When I attend conference receptions, it is not uncommon for me to talk with Managing Partners of law firms. Regardless of where in the world these discussions happen, there tends to be a universal theme.
When I ask about their firm and ‘how things are going’ they often respond with ‘things are going very well.’ I expect this answer for a few reasons: 1) they do not know me (hence, no trust), and 2) business discussions about a law firm’s performance can be challenging, especially for those who have made a career building up a reputation and a book of business based upon that reputation.
When I casually ask a few deeper questions about whether they lead a particular practice at the firm, to what extent they are a rainmaker, whether they evaluate client retention by revenue or units, etc., I usually get a few questions back about my area of practice. After telling them about what I do for a living, many times they ask if I have a few minutes to talk and if I need a refresh on my drink (cocktails are not critical to these discussions, but they sure speed them up).
Now with refreshed drink in hand, I usually end up in a ‘hypothetical’ discussion with them about a firm that could do a better job of evaluating its performance and the way forward, often followed by statements that their Executive Director (if they have one) could be doing more, that costs are out of control, that clients are increasingly demanding, plus that not enough people work to build the firm’s business.
I greatly respect these people and their ‘hypothetical’ discussions and enjoy helping them improve their law firms, especially by leveraging business metrics and finding good ways to implement them.
In this article, I want to emphasize how valuable it is to leverage business metrics to help a law firm improve and maintain its performance, plus discuss a few impactful metrics.
So, if you and I were having a conversation, this is the point where you would refresh your drink. Clink.
Law firms need to improve how they manage themselves to ensure their continued growth and to combat significant challenges in the global legal market. Law firms must address constant pressure from clients to provide more value for less cost, manage escalating costs, continually acquire new clients, retain existing clients, plus procure new business. These challenges are magnified by the global business environment with competitive law firms, legal services companies developing their offerings and footprints, corporate legal departments expanding their realms, plus the proliferation of DIY legal sites.
In an effort to address these challenges, law firms must improve how they are managed from a business perspective. Many senior lawyers at firms understand the concept that it makes sense to do what they can to help monetize their efforts. This is the idea that I call ‘billability’ where a firm does all it can to monetize its efforts by making as much work as possible be billable while reducing non-billable work (e.g., administrative functions). We need to extrapolate this understanding of the monetization effort by adding a level of rigor and business discipline to it. A great way to travel down this road is to utilize business metrics in the management of a law firm.
Business metrics collectively constitute a tool to help a law firm better understand its business. Metrics help firm leadership make more informed data-driven decisions in the best interest of the firm. Metrics can prepare firm leadership to identify and leverage opportunities, risks, accountabilities and liabilities.
Utilizing business metrics can be the foundation of managing the performance of a firm. Creating relevant metrics provides the backbone of action for a firm seeking to understand how it is performing now and how that performance can be improved.
Metrics require data. The collection of data as an exercise in itself is ineffective. It’s critical to turn (collected) data into information, making it useful for a business purpose. Leveraging information allows firm leadership to make data-informed decisions. Decisions lead to actions. Actions lead to impact.
Utilizing data-rich information to make decisions to take impactful action is the business performance cycle. The development of metrics starts the business performance cycle by establishing criteria for data collection. In order to be effective, metrics should be clearly defined, quantifiable and consistent with the firm strategy and goals. Metrics should capture data that transforms into information to be used to evaluate critical elements of the firm’s performance. Evaluation leads to action. These critical elements are synonymous with what the corporate world tags as Key Performance Indicators (KPIs).
While there is uniqueness in what a law firm might measure versus a traditional for-profit corporation, the concept of identifying and leveraging critical business elements is the same. To reflect differentiation for law firms, we call these Key Legal Performance Indicators (KLPIs)™.
What would make effective KLPIs for a law firm? A law firm’s KLPIs should be consistent with driving the stated firm strategy and goals (e.g., being the highest revenue achieving boutique employee rights firm in a geographic market, maintaining client retention revenue at xx% year over year, etc.) and what the firm sees as defining its stated success. I use the word ‘stated’ to strongly suggest that the firm’s strategy, goals and success definition should be formally chronicled and appropriately communicated (you might be surprised by the number of firms not doing this now).
Got It, So Which Business Metrics Make Sense for a Law Firm to Use?
In addition to the traditional billable hour, matter management and operational metrics, I have a few suggestions for your consideration.
Surprised I didn’t start with ‘Profit Per Partner’ or some other similar metric? A firm positioning itself to firmly address the real-time challenges in the global legal market should consider leveraging client-value metrics. Clients are demanding greater value from their firms. Competitive law firms, legal services companies and DIY sites are providing clients with more alternatives for legal service providers than ever before in the industry. Focusing on providing clients more value will help a firm position itself increasingly as a collaborative advisor to its clients versus being seen by them as one of many commoditized service providers.
Client-value metrics leverage the client perspective. Clients want a trusted advisory relationship – this concept is not new for many businesses, but sadly many law firms are not effective enough at understanding what their clients want and how to provide it to them. Communication is a vital way to provide clients with more value. Especially with law firms, clients want frequent ongoing communication – sounds simple, but it has its challenges. When should an attorney communicate with a client: client intake? invoicing? matter resolution? on a schedule? Which communication methods should an attorney use with a client: client portals? emails? messaging? phone calls? What should an attorney communicate to a client: procedural updates? cost status? likely outcomes? These are all examples of one-way communication from an attorney to a client. A firm needs to ensure that communication is two-sided.
Implementation of communication systems and processes should be mindful of securing the client perspective: are they happy? what are their concerns? do they think the attorney and firm are doing a good job?
Understandably, the extent to how a firm is delivering client value will impact its client retention. Client retention is the foundation of a successful firm. Clients are a key resource in obtaining new business for a firm, including by generating additional matters and also by securing new clients. Referrals from existing clients are an ideal source of new business for the firm.
Will your firm’s clients recommend your firm? To help answer this question, a good business metric to use is the Net Promoter Score (NPS). In the corporate world, this metric captures the percentage of customers that would recommend (‘promote’) the business. The NPS uses a brief survey asking the client to provide a rating between 1 and 10 (10 being the most) of the likelihood that they would recommend the firm. The ratings are categorized: (ratings 9 and 10 = ‘promoters’ who would recommend, ratings 7 and 8 are neutral, and ratings of 6 and less = ‘detractors’ who would not recommend). To get the NPS, you determine the respective promotor and detractor percentages from the total number of respondents, then deduct the percentage of detractors from the percentage of promotors.
For example, if you had 150 respondents, with 112 promoters, 30 neutrals and 8 detractors, you have the following percentages: promoters 75% (112/150) and detractors 5% (8/150). You then deduct the detractors (5%) from the promoters (75%) and you get the NPS of 70%. The highest attainable score is +100%. A good score for a law firm would be in the mid+20s. Mid+20s sounds like a low score, but the range is actually from -100 to +100%.
Do not underestimate the value of using the NPS – many global corporations dedicate significant resources to obtaining, tracking and improving their NPS as a critical business metric. Many corporations put achieving a minimum NPS into executive and senior management performance appraisals – an idea worth considering for senior members of a law firm.
There are many ways to measure client value and client satisfaction. Using metrics in this area is a good way to improve how a firm responds to its clients and provides exceptional client service. Developing firm programs is also key to implementing strategies to improve client value, satisfaction and retention. This is one of the most effective differentiators a firm can have in today’s global legal market.
Clients. Client metrics should be focused on their value to the firm from revenue, retention and value perspectives. Some metrics include: revenue per client, revenue per matter (rolled up to client), average cost per client acquisition (add marketing and business development costs / # of new clients; exclude all referred clients), client satisfaction ratings, NPS, revenue mix from existing versus new clients, 80/20 calculations to assess risk of top clients, plus client retention.
A good practice is to extend the ‘profit metric’ beyond the ‘per Partner’ aspect used in most law firms today. Also, metrics should differentiate ‘Partners’ from ‘Equity Partners.’ Some metrics include: firm profitability, profitability of practice area, profitability by Partner, profitability by client, revenue per Partner, revenue per Attorney, revenue per FTE, plus expenses with various calculations at firm and individual levels.
A Practice Area should be evaluated as a distinct business organization to understand its contribution and impact to the firm. Some metrics include: revenue, discounting, profitability, expenses, cross-selling attributed revenue, plus client retention.
Accountability needs to be invoked starting at the individual level. Partners of all types should be evaluated by their contribution to the firm both financially and from a leadership perspective.
While you should have additional differentiated metrics for Equity Partners versus Non-Equity Partners, for the health of the firm, all Partners should be accountable for a consistent set of metrics to help foster a strong firm culture focused on performance.
For Partners of all types, some metrics include: client satisfaction ratings, NPS, employee satisfaction ratings, employee turnover, cross-selling attributed revenue, discounting, expenses, client revenue origination, plus firm culture ratings.
Standard balance sheet parameters need to be implemented and should be part of a regular reporting mechanism to firm leadership (e.g., revenue, costs/expenses, firm liabilities, etc.). Some additional metrics include: debt/equity ratios for all Partners, plus detailed budgets for each Partner, Practice Area and Department (forecast vs actuals).
Marketing costs should be bundled and evaluated as a % of gross revenue (target ~3-5% of gross revenue).
Leveraging key business metrics to make more informed data-driven decisions consistent with the firm’s strategy and goals will provide firm leadership with tools to take action to improve law firm performance.
Increasing your understanding of the respective business metrics to use in evaluating your firm is the first step in activating your role in driving more impactful performance for the firm.
I wish you all the best as you work to improve the business performance in your law firm.
PS – I think the ice in your drink is melting. You may need a refresh.
About the Author
As a Thought Leader, Tim provides insights into aspects of the intersection between legal and business with a focus on improving performance. Tim is currently Principal at PeopleView Legal Business Advisors, a firm helping law firms, their clients & corporate legal departments improve business performance.
Tim began his career as an attorney and has 25+ years of global business experience having held senior global positions with Thomson Reuters, including VP of Culture & Business Transformation, VP of Market Development, plus VP of Business Segment Strategy. Tim’s prior experience also includes senior positions at Thomson Reuters in its Legal business unit in strategic marketing for both the corporate and small law firm markets.
Tim’s earlier experience includes key positions in strategic marketing and legal product development and as Corporate Counsel Consultant at LexisNexis, research management at Russell Reynolds Associates, plus other positions in corporate legal, professional sales and business operations.
Tim began his career as an attorney working with corporate clients. Tim is an active member of The Virginia Bar Association including as Council Member of its Law Practice Management Division, the American Bar Association, the Fairfax Bar Association, the Alliance of Merger & Acquisition Advisors, the Association of Legal Administrators (National and DC Metro chapters) plus the International Legal Technology Association.
Tim is a popular global professional speaker and facilitator who brings his energy and humor to every engagement. For more info, see LinkedIn Bio of Tim White, Esq.