I have written before about key performance indicators (KPIs) for the law. My main message has been that like other techniques and technologies, running a law firm is a business and therefore, measurement is critical for success. KPIs are universal and apply to the legal profession regardless of firm size. This is the first of a series of three blog posts focusing on developing relevant metrics to increase your firm’s profit.
Breaking from traditional KPIs that focus on the lawyers’ input or time metrics, I believe measurement should start with the client and also zero-in on collections rather than only hours. The main reason for business failure is a lack of cash, which is caused by a shortage of clients or poor billing and collections results or a combination of both.
In June 2016, Thomson Reuters surveyed small law firm customers on KPIs and benchmarking to support my book on Small Law Firm KPIs: How to Measure your Way to Greater Profits. The purpose of the survey was two-fold: to better understand if and how small law firms measure and track KPIs and to also gather information on technology usage by those firms.
The survey went to approximately 690 firms. The 62 responses included 10 solo practices. The remaining respondents were divided as follows: roughly 50% had fewer than 10 attorneys; about 25% had between 11 and 20 lawyers: and about 25% had more than 21 attorneys.
More than half, 36 respondents (58%), reported that they do not use KPIs beyond the traditional hours-billed metric. Relying on that traditional KPI is not sustainable, because clients are demanding more for less as well as the ability to rate satisfaction with your services. Some of these concepts are new to the legal industry, but not to in-house counsel or consumers, who see KPIs in their business and everyday lives.
More than half, 36 respondents (58%), reported that they do not use KPIs beyond the traditional hours-billed metric.
Only six firms of the 26 that used KPIs other than hours-billed used more than four different metrics. These alternative metrics included:
- Client experience or satisfaction;
- Cost of client development or acquisition;
- Pipeline dollar value per attorney;
- Aged or overdue accounts receivable;
- Collected billings by attorney;
- Matter profitability; and
- Budget versus actual or opened matters.
Here’s the breakdown of all non-traditional KPIs used by those 26 firms:
- 19 respondents tracked collected billings by attorney;
- 15 firms measured overdue accounts receivable;
- 14 respondents tracked matter profitability; and
- Three firms (under 5% of total respondents) measured client satisfaction.
That last statistic shows the opportunity for firms that start measuring client experience. By moving beyond hours and utilization, you can discover which matters are the most profitable and understand what your clients think about your offerings. Knowledge truly is power when it comes to business metrics, particularly when they impact firm profit.
When asked if firm profitability has grown over the past two years, 48 or 77% of the responding firms said yes, with 16 of those firms citing growth of more than 20%. However, of the 14 firms without any profit growth, eight did not use KPIs. Specifically, four of the five firms that had two or three attorneys did not use KPIs and had not experienced any increase in profits.
It’s clear there’s room for implementing a wider range of KPIs, and that’s possible without having to adopt new technologies.
Finally, the answers for the use of practice management, billing or accounting software products were also surprising. Fifty firms, or 81%, responded in the affirmative. Twenty-one or 34% of respondents reported using various time and billing software only. Another 27 or 44% indicated their use of a practice management system which, in some cases, includes time and billing capabilities. Technology adoption is an important step towards simplifying administrative practices and for gathering data for KPIs.
It’s clear there’s room for implementing a wider range of KPIs, and that’s possible without having to adopt new technologies. Many of the newer KPIs that have to do with client experience and firm culture do not require technology beyond Excel. My next post will address client KPIs that will improve your firm’s bottom line.
Lastly, this gap in KPI knowledge and action is not unique to the small law firms — big law is experiencing it, too.
Mary Juetten recently did a webinar on using KPIs at a small law firm. You can order a recording of the webinar.