Key Performance Indicators

Small Law Measurements Falling Short In Key Performance Indicators

When I’ve written previously about key performance indicators (KPIs) in law, I’ve emphasized the fact that—like other techniques and technologies—running a law firm is a business; therefore, measurement is critical for success. KPIs are universal and apply to the legal profession regardless of firm size.

In June 2016, Thomson Reuters surveyed small law firm customers on KPIs and benchmarking to support my upcoming book, Small Law Firm KPIs: How to Measure Your Way to Greater Profits. The purpose of the survey was two-fold:

  1. to better understand if and how small law firms measure and track KPIs, and
  2. to gather information on technology use.

In addition to asking about firm size and billing and accounting systems, Thomson Reuters asked firms:

  • which KPIs (other than billable hours) they used in practice,
  • whether timekeepers have financial goals,
  • What is the best indicator of profitability, and
  • whether profits have grown over the past two years.

The survey went to approximately 690 firms. The 62 responses included 10 solo practices. The remaining respondents were divided as such:

  • roughly 50% had fewer than 10 attorneys,
  • about 25% had between 11 and 20 lawyers, and
  • about 25% had more than 21 attorneys.

The results for the use of a billing or accounting software product were somewhat surprising. Fifty firms, or 81% of respondents, reported that they used software. Adoption of firm management software is an important step toward simplifying administrative practices and gathering KPI data.

On a more deflating note, 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 alternative fee arrangements as well as efficiency and satisfaction scores. These concepts are new to the legal industry, but not consumers, who see reported KPIs in other professional services.

Of the 26 firms that use KPIs other than hours billed, only six firms used more than four different metrics that included:

  • Client satisfaction
  • Cost of client development or acquisition
  • Pipeline dollar value per attorney
  • Aged or overdue accounts receivable
  • Collected billings by attorney
  • Matter profitability
  • Budget versus actual or opened matters

Here’s the breakdown of non-traditional KPIs used:

  • 19 respondents track collected billings by attorney.
  • 15 firms measure overdue accounts receivable.
  • 14 respondents track matter profitability.
  • Three firms (under 5% of total respondents) measure client satisfaction.

Proactively evaluating your client’s experience or level of satisfaction with your services is relatively new to the legal profession. Traditionally, lawyers wait on client referrals or rely on attorney referral networks. But, by measuring client experience and addressing any concerns, lawyers can proactively drive more business without spending more on advertising or sponsorships.

The survey also asked firms to select the best indicator of profitability from the following options:

  • Take-home amount at month end
  • Actual account balance
  • Matter profitability
  • Overall firm cost versus pipeline or expected revenue

Of those surveyed, 58 firms answered this question, and 31 reported that they use either take-home dollars or the bank balance to measure profitability. Digging a bit deeper, 18 of those 31 firms—which includes firms from all size groups—do not track KPIs. Based on this information, I infer that the majority of firms are looking backwards when it comes to results or profitability. Just like ignoring the client experience, it’s both reactive and somewhat dangerous to wait until the month or year has passed to evaluate your performance, because there is no time for corrective action.

Eighteen of the 58 firms are looking to cost versus budgeted or expected revenue, which is a good start to profitability measurement. However, when the same firms were asked if all the timekeepers had financial goals, only half answered “yes.” It’s hard to measure profitability if there’s no accountability. Meanwhile, 36 firms measure hours, collections, and billings, but only 25% of those firms track the number of new clients. New clients bring new revenue, so collecting that data allows you to evaluate your marketing and business development efforts.

When asked if firm profitability has grown over the past two years, 77% of survey respondents answered “yes,” and 16 of those reported more than 20% growth. However, of the 14 firms that did not report 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. With a sample size of only 62 respondents, it’s difficult to draw too many conclusions, but the trend shows that the more measurement, the better the profits.

It’s clear that there is room for implanting a wider range of KPIs, and that’s possible without having to adopt new technologies. Many of the newer KPIs around client experience and firm culture do not require technology beyond Excel. Lastly, this gap in KPI knowledge and action is not unique to the small law firm. Big law is experiencing it, too. If you want to discuss KPIs further, please reach out to me on Twitter @maryjuetten.

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