Our last two columns introduced the performance indicator dashboard (dashboard) addressing the importance of targeted metrics that assist law firms in evaluating performance on an operational, financial and strategic level, while focusing on the importance of identifying the correct key performance indicators (KPI) for an effective dashboard. Our biggest takeaway is the importance of selecting the right metrics and those translating into action plans. Dashboard metrics should not only communicate and educate firm management, but the metrics must be accurate, timely and responsive to the firm’s strategic plan for improved performance and maintaining a competitive advantage. Also, metrics must be verified to make certain the data is consistent and within the context of what the firm is looking to measure. Metrics cannot be taken at face value, so it is important to be aware of some of the common pitfalls and misconceptions.
Pitfalls and Misonceptions: "Our Only Benchmark is Our Own Past Experience"
Experience and historical data have considerable value, but benchmarking is a great tool for testing metrics for accuracy and context. Several economic and strategic performance surveys are available that assist law firms with analyzing performance data. The benefits of benchmarking include identifying the right KPIs and providing the correct context for comparing data, but some benchmarks can be misleading if not evaluated properly.
An example that illustrates this point is the metric of revenues per partner (RPP). RPP is a very popular metric and is used widely by most law firms. However, coming up with an apples-to-apples comparative of a law firm’s RPP to a performance survey could be difficult. Let's consider a 25-attorney firm. Law firms vary significantly in terms of how many staff support each partner or practice group to generate work. Leverage and profitability can also be impacted depending on a law firm’s structure. There are many performance metrics working simultaneously that affect potential revenues and expenses for determining costs to produce work. Accordingly, how one 25-attorney law firm’s RPP compares to a similar-sized law firm could result in an apples-to-oranges comparison, so it becomes critical to have a clear understanding of metrics being benchmarked. Therefore, it is important to:
1. Measure a law firm against a group of similar firms. Not similar-sized firms, but firms that are structured the same “in the background.” This will provide a valid and consistent comparison to benchmark a law firm’s performance.
2. Compare specific performance measures across the firm’s number of attorneys and staff, practice areas and any or all relevant metrics. Analyzing consistent data comparatives may involve taking a deeper dive into survey data, but survey data can easily be presented and analyzed in various combinations from firm size to practice areas to geographic area. Identify the consistencies between similar firms and analyze the performance data to achieve that apples-to-apples comparison.
3. Understand that benchmarks can be skewed and tend to lean toward larger law firms. Therefore, why would a 25-attorney law firm compare itself to a 100-attorney law firm? Believe it or not, it happens often. There are many reputable large-scale economic performance surveys for law firms available, and many small metro and suburban law firms continue to compare their performance data to the larger law firms because the assessment is the “data fits in many other areas.”
Rather than invite the apples-to-oranges result, law firms should seek out local surveys, where possible. Many smaller metro or suburban law firms have professional service organizations within their communities that provide economic surveys based on their geographic location. These surveys can be very useful and are often produced by local bar associations, law firm business partners and other legal professional associations. These surveys often are more targeted and provide the solid benchmarking data the contextual analysis required.
Dashboard Implementation and Evaluation Made Simple
We have selected the right KPI metrics and tested the data contextually to be sure we are on the right track. We can now outline the dashboard development process, as well as the implementation and evaluation methodology.
1. KPI Selection
a. Historical data analysis. Find the right metrics—reliable indicators of performance.
b. Benchmarking. Apples-to-apples metrics—interpreting metrics.
c. Design/implementation. Select KPIs that work together and tell a story.
2. Dashboard Reporting Design
a. Organize the metrics to demonstrate value—contextual analysis.
b. Illustrate trends through graphical or chart analysis. Graphics help tell the story.
3. Implementation
a. Circulate to firm management; get feedback and management buy-in.
b. Tweak presentation of data; generate more meaningful metrics to support conclusions.
4. Evaluation
a. Analysis. Translate performance metrics into clear improvement opportunities.
b. Results. Implement for improved performance.
5. Best Practices
a. Include eight to 10 KPIs.
b. Financial and nonfinancial metrics—well-rounded view.
i. Operational
ii. Financial
iii. Marketing/business development
c. Suggested dashboard metrics.
i. Working capital
ii. Operating cash flow
iii. Accounts receivable and work-in-process turnover
How Do We Measure Success?
The evaluation of the dashboard data is critical and should be monitored on a regular basis. Focus on key business processes and be sure to highlight the transparency of operation to the firm’s management. Trends identified will facilitate firm goal alignment and assist in developing the action plans needed for overall improvement within the firm—but equally important, will induce a culture of continuous improvement with more focus on process improvement and project management.
The key is to start simple, ensure usefulness and acquire buy-in at all levels of the firm. Dashboards that facilitate continuous improvement will bring significant return on investment. They will assist in building a highly productive law firm culture with ongoing improvement in producing cost-effective work product and delivery of legal services. Also, the firm will become better and more proactive in performance tracking with timely action for improved results.