Key performance indicators (KPIs), or performance metrics, are receiving some attention in the legal field. KPIs enable businesses to make data-driven decisions, and I, too, believe that KPIs are the next big thing for lawyers and law firms.
Mantras like “measure or perish” have been bantered around many legal events over the past couple of years. However, measuring utilization and profit per partner are not the focus of the new breed of KPI. Instead, the focus is shifting from measuring inputs like available hours to measuring outputs that include value. A few examples of measuring value:
- Do your clients find your services valuable?
- What is the monetary value of each client?
- Do your clients refer additional business?
- How many referrals, and how valuable are they?
Clients, whether businesses or individuals, are demanding value and accountability. Given the increasing level of competition within law practices and from outside by alternative legal resources, you must be as efficient as possible and understand the results of any changes or technology you implement in your practice. But if you cannot measure the results, including for the client experience and the bottom line, how do you know what is working for your practice?
Are You Measuring More Than Hours?
KPIs are normally measured at two different levels: firmwide and individually. Lawyers are not so different from accountants or engineers, who also deliver professional services. That’s great news because proven KPI measures and frameworks can be borrowed from other industries.
You’ll still need to record all types of hours, regardless of whether hourly fees are charged or you are billing at a flat rate. 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!
Here are three tips to get started with KPIs:
1. Compare “like” data. Map out your data sources and make sure you are comparing similar periods and units. For example, don’t compare calendar month information to billing period information if they are different time frames. And, when measuring the monetary value of each client, you want to look at the potential revenue for the client over the entire potential relationship, and compare those revenues and the client acquisition cost, not just the initial engagement revenue.
2. Establish a baseline. Go back one year at a high level for all areas of measurement to create historical data to help set targets. Also, look for outliers or strange results. For example, if your collections plummeted in a certain month, then dig deeper or go back further to find out why and whether this is likely to re-occur or if there can be a change. If it was an anomaly, discard that month and the rest of the prior year data will be a sufficient baseline.
3. Start with clients. Most law firms are measuring profitability and utilization in some manner. Borrow from consumer-facing and software businesses, and embrace the Net Promoter Score (NPS). Ask your clients, on a scale of 1 to 10, how likely they are to recommend your firm to their friends, family and colleagues (with 1 being not at all likely and 10 being extremely likely). Once you have that information, you can then calculate your score across clients and determine steps to improve.
The KPI framework will allow you to evaluate not only which types of clients are most profitable, but also which value your services the most. Be open to change; there is no point in gathering data and tracking KPIs if you are not willing to evaluate your processes and improve them.