Measuring your firm’s success

Key performance indicators, when done right, should offer a quick snapshot of how to better run your law firm.

It’s long been expected that when partners at Willms & Shier Environmental Lawyers LLP sit down for their monthly meetings, they see in front of them a double-sided piece of paper they consider a valuable tool in the overall operation of their firm. Co-managing partner Marc McAree calls it a “financial dashboard” of key performance indicators (what are known as “KPIs”).

His goal is to present a snapshot of the financial health of the firm on that single sheet so that the partners of the Toronto firm can absorb it all within five minutes and then have a good understanding of where the firm is heading and what needs to be improved. He sees it as an efficient way of providing financial transparency.

“Roughly 15 years ago, before key performance indicators were even known to be KPIs, our firm was working with our accountant who is also a very business-minded advisor and we began to develop these measurements, these tools. And we have, over the years, refined and matured the use of KPIs,” he says. “It’s an indispensable financial tool at our firm.”

Some indicators may be common from one firm to the next. But each firm’s needs differ, depending upon its structure, where it is in its growth, its goals and objectives and if there are particular areas of interest or areas undergoing change.

Billable hours and income is what firms had typically looked at to gauge their operations. But models from other businesses have seeped into the business side of law, including KPIs.

Stephen Mabey, director of Windsor, N.S.-based Applied Strategies, which does consulting for law firms, says KPIs have become more sophisticated in degree and level. Software can simplify the process and generate the reports. Although software isn’t necessary, a spreadsheet will do the trick.

“KPIs at their best should give you a sense of a doorway you need to go through,” he says. “In today’s world, where percentages can make a big difference both in retaining lawyers and attracting laterals, you really need to be on the top of your game. So the degree of sophistication has had to increase as markets have gone flat, as competition has increased.

“I don’t know any company, if you go outside the legal profession, that doesn’t have its benchmarks and its key performance indicators and they can tell you down to 1/100th on everything. Why do we, as a legal business, think we don’t need the same type of tools?”

But, he warns, the indicators must be key, and there can’t be too many. By keeping track of just five to 10 key areas, comparing them to previous months or years and also to other firms, members of the firm can easily spot upward or downward trends, giving them the opportunity to investigate further.

To get there, Mary Juetten, author of Small Law Firm KPIs: How to Measure Your Way to Greater Profits (published by Thomson Reuters, which also publishes Canadian Lawyer) and founder of Traklight.com, suggests approaching it as a framework and beginning with the pain points. She uses accounts receivable as an example.

“A lot of lawyers in Canada don’t collect the money up front,” she says. “What I tell lawyers if they’re experiencing a bit of a cash crunch, the first place to look is your accounts receivable.”

The longer period of time that passes after the bill is issued increases the likelihood of that bill not being paid, she points out. If a lawyer tracks those days that pass, they’ll soon discover if this is an area that’s cause for concern.

But Juetten says one indicator does not provide a full picture. On the other hand, focusing on too many indicators will weigh down the process. So she suggests picking a handful of KPIs that matches the major steps in the firm’s workflow.

Without them, she says, problems could well build exponentially before they become obvious. Or, she says, it may be difficult to actually find the cause of the problem.

“If you try to fix something without the right data, without the right KPIs, it’s like somebody taking medicine without being diagnosed first,” she says.

Edmonton lawyer Greg Miskie says the big picture at Duncan Craig LLP, where he serves as chief operating officer, consists of about three or four KPIs. But there are several subsets that can be examined if there are concerns or issues.

The firm’s accounting software provides access to hundreds of data points that can be combined in a variety of ways and then transported onto a spreadsheet, providing quick and comprehensive access to the firm’s own data. So if a particular KPI looks off, there is the ability to drill down with little effort.

The bottom line, he says, is that KPIs allow trends to quickly become apparent and comparisons of the data could show gaps or opportunities. That can lead to some useful internal conversations.

“Everyone works really hard and puts in long hours and is trying to represent their client’s interests to the best extent possible, and so we really don’t want to distract from that process,” says Miskie, adding that he wants to ensure the firm is offering efficient service to clients who are also asking about their KPI tracking. “It’s very important to us to have our own data and also to understand how we can meet some of the things they’re asking for.”

A firm may also want to look down the road to see where it’s heading. As a way of judging interest in the firm, McAree looks at the conflict checks conducted as soon as someone enquires about retaining Willms & Shier.

“It is representative of the volume of activity [and] interest in prospective clients looking for environmental legal advice at our firm,” he says. “The number of inquiries should, theoretically, result in a certain number of open files,  and open files equals either new clients or existing clients with a new file, but, ultimately, conflict checks leading to new files leads to revenue.

“It becomes an analytical tool focused on productivity on the whole.”

Occasionally, the firm will calculate the percentage of conflict checks that turn into files. If the lawyers’ collective number of conflict checks drops, they know that a percentage of the revenue will be down in coming months.

Including cash per day in a monthly benchmark report and not just billing hours provides a sense of the firm’s financial health. That might be required by a financial institution providing credit facilities. Other areas that can provide some indication of when it’s time to put a push on collections include accounts receivables and the number of days revenue is tied up in receivables, says Mabey.

“Those firms who get the cash to the partners the fastest are the firms that are the most attractive to lateral hires,” he says.

There is potential to examine a wide variety of metrics and then drill down to specific issues, practice areas and even individual lawyers. That could put additional pressure upon lawyers to not just perform  but keep a diligent eye on the financials.

“The more pressure we get from clients on rates and the more pressure we get from the bottom up on expenses and having to invest more in technology, like any business, I think we have to keep an eye on our costs and our productivity and our profitability and understand where there are differences and whether we can improve them,” says Miller Thomson LLP’s chief operating officer, Orest Szot.

An area that is currently developing for many firms is profitability. One practice group might be compared to another to determine best practices. But that could be applied to individual lawyers as well, forcing them to keep track of what they charge, how much and how often they discount their fees, what percentage of the bill they collect and how long it takes to collect on that.

“We haven’t nailed that down completely yet,” says Szot. “We’re starting to look at profitability metrics.”

When two partners, for instance, have a $1-million book each, but one is more profitable than the other, the goal is to break that down to determine the differences.

But examination of the client might also be warranted. If the information shows that a client’s own performance isn’t up to par, the firm will have to ask if it’s worth keeping that client. Szot says the client must understand that the firm, too, needs to be profitable and if its objectives aren’t being met through that client that it’s time to move on. “And that could turn the table on the client.

“I can see getting to the point of doing profitability calculations per client,” he says. “We may get to the point where we say maybe this client isn’t reliable. It’s early stages from that perspective.”

Partner compensation may well be included in the profitability metrics as well.

John Hawke, Calgary’s McLeod Law chief operating officer, says the focus in the past has been to examine profitability on a firm-wide basis, but not at the partner level. He believes that’s on the way and that the individual’s compensation will be tied to that person’s profitability instead of simply to their billings and the work they generate that is spun off to other lawyers. So, issues such as expenses and other costs will play a role in the overall assessment.

Like other businesses, law firms are being pressured to become more efficient and competitive and that trickles down to the individual lawyers as well.

“This is a challenging but exciting time for law firms because I think that firms that are embracing KPIs and are embracing profitability and are really focused on how we do it better, faster, cheaper are going to be the firms that are going to be successful going forward,” says Hawke.

Effective KPIs

Stephen Mabey, director of Applied Strategies consulting for law firms, suggests that KPIs be realistic and be presented in a way that can be quickly absorbed.

He believes their main objectives should:

• reflect the firm’s strategy and goals;

• offer a view of what the firm intends to achieve;

• provide a picture of where the firm is going.

“I recommend to clients if your benchmark sheet, your score sheet at the end of the month, goes longer than a page, you’ve lost everybody,” he says. “If you stick to the simplicity, you get the most meaningful KPIs.”