Track these 5 metrics to aid your law firm bottom line

October 2015 | Around the ABA

Your law firm collects reams of data every day all day. But do you know the value of that data or how to take advantage of it? Understanding which key metrics you should be tracking and measuring, the experts say, is critical to remaining profitable as a solo and small firm.

Peggy Gruenke, founder of Legal Biz Success in Cincinnati, and Haley Ackerman, founder of Odom Ackerman Consulting in Austin, Texas, discuss the importance of tracking and measuring your law firm’s performance during a recent webinar, “Five Law Firm Management Reports You Should Be Running and Why,” co-sponsored by the ABA Legal Technology Resource Center, Law Practice Division and the Center for Professional Development.

Their presentation focuses on two segments — database reports and financial management reports.

Gruenke begins by asking: How do you know what types of processes you should be tracking? What reports should you be running? And what do you do with the information you’ve been tracking once you’ve obtained it? “The data you have and the data you want to collect are going to help you make better decisions about how to run a more profitable law firm,” she says.

The five (well, six, because Gruenke throws in a bonus) law firm management reports you should be using to track your law firm metrics:

Database reports:

  1. Case lifecycle
  2. Referral information
  3. Networking/marketing
  4. Financial management reports:
  5. Firm metrics: Tracking your key metrics
  6. Economics of your law firm
  7. Cash flow worksheet

Ackerman provides a breakdown of each of the database reports:

1. Case lifecycle

Case management reports help you track the valuation and cost of the case at each stage and allow you to figure out the average number of days it takes from intake to payment. “The case management database is the single-most important repository of information in your law firm because it holds a lot more information than you think it does,’’ Ackerman says. The report involves several stages: Intake, pre-filing, discovery, litigation, resolution and payment.

“This report tracks the actual dollar amount that your firm spends at each stage of the lifecycle,” Ackerman says. “Each firm tracks information differently, but you want to know where the gaps are in efficiency in your office. You can find out how long it takes to move cases, the value of a case at each stage, who moves cases the fastest (the most efficient person or team in your office) and this information will help you figure out how to better allocate resources to make your firm more profitable.”

2. Referral information

All firms depend on referrals and Ackerman says that for a lot of the firms she works with referrals are “the most important lifeline for receiving cases.” With referrals you want to know the actual dollar amount attached to each referral, she says. Ackerman suggests looking at several different metrics to help with tracking — number of cases (taken vs. rejected), value (money earned vs. money spent on cases) and time and investment (gifts/fees and networking).

“Tracking this information is important because you might find out that you are spending a lot of money and time courting referral sources but that you’re not getting the return in referrals or the kind of referrals you want,’’ Ackerman explains. “I would much rather spend time and money on a referral source that only sends me two cases a year but that I’m going to make a lot of money on versus spending money on a source that sends lots of cases that my intake department have to cull through and end up rejecting. Now we’ve spent a lot of money, but we haven’t earned any.”

Attribution is another important tracking metric related to referrals. This metric helps identify one individual or team as the primary contact for any given referral source. Who spent the most time with them? How much money did the firm spend? Who cultivated the relationship? Who is working on those cases? Are there any trends? “Attribution is significantly harder to pinpoint, but it’s important because you want to know who is directly responsible for bringing in the big money for the firm through cultivating these relationships,’’ Ackerman says.

3. Networking/Marketing

When trying to track networking or marketing, Ackerman says the question is figuring out what you are not tracking. Are you tracking who you have coffee with, who you take out for lunch or who you take out for dinner or drinks?  “If you don’t, then you are missing out on a huge section of your networking activities,” she says. The goal is to get a big picture of how much money and time is spent on networking because that equals cost. “You don’t want to spend a lot of your time on cases that don’t bring money into your firm,” Ackerman says. What you learn from tracking networking activity is what works best for you, what works best for other attorneys in your firm and that you might need to refine your networking/marketing strategies.

4. Firm metrics: Tracking your key metrics

Financial management reports, like database reporting, also help to give you a better picture of how your firm is doing or in what areas you can improve. Financial health, Gruenke says, is dependent on three simple concepts: Getting work (“That’s the marketing piece, selling your product”), doing the work (“This is the lawyer stuff”) and getting paid for the work (“The collection piece, invoicing, billing, making phone calls”). Gruenke says in order to be profitable you need a steady flow in all three components, and you have to be willing to measure results along the way.

Deciding on the appropriate metrics for your firm depends on your particular needs:

  1. What you want to measure (profitability of cases – by type, lawyer, how billed; client costs; collection realization rates; expenses – monthly, annually);
  2. How you plan to collect the information (spreadsheets, billing system, client intake forms, etc., in your accounting system);
  3. How the information will be delivered (understandable, relevant, fair and objective and timely).

“You need financial reports that don’t use accountant terms but are in a language that you can understand,’’ Gruenke says. “The reports must be relevant to your firm; not every firm is the same. They must be fair and objective in that they tell the true story, because numbers don’t lie until you start trying to manipulate them. And the reports must be timely. If you are not getting data on time, you can’t make good decisions to prevent something that happened two months ago from happening two months in the future.”

5. Economics of your law firm

Profitability reports are crucial, says Gruenke, because they provide you with a quick snapshot of a firm’s financial health. The report she recommends is broken into Section A (expenses recorded) and Section B (revenue recorded). Section A includes your compensation – how much you want to get paid annually. It also includes taxes, total expenses to run the business (salaries, rent, utilities, softball, etc.) and even your retirement savings.  What you are looking to capture is what is needed to cover all your expenses. Section B includes the billing realization rate (never voluntarily discount your rate – let the client come to you and ask for a discount), the collection realization rate (this measures the amount billed and actually collected; target 90-92 percent), profit/loss number and gross fees collected.

6. Cash flow worksheet

This third set of metrics are an assortment of expenses that show your costs — client expenses, sales and marketing, etc. “This is just making you understand that you are running a business and that there are costs involved in running a business,” Gruenke says. “And understanding where you are spending money is important as well because you can then look to see where can cut back, do things differently and think about where you really want to spend money.”