September 20, 2016
As a partner running a small law firm, you are a business owner. And like all business owners, your clients are everything. After all, you wouldn’t have a business without them. And yet, plenty of law firms—and businesses in general—fail even when they have customers. Why? They fail to measure, track, and act on key performance indictors (KPIs)—and I am not talking solely about the billable hour.
Too often performance measurement is seen as a waste of time because it looks to the past. Nothing could be further from the truth. You may have a gut feel about a month’s results based on bustling activity in your office, but the impact on the firm’s bottom line is not always directly correlated. KPIs allow you to examine what does impact profitability and success.
(I’ll dive more into this in my webinar on Sept. 21; please register here).
Within a small law firm, it often falls upon the partners to generate new clients, practice law, and handle administrative work, including setting targets and evaluating performance. In other words, in small law, the owners are CEO, CFO, CTO, CIO, and practicing attorneys.
The overall business goal is to be proactive and on top of your law practice. KPIs are business metrics that evaluate an organization’s performance and success. KPIs are not new in professional services or even big law. In small law, I suggest adopting best practices from other professional services and companies.
“Data-driven decision making” may be a buzz phrase these days, but there is nothing new about making informed business decisions. Large law firms have been gathering business intelligence and metrics for a long time, and the only financial difference between those big organizations and small law is the number of zeros on the reports. The process and practice management are basically the same across all professional services.
KPI knowledge is the power to make informed business decisions. Ultimately, you are selling a valuable service to your clients; therefore, it’s critical to measure and monitor your client satisfaction in addition to the cash received.
Note that we are not focused on the hours billed because we advocate the use of technology and/or alternative fee structures. Ultimately, though, every business boils down to whether the cash collected exceeds the money spent.
What are KPIs?
KPIs are a framework that covers all aspects of your practice, but it’s important to understand how the metrics interact. Keep it simple to start and review a past year to establish a baseline.
Key elements of a KPI approach include measurements of the following:
- Client experience
- New business development
- Firm environment
- Client acquisition cost (CAC)
Start with client measurements because without clients there is no business. Many clients now search out a do-it-yourself legal service, particularly millennials. Although measuring client experience is a relatively new concept in law, knowing what you can improve upon based on solid feedback is mission-critical.
You’ll still need to record hours, regardless of whether you charge hourly fees, because the only way to measure case profitability is to understand the costs including how much you spent acquiring a new client. The concept of beyond the billable hour does not mean the death of the timesheet for any professional service!
“Garbage in, garbage out” is a common saying for data and KPI systems. And you cannot measure what is not recorded or tracked. Start with an inventory of your various systems and who collects your data. Common inputs come from your practice or case management system, accounting software, scheduling or calendar, and feedback from firm members and clients. Determine if there are any holes between the data you need and the data you can pull from your systems.
Assign the KPI framework to your professional accountant or bookkeeper with assistance from a tech-savvy administrator. The most important thing is to start collecting data, so start small with a couple of metrics in each category and at the firm level. As you discover trends, you can drill deeper.
KPIs should not be a separate project outside of the practice management process or system. Ideally, your case or practice management system should have a KPI dashboard. Most likely, though, you will have to create an Excel workbook that draws from your various systems. It’s best to have your regular reporting integrate with any Excel files, so that you are not doubling your data input. Building in a KPI framework is a change management process, and it’ll only succeeds with proper support and an actual process to capture and review the data against targets.
If you have the time, go back and analyze the most recent year with readily available data. Next, calculate the KPIs for the most recent couple of months to spot trends. From there, review your KPIs monthly and quarterly to analyze the reports and take corrective steps within the year.
Follow the standard management model of “Plan, Do, Check, Act.” Review your KPIs, paying particular attention to what is driving the results. The simpler the measurement, the easier it is to take corrective action. Time is a finite resource and technology can be a great asset to any law practice, but in the end, cash is king. Measuring more than the metrics associated with the traditional billable hour will help your firm succeed.
If this has whet your appetite for information about your own firm, please join me for a law firm management webinar on Sept 21 at 12 noon Eastern/9 a.m. Pacific. Simply register for the webinar here.