What KPIs Matter for Your Firm's Success?
Law firms, like any other business, need to be aware of, monitor and act on key performance indicators (KPIs). While firms are typically on top of measuring billable hours, there are many other KPIs that can help you better manage revenues and expenses. Knowing how — and when — to measure and benchmark a firm's KPI's against industry trends and best practices will help modify and improve firm performance. KPIs can deliver a treasure trove of information to law firm administrators and partners — the key is knowing what to look for and how to report your findings in a format management can understand.
So, where should your firm start?
There are a multitude of KPI statistics & reports available, way too many to effectively manage all of them at once (at least in the beginning). Start by choosing the metrics that are most relevant to your firm and culture that grow over time. It’s best to measure against your firm’s past performance to spot improvements, develop new goals and strategies and provide objective measurement against other firms in your competitive field. Measure the KPIs that are specific to your long-term goals, but here 8 KPIs you can start with, regardless of firm size or practice areas.
Metric 1: Number of New Clients per Month
Most law firms have established specific goals identifying how many new client engagements the firm and its attorneys should enter into each month. After all, without new clients, most firms simply will not have the ongoing revenue they need.
Tracking new client engagements manually is both labor-intensive and prone to errors, so a best practice is to use a legal management solution that will allow law firm administrators, partners and assigned attorneys and staff to enter and access information about new engagements in one place. That data can then be quickly aggregated and reviewed to determine patterns or potential areas for growth.
In addition to monthly numbers, a system will also help you identify how many active cases the firm has at any given time, plus how long cases are generally open and active, so outliers can be reviewed to determine whether additional support or resources are needed.
Metric 2: Asset Management
Begin with the basics of Asset Management. Start by tracking:
- Unbilled time
- Unbilled cost
- Accounts receivable with aging (aging periods set up relevant to your firm)
Knowing the dollar value of these statistics, as well as the variance by percent when comparing years, is essential to understanding the rudimentary financials of your firm.
Metric 3: Revenue Billed/Revenue Collected per Month
While retaining new clients is a critical KPI to position a firm for future success, billing and collecting revenue each month are equally as critical for the firm’s current success. Firms that use spreadsheets or different systems for various users to submit or track costs, or firms that have haphazard billing records will likely find themselves struggling to be efficient and competitive.
Look for ways to simplify operations, especially with paperless workflows to create efficiency, by being able to generate reports and insights on billing and collections quickly and easily. Staying on top of accounts receivable will help your firm identify whether there are potential issues with a specific client’s account, or with client accounts handled by a specific associate or partner.
Metric 4: Monthly Expenses
Tracking your firm’s monthly expenses will help you see where money is going every month, which is a good indicator for your firm’s performance. Firms that don’t have a system in place to record, track and benchmark expenses may find it difficult to identify if expenses in certain areas are higher than they should be or if you’re not investing in necessary expenses that will improve your firm’s overall performance.
Using a practice management system that tracks everything helps users see how monthly spending compares with the firm’s average costs for spending categories (i.e. printing and distribution, marketing, office supplies and vendor expenses).
Metric 5: Financial Statements
Basic financial statements, such as comparative income statements, are an effective method to assess any improvement (or lack thereof) year over year. Again, the firm is comparing their current performance against their previous performance to evaluate if they did better than last year.
Metric 6: Profitability
Profitability analysis is an accounting allocation process, which measures the gross and net contribution to the firm’s profits of a given revenue stream. It involves identifying revenue streams, identifying direct costs, identifying indirect/overhead costs and applying direct and indirect cost to revenue. Understanding the gross and net contribution to partner profits by product line, originating attorney, client, billing attorney and working attorney is an important management tool.
Metric 7: Client Satisfaction Scores, Client Experience Metric & Net Promoter Score (NPS)
When your clients are happy with the services your firm has provided, they are more likely to refer new business opportunities to you. Surprisingly, many law firms still don’t ask clients to provide feedback. If you don’t know whether or not your clients are satisfied, you may be missing an opportunity to improve the client experience.
While you can use any type of survey tool, the Net Promoter Score (NPS) may help you get more useful feedback because clients have likely used this type of feedback tool for other service providers. Quite simply, the NPS score asks clients to rate, on a scale of one to ten, how likely they would be to recommend your firm’s services to others.
When you ask your clients to provide feedback about their experience with your firm, you will have valuable data that you can use to either reinforce your existing client experience or make needed changes.
Metric 8: Employee satisfaction scores
Don’t focus exclusively on client satisfaction at the expense of employee satisfaction. High employee turnover costs can eat into a law firm’s bottom line; according to a 2006 ABA Law Practice article analyzing the impact of employee engagement (and a lack thereof), the cost of employee turnover “represents on average about nine percent of revenue.”
Overworked or unhappy employees can do more than increase your staffing turnover rate; employees who are no longer engaged and don’t feel valued may also ultimately lead to unhappy clients. That, in turn, directly impacts your firm’s revenues in a negative way.
Solicit employee feedback, and monitor employee satisfaction on a regular basis to help avoid finding your firm in this vicious cycle. Most importantly, use the information you glean to make operational or process improvements designed to improve employee satisfaction scores.
Use a Practice Management System
In order to monitor your KPIs, you need to track them first. Monitoring data specific to your firm’s identified goals will help you gain a clearer picture of the types of engagements your firm is actually handling (which may be different than what you think is happening.) You will also be able to see the true cost of each engagement, helping you identify if you need to make operational or staffing changes within the firm.
When your firm implements a practice management system designed to put all of your firm’s data into a single user interface, you will be able to leverage the information you’re collecting to help with firm budgeting and structural decisions. This, in turn, will help your firm remain competitive, positioning you for long-term success.