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We live in a rapidly evolving business environment. And while many law firms have been reluctant to adapt, forward-thinking leaders are seizing the opportunities these changes have inspired.
Our recent blog posts have focused on an evolving workplace. We have highlighted three significant opportunities law firms should embrace to build a stronger, more resilient firm:
1.) Build a Strong Firm Culture ( View Article)
2.) Streamline Workflows (View Article)
3.) Measure the KPIs that Matter (article below)
How does your law firm measure success?
Most law firms take a relatively narrow approach to formulating their goals. They define success with a handful of financial metrics and focus mainly on profit maximization, with billable hours as the most important performance indicator.
However, this approach limits strategic planning, ignores the potential long-term implications of in-the-moment business decisions, and, in turn, reinforces shallow and ill-defined goals. Instead of a rigid short-term focus, law firms are encouraged to expand their success metrics and establish more comprehensive performance reviews using a well-rounded set of key performance indicators that measure success beyond short-term profitability.
Metrics vs. KPIs
For clarification, metrics are used to track general business performance. A key performance indicator (KPI) is used to measure a specific, important goal or objective
Reporting and Data Analytics
Law firms should review their capability (reporting and knowledge) and take the necessary steps to gain a more nuanced assessment of essential metrics related to productivity, return on investment, profitability, and qualitative results.
A practical data analytics function consists of the following 4 elements:
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1. Data Capture |
Which tools are in use? Which policies are in place to ensure accurate and complete data capture? |
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2. Data Analysis |
Which reports are automated? Which ones require manual input? Who is in charge of analyzing them? |
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3. Modeling |
Is there qualified in-house or outsourced staff in place to forecast future results? |
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4. Action Steps |
What is the procedure for addressing findings? Who is in charge of strategic plan development? |
With a comprehensive reporting system, law firms can capture data to identify what is happening and better understand why it is happening. They can then focus on metrics contributing to a healthy work environment while ensuring financial and cultural stability.
Law firms should look at four types of data analysis: descriptive, diagnostic, predictive, and prescriptive.
- DESCRIPTIVE: This analysis is based on historical data and focuses on your past performance.
- DIAGNOSTIC: This analysis indicates why your performance is the way it is.
- PREDICTIVE: This analysis gives insight into what will happen.
- PRESCRIPTIVE: This analysis helps determine what to do to improve performance..
Descriptive and diagnostic analyses focus solely on past performance, whereas predictive and prescriptive analyses are used to forecast and model future performance
Basic, Intermediate, and Advanced Metrics
Law firms need to understand the various metrics they can apply to perform the different types of data analysis. Consider the following categories of metrics: basic, intermediate, and advanced.
Grouping metrics by function or purpose is also helpful. For example, financial, operational, marketing, client service, cultural/social, workforce, etc. For this article, metrics are grouped into financial and non-financial sets to keep it simple.
Basic Metrics
Responsible firms should (at the least) consider basic metrics in their reports. For the firm as a whole, basic metrics include:
- Fees, expenses, and net income
- Accounts receivable (AR) and work in progress (WIP)
- Cash flow, debt, and equity levels
- Billable hours, billable value, billings, and collections (non-hourly firms tend to focus on gross dollars collected)
For timekeepers (revenue generators), key metrics include:
- Productivity
- Billable Value
- Billings
- Collections
- Bill Rates and Realization
- Profitability (sometimes if they have a robust system)
Beyond the standard financial reports, firms sometimes also look at capacity and demand-related metrics such as:
- Case count
- New cases vs. closed cases over a defined period
- New clients and clients lost/finished
- Timeliness and compliance with client guidelines and requirements as well as firm processes
Intermediate Metrics
Intermediate financial reporting includes:
- Financial KPIs (average bill rates, billable hours, and collections per TKPR), with robust sorting features that provide insights into performance by position, practice area, experience, tenure, client, and team.
- Average profit and profit margin per timekeeper with the same sorting capability
- Compensation and overhead benchmarks by experience, position type, qualitative scores, and market ranges.
Intermediate non-financial reporting includes:
- Average days files are open
- Files opened and closed per week/month
- Associate and paralegal leverage per client/case
- Average time spent on case, client, task, etc.
- Utilization rate
- Marketing KPIs include client conversion rate, client retention rate, new clients vs. lost clients
Advanced Metrics
Rarely do law firms turn to advanced metrics that fully capture the underlying causes of performance outcomes.
Advanced financial metrics include (limited by data):
- Profit by client and matter
- Payroll and overhead per hour
- Cost per completed task
- # of cases per 100K revenue
- Return on invested capital
Reporting levels typically include firm, client, matter, case, and assignment.
On the non-financial side, only a few firms consider measuring qualitative metrics or their correlation with performance, such as:
- Job satisfaction
- Quality of the work environment
- Management efficiency (direct reflection of productivity, operations metrics, turnover rate)
- Turnover rate
- Staffing efficiency
- Training quality
- Organizational stability (summary of the metrics above)
There is a wide range of measures law firms can track to assess their performance. Without a comprehensive set of metrics, law firm managers have an incomplete picture of the health of their organizations. Their ability to analyze the underlying factors for financial or operational challenges and to identify patterns or create models to forecast future performance is limited.
Defining KPIs for Your Law Firm
Choosing the right mix of metrics to serve as key performance indicators depends on a multitude of factors, including:
- Vision, goals, expectations, and timing
- Business cycle phase (Startup, Growth, Maturity, Decline)
- Firm culture
- Size/Scale
- Organizational structure
- Operational systems and processes
- Location
- Utilization of space
Goal setting has a significant impact on which KPIs are essential. Devoting time to formulating a vision, goals, and objectives is critical to determine which performance metrics matter. All firms should incorporate basic, intermediate, and advanced KPIs into their reporting habits.
While some of the more advanced elements may need to be tracked informally in smaller organizations, the idea is to compile a list of metrics that managers can trust to adequately reflect the firm’s performance measured against specific goals and expectations.
A well-rounded stack of KPIs will allow law firms to define goals and measure performance against those that surpass simple short-term financial objectives. A firm that sets goals in the interest of all stakeholders while measuring its performance comprehensively through various financial and operational metrics is prepared to overcome challenges and prosper.
And be sure you are caught up reading our posts on the fascinating and relevant topic of the evolving legal workplace. Previous posts are listed below:
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