How do you Measure Up? Implementing Metrics & KPIs in Your Firm

by Affinity Consulting Group on June 21, 2018

By Erica Fujimoto, Director of Default Services, Affinity Consulting Group

Law firms are typically run 2 different ways:  firms who try to analyze data and understand their business based on reports, and those who eyeball their circumstances and hope for the best.  One might think that as a result, the former have a good handle on their firm, whereas the latter are just guessing.  In actuality, neither is a completely accurate assessment.

Of course guessing is never the best way to go about running any business.  However, many firms who do not operate or make their business decisions from data analysis have still been able to achieve some level of success because the owners and/or managers are very hands on and have a good idea of what is being done in the firm.  Conversely, simply running reports without really understanding the story the data is telling, and in many cases not looking at the right data points, can be even worse. Think of it like a map – if you don’t know where you want to go, you really can’t have a predictable way to get there.  And, you would never want to use a map that takes you to California when you really want to go to New York.

Ultimately metrics can help a firm gauge the market, improve internal performance, promote staff accountability, open lines of communication, increase profitability, and facilitate future planning.

Decide What to Measure and Analyze
Key Performance Indicators (KPIs) are quantifiable measurements specific to the firm and its business that reflect strategy, goals, and success factors of the organization.  They are essentially the measurements a firm utilizes to perform internal analysis and make improvements, and can be critical to identifying issues in the firm.

It is important to note, as previously mentioned, that the KPIs are a reflection of the firm’s strategy.  In order to determine how to measure the firm’s strategy, an analysis of the current state is usually needed.  That discussion of how the firm is currently operating, what is and is not working well, and a plan of action for desired improvements will usually lead a firm right to the target indicators for measurement.

Firms who are not currently taking advantage of the data that is tracked in their case management systems, time billing and accounting systems, document storage systems, etc., might be encouraged to find that these systems generally have some level of built in mechanism for extracting data, and if the tool provided with the software is not sufficient, there are often third party solutions that can help.  In either case, there is no better time than now to start mapping out the desired KPIs.

There is a difference between metrics and KPIs.  KPIs reflect your business strategy and goals, whereas some metrics are simply measurements used to analyze the current state and derive trends over time.  Which a particular measurement is depends on the strategy it is aligned with, so for simplicity the examples provided are listed as metrics.  There are standard metrics that most law firms should be running, and then there are metrics that may be unique to a specific firm or industry.  Below are some examples of metrics that might be used in a default law firm.

Financial Metrics

Metric Description How it can be put to use
Realization The difference between the chargeable per hour rate and the rate paid by a client after write-offs.  It enables a firm to know how much money is needed to sustain business. Analysis of Realization rates that are low could be indicative of too many write offs, an efficiency problem, billing not being done timely, etc.

 

Aged Accounts Receivable Invoiced fees and costs that have yet not been paid to the firm. Reviewing overdue amounts can reveal issues with the collection process, or potentially even with the billing process itself.
Utilization Billable hours divided by total hours expressed as a percentage. Establishing a utilization policy and creating a foundation to measure it consistently can help uncover scheduling problems, whether people are working enough, whether there is a motivation issue, whether people are billing all of the time they actually worked, and whether they are managing non-billable hours productively.
Hourly Billed Charges The amount of hourly fees billed by timekeepers over a specific period of time. Setting a daily or weekly billing target, and using the measurements to determine whether the process is broken, there are not enough files or too many files per timekeeper, whether bonuses are needed, etc.
Client Advanced Costs The amounts that are paid out of pocket by the firm and reimbursed later by the clients. When amounts are not being paid in full by clients, it may be a result of untimely or incorrect billing, whether outside vendors’ rates are too high, etc.

Creation, Automation, and Continuous Improvement
Once the desired KPIs and metrics have been established, the next step is to create the reports to output the information and to automate them if possible.  In some cases, there may need to be manually tracked information, but it is best to minimize or avoid this whenever possible.  Instead, creating methods of storing this information, if it is not already tracked, is optimal, and will ensure that additional burden is not placed on staff.  Automating the delivery so that they are sent to the appropriate attorneys, managers, or staff at the proper intervals will enhance the process and improve likelihood that the reports are reviewed at regularly.

The metrics broken down above are examples that might be helpful to a typical law firm.  Ultimately, the goal with these metrics is to improve the quality, process, and financial wellbeing at the firm, so it is important that the implementation of data analysis include regular reviews with a specific focus on potential issues and opportunities for improvements.  And once those improvements have been made, continuing to better understand the data or adjusting the metrics that are needed for the firm ensures that the process is circular, and increases the chances of success at the firm!

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