
Karen MacKay is President of the consultancy Phoenix Legal Inc., focusing her work on leadership and strategy execution for law firms. She is a member of Law Practice’s Editorial Board.
Stephen Mabey is Managing Director of Applied Strategies, Inc., and works with law firms in strategic planning and crisis management.