The legal industry is entering a gilded age of information technology – firms are adopting new practices and platforms at a heightened rate to remain competitive. Legal careers are becoming more tech-focused, and there's a benefit to all this: useful metrics are easier than ever to come by. Most legal software has flashy graphs that will attempt to tell a story about the effectiveness of various efforts within the firm, whether it be in BD, Marketing or elsewhere.
While technology analytics do tell a detailed story about marketing and lead-gen efficacy, there is often precious little to show for many law firms' business efficacy. Strategy-focused firms would be wise to keep a close eye on critical financial numbers and how daily business practices intertwine with those metrics. By using a specific set of Key Performance Indicators (KPIs) as its "guiding stars," a firm can foresee factors that may spell disaster or prosperity for the firm in the future.
In an article published in Law Practice Magazine, Stephen Mabey and Colin Cameron share their methodology around KPI strategy. "An indicator should meet the following three criteria to qualify as a KPI for your firm:
- It must reflect the firm’s strategy and goals.
- It must be vital to the firm’s success.
- It has to be quantifiable.
The nature of your firm’s practice will also affect its selection of KPIs. For example:
- Transaction-focused firms will undoubtedly have different KPIs than relationship-focused firms.
- Billable-hour-driven firms will have different KPIs than tariff-driven firms.
- Firms at a growth stage in their life cycle will have different KPIs than firms at a succession or mature stage."
Their detailed article suggests a variety of metrics to track but settles on five that are relevant to almost all firms that use the billable hour system.
- Lockup: measures the combined time it takes to bill and collect a firm’s accounts.
- Billable Hours per Full-Time Equivalent Timekeeper: measures how many billable hours are worked per full-time theoretical lawyer. It can signal whether a firm has more lawyer than hours to bill or vice versa.
- Average Billed Rate: measures the effective rate billed by the timekeepers and is a measure of efficiency. For a given piece of work, more hours billed completed in less time = better.
- Leverage: measures the ratio of associates to partners. This ratio is an essential measure of law firm profitability as too many partners means the firm may be missing out on profits as more heads share them.
- Billings per Full-Time Equivalents: measures how much revenue is generated by a given timekeeper type's full-time equivalent, from equity partners, non-equity partners, associates, and paralegals.
If you are interested in the specific numbers that influence these KPIs, please read the full article.
These are far from the only KPIs a firm could track. It is the job of the law firm management to recognize historical trends, ebbs, and flows – and what a spike or dip in one KPI can mean for the firm's upstream and downstream conditions. Beyond management, all team members need to be aware of the importance of a metric and how their individual work influences it.
Getting Started with a KPI Process
Next, each KPI should be assigned a designated owner that is responsible for monitoring it. The next step is to establish a regular group focus on these numbers and a working knowledge of them. Revisiting KPIs regularly is key to informed decision-making. One way to get eyes on these numbers is to require that everyone review them in advance of the weekly or monthly meeting and make any notes on variations that stand out.
Thus, for the sake of simplicity, it is better to track fewer, but more crucial metrics as opposed to a bevy of poorly-understood indicators. The firm can expand its KPIs as its sophistication with tracking and understanding the KPIs grows.
Challenges to Address
The problems with tracking KPIs are visibility and accessibility. Pulling multiple reports for historical data, then applying functions and compellingly presenting the information can be a time-consuming chore. This time cost presents a challenge to law firms with limited internal bandwidth. Furthermore, it's difficult to watch these numbers change in real-time.
Another challenge is the distribution of information – it is possible that conditions may have changed before the information is distributed in a report and thoroughly discussed. This may not be a problem at very small firms, but is compounded in larger organizations.
In summary, today's law firm requires a redirection towards an agile approach that is informed by trusted and understood metrics that tie directly to the strategic plan and the firm's goals.
An analytics dashboard platform like Practice Viewer can display real-time and historical analytics for firm business efficiency and makes informed decision-making easy. Law firm leaders can keep their eyes on key metrics, creating a simple platform for dialogue around firm strategy.