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Key Metrics for Law Firm Effectiveness

Posted by Daniel Pasquarelli on Wed, Jul 05, 2017

Key Metrics for Law Firm Effectiveness

by Daniel Pasquarelli / July 5, 2017

Key-Performance-Indicators.jpgYou can collect a lot of data about your law firm. The challenge is to identify which data is critical to the health and performance of the firm so you can measure and benchmark those metrics to improve the firm’s effectiveness and ultimate success. These significant metrics are referred to as key performance indicators, or KPIs.

Often, when attorneys consider KPIs, the term “billable hours” comes to mind. Getting answers to the following billing-related questions is certainly important to understanding the finances of your firm:

  • Average bill rate
  • Unbilled days
  • Ratio of billed-to-work rate
  • Number of billable hours per attorney
  • Number of billable hours per legal assistant
  • Cost recovery revenue per matter
  • Number of open cases
  • Staffing ratio

Billable-related KPIs can provide important insight into financial matters, such as net income as a percentage of revenue; average net overhead; revenue per square foot, revenue per employee; revenue per matter, etc. Digging deeper into KPIs, you can ascertain which processes aren’t working. You can also discover which processes do work and why and apply that knowledge to the ones that drain your bottom line. By turning data into knowledge, you can transform the effectiveness of your business. Here are some KPIs to look at:

  • Missed marketing opportunities
  • Your firm compared to the competition
  • Marketing campaigns that yielded the most valuable clients
  • Client development activities that worked and those that didn’t
  • Scheduling of hours and tasks to make the best use of your professional staff
  • Client satisfaction measurements
  • Which attorneys consistently contribute to profits and which don’t

This list is just the tip of the iceberg. In this blog post, we’ll give you some valuable points how to use KPIs to pinpoint, measure, and leverage metrics to make your law firm even more successful than it is today. For more on what is necessary to use BI effectively, read our blog 4 Rules for Effective Law Firm Business Intelligence.

What Metrics Should Law Firms Should Measure?

No firm uses all KPIs. The KPIs you focus on should be based on the strategies and goals of your firm. But it also should be viewed in context to how your firm relates to the entire law profession through benchmarking.

So the question is, why should you care about one performance indicator over another? An indicator must be key to your firm’s success as well as be quantifiable. We emphasize your because the value of KPIs changes based on what is important to the success of your firm at a particular time. For instance, new firms or firms that are aggressively trying to grow their business will look at entirely different KPIs than a firm that is firmly established. Likewise, firms that bill by the hour will be looking at different metrics than firms that charge fixed prices.

The American Bar Association does a beautiful job listing important KPIs broken into three separate tables: Business Development, Productive and Financial. Following is a short sample of the type of information you can find in these tables. Each row gives a What, Why and How for the KPI. The list is exhaustive. Rather than repeat them here, we suggest you take a look at the American Bar Association website for further details. 

 American-Bar-Association-KPI-Recommendations.png

Source: The American Bar Association

The important take-away is that KPIs are firm-specific. What matters to one firm may not matter to another. It is not a one-size-fit all tool. In fact, it should be an evolving, changing one. As your firm goes through its own unique, professional life cycle, the focus on specific KPIs will change based on the shifting of priorities for the firm. 

How Do Law Firms Measure Key Metrics?

Many law firms measure key metrics by running monthly KPI reports. Based on these reports you can see where improvements are needed. Using a management model, such as PDCA (Plan, Do, Check, and Act), you can bring a scientific approach to make improvements and increase effectiveness.

Basically, your law firm could benefit from using PDCA in regard to KPIs by implementing the following steps of the management model:

  • Plan - gather the data for your KPIs
  • Do – Run the KPI report
  • Check – Review and check KPI metrics
  • Act – Take corrective action and repeat cycle

In essence, KPIs applied in this manner are basically using your firm’s past experience as the only benchmark. While this may be a great start, when you evaluate your firm’s KPIs against a wider legal marketplace (i.e. your competitors), you are harnessing the real power of KPIs.

When you benchmark your firm against a group of comparable law firms (size, location, practice areas), you are able to discern how you rate when compared to the entire law profession. You learn where you stand and where your competitors stand. You understand what areas you excel at and those that need improvement. You learn what is important to existing clients and how to retain them. You learn how potential clients search for a new law firm and what they want in order for you to sign them on. All of these KPIs are invaluable to the success of your firm.

But where do you get that data? There are several national sources of indexes that you can use for benchmarking, such as:

  • Lexis®Firm Insight BI Companion
  • Annual Survey of Law Firms, by Incisive Legal Intelligence
  • Hildebrandt Peer Monitor Economic Index (PMI)
  • LawFirmKPI Inc. annual survey

You can also find formal and informal benchmarking sources in your region online. For example, using any of the following search phrases should yield some promising results.

Regional-BI-Benchmarking-Sources-Google-Search.png

Just make sure that the sources you use include firms similar to yours (i.e., size, location, type of firm, etc.). Also ensure that the metrics are provided by a third-party source and measured consistently so that results are not unfairly skewed.

How Do Law Firms Leverage Key Metrics?

Measuring without action and follow-up will not add value to your law practice. Without interpretation, analysis, and a commitment to action, KPIs are just numbers. In addition to the PDCA model discussed earlier, the Kaizen cycle is another way to leverage the key metrics to improve effectiveness. The Kaizen cycle includes these five steps:

  1. Set goals and provide any necessary background.
  2. Review the current state and develop a plan for improvements.
  3. Implement improvements.
  4. Review and fix what doesn’t work.
  5. Report results and determine any follow-up items.

The examples in this blog post are two common models used. There are a slew of options available, and you may already have a preferred method in place. Whatever model you choose to implement, as long as you measure, check and adjust on a regular cycle, you will achieve improvement.

Of course, the KPIs you manage and leverage should be based upon those KPIs that are vital to the success of your firm. However, according to the Business of Law Blog, there are 3 KPIs that could benefit the bottom line for any type or sized law firm. They are:

  1. Realization - This is the time it takes from when the client first receives an invoice until the firm receives payment. Understanding the payment cycle enables accounting to know the minimum amount of money the firm needs to sustain business operations, freeing up cash for other purposes.
  2.  Leverage. Analyzing staffing requirements and pay rates allows the firm to delegate work to lower-paid support staff whenever possible. Staffing the firm more strategically makes the firm more profitable.
  3.  Margin. Examining the firm’s spending patterns provides opportunities to save money and cut costs. Whether this is by discovering more efficient ways of conducting business or using technology to better manage time, both are important ways to improve the firm’s profit margins.

 

One KPI cannot tell the entire story. Instead, look at each KPI as a chapter of a book or a part of a whole. When reviewed in its entirety, you understand the whole narrative and can base your firm’s decision on the true story.

When you use KPIs to turn data into knowledge on an ongoing basis, you can effectively improve the running of your firm so that it is as successful as possible. To learn more about what is necessary for Business Intelligence to be successful for your law firm, download our free viewpoint document!

 

BigSquare is the leading provider of Business Intelligence for law firms and professional service organizations.  We focus exclusively on law firm reporting, law firm BI, law firm profitability and law firm analytics.

The Keys to Successful BI for Law Firms

 

  

Tags: Business Intelligence KPIs Key Metrics

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