Module 6: Measuring and Managing for Performance

Why measure performance? – How to measure performance – What exactly should you
measure? – financial ratios – key performance indicators (KPIs) – Sales measures –
Communicating results - Benchmarking

Contents
Module 6: Measuring and Managing for Performance 1
Introduction 2
Summary ............................................................................................................................ 2
Overview ............................................................................................................................. 2
Why Measure Performance? 2
How to Measure Performance 3
Organisational Controls....................................................................................................... 3
Outcome and Behavioural Controls 3
Quantitative and Qualitative Controls 4
What Exactly Should We Measure? 4
The Measuring Tools .......................................................................................................... 4
What Are ‘Financial Ratios’? 5
What are KPIs? 5
What measures are commonly used? ............................................................................... 10
What measures should be used? ...................................................................................... 12
Dare We Measure Sales? 26
Communicating What is Measured 27
Data versus information. ................................................................................................... 27
The dashboard. ................................................................................................................. 27
How to Benchmark Your Law Practice’s Financial Performance 29
Managerial Competency ................................................................................................... 29
Performance Factors ........................................................................................................ 29
Realisation Rates .............................................................................................................. 30
Improved Practice ............................................................................................................. 30
Conclusion 30
Practical tips/reflection 31
Introduction
“Your actions reveal how badly you want something. If you keep saying something is a
priority but you never act on it, then you don’t really want it. It’s time to have an honest
conversation with yourself. Your actions reveal your true motivations.”

James Clear, Atomic Habits, (2018)

Summary

To repeat from Module 5, lawyers may not be comfortable with numbers, but managers have
to be.

This module will consider how, as a manager, you will measure and manage for performance
using financial ratios and key performance indicators that you choose.

This is the module where you have to admit your real priorities in creating a law practice or
legal services business and start doing what you say you want to do.

Overview

This module provides a managerial framework for measuring performance of a law practice
or legal services business, then provides a context and examples of tools (financial ratios
and KPIs) that students can analyse in order to select their own relevant performance
measures. It goes on to consider measuring sales, communicating the results of the
measurement framework and using the results to benchmark.

Why Measure Performance?

Measuring performance and keeping it on track requires controls.

Controlling the organisation’s performance is a key managerial obligation.

Why measure or control performance?

Measuring and controlling performance is the most effective way of ensuring that
organisational performance does not deviate from the standards you decided need to be
achieved in order to achieve your intended goals.

Simply put, this means making sure the organisation hits the targets you want to achieve.

Controlling consists of three steps:

1. setting performance measures,

2. comparing the actual performance against the measures, and

3. taking corrective action when necessary.

The managerial function of controlling should not be confused with control in the
manipulative sense.

‘Controlling’ here means the manager taking systemic action to ensure that performance is
contributing to achieving organisational objectives.

How to Measure Performance

As stated above, measuring performance and keeping it on track requires controls.

Creating and implementing organisational controls gives you the ability – the ‘how’ – to
measure performance.

Organisational Controls

Organisational controls are basically processes that:

• set performance measures,

• design information systems to record performance against the measures,

• compare actual performance against the measures,

• check if there are any deviations,

• assess the deviations’ significance, and

• take any action required to assure that all the organisation’s resources are being used
in the most effective and efficient way possible in achieving corporate objectives.

Organisational controls can be loosely categorised as:

• Strategic controls, which evaluate how your strategy is performing.

• Management controls, which focus on achieving specific performance targets that

contribute to achieving your strategy.

• Operational controls, which are concerned with individual and group performance.

These loose categories are not clearly separate and distinctive from each other. Moreover,
similar measurement techniques may be used for each type of control.

Outcome and Behavioural Controls

Controls differ depending on what is monitored - outcomes or behaviours.

Outcome controls are judged by the result of the organisation’s activities, while behavioural
controls involve monitoring how the organisation’s members behave on a daily basis.

Outcome controls are generally preferable when just one or two performance measures
(say, profitability or cash flow) are good gauges of a business’s health.
They are also effective when there is little external interference between managerial decision
making on the one hand and business performance on the other.

Behavioural controls involve the direct evaluation of managerial and employee decision
making. Behavioural controls tie rewards to a broader range of criteria than outcome
controls.

Quantitative and Qualitative Controls

Controls can take on one of two predominant forms: quantitative or qualitative.

Quantitative control involves controlling the firm’s costs and expenses against the budget.

The tools for quantitative control are the financial statements described in Module 5 – the
cash flow statement, the income statement and the balance sheet – as well as the budget.

Without effective quantitative controls, the firm’s performance can deteriorate.

While we can treat quantitative controls as a form of outcome control, they can also be used
as a behavioural control.

For example, if staff must obtain approval for expenditures over a budgeted amount, then the
quantitative control also provides a behavioural control mechanism as well.

Qualitative controls complement quantitative controls by monitoring variables like customer

satisfaction and employee morale.

Increasingly, organisations measure variables such as customer loyalty, referrals, employee

satisfaction, and similar variables.

Qualitative controls track aspects of the organisation that are not immediately quantitative in
nature but are expected to lead to positive performance outcomes.

The theory behind qualitative controls is that they should provide managers with a glimpse of
the organisation’s progress before quantitative outcomes can be measured (Ittner & Larcker,
2003).

This theory does have some practical support. General Electric has found that highly
satisfied customers are the best predictor of future sales in many of its businesses, so it
regularly tracks customer satisfaction.

What Exactly Should We Measure?

The Measuring Tools

Before considering exactly what to measure, the nature of the quantitative and qualitative
tools to be used – financial ratios and key performance indicators (KPIs) - should be
considered. The two overlap – a financial ratio may also be a KPI.

Running a law firm is a business and measurement is critical for success. KPIs and financial
ratios are universal and apply across the legal profession, regardless of firm size.

What Are ‘Financial Ratios’?

Financial ratios are useful tools because they allow you to make comparisons about sanity-
checking profit, debt, cash, and efficiency quickly.

Once you have compiled your financial statements and budget, you can examine them in
different ways. One of the most effective strategies is to calculate a Financial Ratio: a
comparison of two important elements of your law practice or legal services business.

Looking at how these ratios change over time helps you see how the business is changing
over time. Comparing the ratios to industry averages makes it easy to see if the company is
performing like a typical company in the industry, or if something is odd.

Profitability ratios indicate a business’ ability to generate profit. The higher your revenue
and the lower your costs, the higher your profitability ratios. We have already
discussed Profit Margin, which is a very basic profitability ratio.

Liquidity ratios indicate the ability of a business to pay its bills. Running out of cash is a
serious issue, so ratios like the “Current Ratio” (current assets divided by current
liabilities) and the “Quick Ratio” (current assets minus inventory divided by current
liabilities) make it easy to determine how close a business is to bankruptcy, or if the
business is sitting on cash instead of invest money in growth or improvement.

There are thousands of different types of financial ratios, and covering them all is beyond this
module’s scope.

Managers and financial analysts tend to choose a small set of important ratios based on the
industry: it makes little sense to calculate “inventory turnover” for a barbershop.

What are KPIs?

KPIs are the critical indicators of progress toward an intended result. They help you
understand if you are achieving your goals. KPIs create an analytical basis for decision
making and help focus attention on what you consider matters most, and enable you to make
evidence-driven decisions.

Developing meaningful KPI and related performance measurement tools is a skill that
involves:

• articulating what an organisation is trying to accomplish – your intended goals,

• identifying the most meaningful and useful indicators of success – ‘what to measure’,

• identifying and crafting the tools to measure these indicators – the ‘how to measure’,

• analysing the resulting information,

• clearly communicating that information and analysis; and

 • using the information to identify any gaps between actual and targeted performance,
control actual performance and make better decisions.

Simply selecting a few tools from a long list of possible measures is not effective.

Operational measures, project measures, risk measures, and employee measures provide
an early-warning system throughout an organisation to help improve performance.

Meaningful KPIs provide insight into whether strategies and plans are working, and whether
projects and services are on schedule, on budget and delivered effectively.

KPIs can focus employees' attention on what matters most to success, and allow for
measurement of accomplishments.

KPIs are normally measured at two different levels: firm-wide and individually.

Lawyers are not so different from accountants or engineers, who also deliver professional
services. Proven KPI measures and frameworks can be borrowed from other industries.

You will 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.

The following is a checklist for implementing KPIs:

1. Describe your strategy or plan

Always begin by articulating your strategy properly. If you do not know what you are
trying to accomplish, it is too early to create and introduce KPIs.

2. Describe the Intended Results

Meaningful measures require clear intended results. Strategy tends to be written in

the form of abstract ideals. Measurement is specific, so agreement on definitions
and expectations is critical. For example, the strategic objective, ‘Improve Product
Quality’, might sound like an obviously concrete and specific objective, but what if
one person on the team believes quality means that the services meet certain
specifications while another defines quality in terms of the outcome for the client?

Once agreement is reached on the intended result, it is easier to explicitly define

what to measure.

3. Understand Alternative Measures

Analyse how results can be measured, starting with these questions: Can the
intended result be measured directly? Is there a clear way to capture the entire
intended result in one or more measures?

If the answer is yes, identify the most appropriate direct measure. Objectives in the
 two results perspectives (financial/stewardship and customer/stakeholder) usually
have easily identifiable direct measures. For example, if ‘Increase Product Sales’ is
a strategic objective and the intended result is that product sales revenue increases,
the direct measure is sales revenue dollars.

If the answer is that results cannot be measured directly, develop measurable

components that thoroughly describe the intended result, usually by establishing a
hypothesis around correlation or contribution.

The logic model, cause-effect analysis and/or process flow analysis are three
popular tools that can be used to better understand measurable components before
selecting indirect measurements.

4. Select the Right Measure(s) for Each Objective

Narrow down the potential measures identified in the previous steps and select final
measures that best reveal how strategic performance is improving, worsening or
staying the same. Choose metrics that:

• have meaning and relevance,

• answer key user questions about the organisation’s performance towards

strategic objectives,

• provide the information needed to make better decisions,

• are valid and verified, measuring what is intended,

• encourage desirable employee behaviours; and

• avoid an undue data collection burden or other unintended consequences.

5. Compare apples with apples, not lemons.

Map out your data sources and make sure you are comparing similar periods and
units. For example, do not 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.

6. 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.

7. Set Targets and Thresholds

Describing desired performance levels and determining how data is interpreted is as

important as selecting the measure. This step defines good and bad performance,
and determines how the data is used.

Performance is based on targets, the desired level of performance for a specific

reporting period, and thresholds, the upper and lower limits of desired performance
around a target value.

Thresholds create the exact points where an indicator displays green for good
performance, yellow for satisfactory or red for poor. The figure below shows an
example of targets and thresholds.
 8. Define and document selected performance measures

For better communication and understanding, document the essential information

comprising every performance measure on a scorecard like this example below:

This is a critical implementation step.

Data definition is especially important if you plan to use the performance information
for decision making. Consistent and thorough data definition makes implementation
much easier and faster and the decisions based on the collected data more reliable.

Documenting the details of the measure help ensure that it is consistently calculated
and presented from reporting period to reporting period, enabling meaningful
performance analysis and conclusions.

9. Start with clients.

Most law firms are measuring profitability and utilisation in some manner.

Borrow from consumer-facing and software businesses, and embrace the Net
Promoter Score (NPS). NPS is further described below.

The KPI framework will allow you to evaluate not only which types of clients are
most profitable, but also which clients value your services the most.
 Pro-Tip

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.

Challenges to Using KPIs

Utilising KPIs to assist in making business-like decisions does have its challenges, including
the following points:

Finding a relevant external benchmark against which to compare your firm's KPIs so it has
real meaning and appropriate strategies can be developed.

Most law firm accounting software packages do not lend themselves to generating the
information in a timely fashion (if at all).

Misinterpreting KPI results and overreaction to short-term variations in results.

Keep in mind that context is critical to the effective use of KPIs. An excellent way to do this is
through benchmarking, comparing your firm's KPI results against the same KPI for other
organisations. The trouble is that access to benchmarking data in the legal profession is
limited.

What measures are commonly used?

Every business model has a small number of important ratios and KPIs to consider, so it is
worthwhile to understand what is commonly used in law and legal services.

In general terms, the following measures – both financial ratios and KPIs – are used in the
Australian legal industry.

Profitability measures

The success of any business depends on profitability.

One of the most important issues for any business is maintaining profitability. A profitable
business will ensure that the business operations are in line with the overall strategic
objective, whether it is to grow the business, sell at a later date, or any other objective.

Evaluating profitability can be undertaken by using profitability ratios, return ratios and using
the mark-up and break-even calculations.
Cash flow, liquidity and solvency measures

Cash flow, liquidity and solvency should be monitored regularly to ensure the ongoing
survival, both short-term and long-term, of any business. Liquidity is a measure of the ability
of the business to meet short-term debt obligations while solvency measures the ability of the
business to meet longer term commitments. Cash flow is an operational measure that
ensures that the business has adequate cash to cover all outgoings during the period to be
monitored.

Utilisation

This is the metric used to measure a lawyer's activity, measured against the total amount of
time that is available for that lawyer to work. You would budget or set a number at the
beginning of the year that says this is what 100% utilisation would look like, and then
measure the billable hours that lawyer does against that metric. The percentage of the
results is called utilisation.

Realisation

The next key metric is realisation, and this metric is the percentage of time recorded that is
actually paid. Take the recorded time, multiply it by the applicable billing rate, and the result
is what 100% realisation would look like.

Realisation is usually less than utilisation because realisation takes into account things like
discounts and write-offs. Realisation is the percentage of time recorded that is actually paid
using the applicable billing rate.

Leverage

Leverage in a law firm refers to the ratio of non-partner/principal (lawyer) hours to

partner/principal hours.

A high leverage means a high number of lawyer hours for each partner hour, and a low
leverage means the reverse.

Leverage is important because it translates into a higher amount of revenue for each partner
hour.

For example, if for each hour a partner of the firm works, the lawyers work three, then you
have leveraged up the time that the partner is able to bill. This is where the term comes from.
All things being equal, a law firm will make more money if it has higher leverage.

That does not apply across all practice areas equally. There are some practice areas which
are suited to high leverage historically, and there are others which cannot take higher
leverage because of the way in which the work has to be done. It is too technical or it
requires a lot of partner face-time.

Leverage is also a component in the profitability calculation.

Price

The last, predictably, is price - essentially the number by which the total billable hours
worked on a matter multiplied by the applicable billing rates to arrive at the bill. The price is
obviously the fee charged per hour that has been agreed with the client.

Costs

The firm's costs, obviously enough, are mainly the office space and the salaries. You could
look at the costs as effectively fixed, right, at least in the short term, in a given financial year.

Profit (per Partner)

The profit per partner/principal will be the revenue less the costs divided by the number of
equity partners/principals.

One way of measuring law firm profitability is to just look more simply at this:

Let's get as much revenue in as we can, let's spread it over as low a

fixed cost base as we can, and in that way, increase profits.

What measures should be used?

Warning - The following will be contentious and agreement may not be achievable.

Technology-driven transformation, innovation and disruption have only intensified the debate
within the law and legal services industry around the world on what measures should be
used.

We start with some evidence.

The 2018 Thomson Reuters Legal Executive Institute’s Dynamic Law Firms Study divides
the firms being studied into ‘Dynamic’ and ‘Static’.

Dynamic law firms are those among the top 25% for three-year growth in revenue per lawyer,
overall profit, and profit margin from 2015-2017. Static firms were among the bottom 25% for
growth in these metrics.

The Study’s conclusions are:

1. Productivity is king

Dynamic firms saw, on average, an additional 96 billable hours per lawyer placed into
work-in-progress in 2017. This was the culmination of a widening gap over the three
years examined. This trickled down to other aspects of the firms’ performance.

2. When productivity suffers, investment isn’t far behind

Hours do not necessarily equal revenue; but it is hard to generate revenue without
booking the hours. For Static firms, much of their investment strategy for the
examined period was likely based on 2014 and 2015 performance, a period where
many of these firms did relatively well. But 2016 was not a kind year to these firms.
Average productivity started to decline quickly, putting a pinch on available funds for
investment.

3. Lack of investment hurts profit potential

Dynamic law firms vastly outpaced their Static counterparts in terms of investment in
technology improvements and marketing/business development growth. Static firms
saw dramatic reductions in both of these investment areas in 2017 compared to
2016. Not only are the Static firms unable to invest in technology that could help them
improve their client service delivery and internal operations, they have cut back on
the money they spend to reach out to their current and prospective clients. If your firm
is not improving in these areas, it will undoubtedly impact your ability to find additional
profit.

4. Protecting fee rates is more important than raising them

Even when it is difficult to grow rates, it is important to protect the rates your firm can
charge. Lax practices regarding discounts and write-downs will negatively impact a
firm’s billing realisation level, which will negatively impact collections. Dynamic firms
enjoy a higher rate structure, but also higher erosion of those rates. An increased
focus on improving billing realisation will help ensure maximum performance for all
firms.

5. There are other ways to make money beyond simply growing rates

Even with stagnant rates, it is possible to increase profit margins. It is no coincidence

that Dynamic firms have opened a widening gap over Static firms in terms of profit
margin.

Increased demand can lead to greater productivity if matched with proportional lawyer
growth. Dynamic firms enjoyed a noticeable lead over Static firms in total demand, as
well as demand in key practices. The three-year trend for per lawyer productivity
again shows a growing gap in favour of Dynamic firms.

6. Declines in productivity have significant ripple effects

Utilisation, or productivity, is a key element of profitability. A firm that struggles to

grow rates and experiences even standard year-over-year expense growth will see
dramatic consequences as utilization slips.

The “widget” a law firm has to sell is the time of its professionals, whether the firm
bills by the hour or on an alternative model. Declining productivity means fewer
 “widgets” sold, creating revenue worries and impacting longer-term investment
priorities.

Regardless of a firm’s size, its financial fortunes will improve – without reliance on
rate increases – if it can maintain or improve per lawyer productivity, protect rates
from unnecessary discounts and write-downs, and improve profit margins.

In June 2016, the Legal Executive Institute surveyed small law firms on their use of KPIs and
benchmarking.

The purpose of the survey was twofold: to better understand if and how small law firms
measure and track KPIs and also to gather information on technology usage by those firms.

The survey went to approximately 690 firms. The 62 responses received back included 10
solo practices.

The remaining respondents were divided as follows:

• roughly 50% had fewer than 10 lawyers;

• about 25% had between 11 and 20 lawyers; and
• about 25% had more than 21 lawyers.

More than half - 36 respondents (58%) - reported that they do not use KPIs beyond the
traditional hours billed metric.

Relying on that traditional KPI is not sustainable long-term because clients are demanding
more for less as well as the ability to rate satisfaction with legal services1.

Some of these concepts are new to the legal industry, but not to in-house counsel or clients,
who see KPIs in their business and everyday lives.

Only 6 firms of the 26 that used KPIs beyond hours-billed used more than four different
alternative metrics.

These alternative metrics included:

• Client experience or satisfaction,

• Cost of client development or acquisition; and

• Pipeline dollar value per lawyer.

The breakdown of all non-traditional KPIs used by those 26 firms follows:

• 19 respondents tracked collected billings by lawyer,

• 15 firms measured overdue accounts receivable,

1
I am not suggesting that timekeepers should stop recording hours – that information is invaluable for pricing, including
determining billing rates and flat fees. Simply consider not using recorded hours as the sole basis for billing.
 • 14 respondents tracked matter profitability; and

• Three firms (under 5% of total respondents) measured client satisfaction.

What measures does this evidence support?

The author suggests that there are four areas of measure that are not adequately addressed
or need to be better addressed:

• Client satisfaction and value perception

• Profitability

• Productivity

• Cashflow

Addressing each in depth:

Client satisfaction and value perception

Module 8 details the arguments in favour of retaining and gaining more work from existing
clients.

This presupposes that existing clients are happy with the work delivered by the law firm and
perceive value in it.

Client-value metrics focus on 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.

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. This approach is an effective differentiator for a firm in today’s legal market.

Client metrics should be focused on their value to the firm from revenue, retention and value
perspectives. Some possible 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; and

 • apply the Pareto Principle2 (the 80/20 rule) to assess risk of top clients, plus client
retention.

Communication is a vital way to provide clients with more value. Especially with law firms,
clients want frequent ongoing communication – this sounds simple, but it has its challenges.

When should a lawyer communicate with a client: client intake? Invoicing? Matter resolution?
On a schedule? Which communication methods should a lawyer use with a client: client
portals? Emails? Messaging? Phone calls? What should a lawyer communicate to a client:
procedural updates? Cost status? Likely outcomes? These are all examples of one-way
communication from a lawyer to a client.

A better perspective for you to consider is to make client communication two-sided.

Implementation of communication systems and processes should be mindful of securing the

client perspective: are they happy with your firm? What are their concerns? Do they think the
lawyer 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).

2 https://www.investopedia.com/terms/p/paretoprinciple.asp
 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 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.

However, the NPS numbers alone may not be enough. Instead, consider asking the client
“why or why not?” along with the NPS survey question.

Collaborating and working well with a client requires soft skills like communication and
project management. Clients desire polite, timely communication and efficiencies through
technology.

No one wants a surprise either in terms of outcome or billing. The NPS survey with the “why
or why not?” follow-up question gives a law firm the opportunity to check how it is doing and
make needed changes based on the feedback.

Another complementary measure to NPS is to track the source of your new business by
measuring new clients that come from referrals as a percentage of total new clients. It is
easier to either sell additional services to existing clients or potential customers who are
referred.

Profitability

Business success and viability depends on profitability.

To get a comprehensive picture of your law practice’s profitability, consider extending the
profit metrics beyond the ‘per partner’ aspect and others like profitability ratios, return ratios
mark-ups and break-even calculations used in law firms today.

Some possible metrics include:

• firm profitability,

• practice area profitability3,

• profitability by client,

• revenue per partner,

3
A practice area could be evaluated as a distinct business organisation to understand its contribution and impact to the firm.
Some metrics include: revenue, discounting, profitability, expenses, cross-selling attributed revenue, plus client retention. It is
great if your firm is generating a profit, but is it making a profit because all the practice areas are profitable, or is it because only
one practice is extremely profitable and carrying all the others?
 • profit by lawyer

• revenue per lawyer; and

• revenue per full-time equivalent (FTE) employee.

Whichever metric you choose, remember its effect on other decisions you have made about
your law practice’s culture and recruitment. Over-emphasis on any one metric, like profit, can
and will nullify or counter the effect of other decisions and performance measures.

Productivity

Productivity is notoriously hard to assess in service businesses like law practices and legal
services businesses.

The Big (Economic) picture

To put this in context, there was and still is concern amongst economists about the so-called
‘productivity growth slowdown’ amongst Organisation for Economic Co-operation and
Development member countries.

Much of the alleged reduction in the growth of productivity was blamed on the growth of
service businesses.

In many services sectors it is not exactly clear (at least to economists) what is being
transacted, what is the output, and what services correspond to the payments made to their
providers.

A simple model illustrates the problem. The outcome of expert advice or intervention (e.g.,
medical, legal, financial, educational, management consulting) can be thought of as a shift
from an initial state of being to a post-intervention state, where “state” refers variously to the
condition of wellness, legal or financial position, knowledge, etc.

The subject purchases expert services, X, in the expectation or hope that they will have a
positive outcome.

However, the outcome also depends on the subject’s own efforts and initial state of being.

Measured gross domestic product (GDP) records the payment for X, and perhaps ancillary
expenses incurred, but not necessarily the value of the outcome to the recipient, which may
be different and is often complex and subjective.

A fundamental problem arises when trying to separate X into price and quantity components
in order to measure GDP: in what units do you measure X? Doctors and lawyers may
provide information but bill by the visit, the hour, or the procedure.

This is their “output,” and it is not measured in bits or bytes of expert information.

The service providers usually do not sell guaranteed outcomes, since the advice they provide
may not be heeded and outcomes are often uncertain.

There is a parallel problem in the units in which outcomes are measured: whatever these
units are, they are not necessarily the same for buyers and sellers.
But if there are no clear units of measurement, how is it possible to determine the level of
output and tell if improvements in technology have increased outcome-based output over
time?

This is a growing measurement problem, given the service sector’s technological dynamism
in recent years and the increased availability of expert advice and information on the Internet.

The Small (Law Practice) picture

A traditional proxy for productivity is the profit earned by one partner and the lawyers they
supervise on the matter.

Profitability can be improved either by:

• increasing the price paid for the service, or

• by lowering the cost of delivery.

Previously, law firms have focused on the former by merely raising hourly rates. That tactic is
increasingly resisted by clients.

There are other ways, however, to improve productivity.

Increasing overall net income through improved productivity increases profits per equity
partner or principle (PPEPP).

Higher PPEPP means a larger total income base and therefore greater flexibility to pay
exceptional legal talent.

Many types of productivity improvements also allow the firm to reduce fees to clients to make
the firm more competitive, while maintaining profits.

But - productivity improvement is not a strategy.

Instead, it is an operational element to compete more effectively.

Strategy aims to differentiate, typically to avoid competing solely on price, though it may be a
valid strategy to be the least expensive law practice in selected services.

For most law practices, strategy without productivity improvements will not succeed in the
long-term.

Very few firms can differentiate themselves so strongly that they succeed despite lack of
productivity gains.

Effective differentiation does allow a firm to charge more, because clients perceive greater
value in the differentiated service.

Yet because of continuous productivity improvements by competing firms, the value clients
perceive for even differentiated services is generally declining. Most firms feel the pressure
to reduce prices over time (or produce more value for the same price) and to make
productivity improvements in order to maintain profitability.

Many lawyers mistake increasing utilisation – the number of billable hours recorded by the
same timekeepers – for improving productivity.
This is not true.

Productivity means working fewer, not more, hours to produce the same result in a matter.
More precisely, it means working a lower total cost of hours to produce the same results.

For example, pushing work down to lower cost lawyers, even if they require somewhat more
time, may reduce the overall cost of producing the work.

In contrast, increasing the cost of hours on a particular matter, such as through the same
lawyers spending more time or senior lawyers hoarding work, while delivering the same
value reduces productivity, making the matter relatively more expensive to the client than
competitors' offerings. This results in discounts and write-offs.

To illustrate, here are some examples of productivity improvements that are financially
advantageous to a law practice or legal services business.

A. Perform the same work in less time.

One way to boost productivity is to become more efficient by performing the same
work using a lower total cost of hours. As previously noted, the firm makes more
money by re-deploying the saved hours on new work.

For the same reasons, efficiency improvements increase profits on matters with fixed
fees, which are becoming more prevalent. A firm that can effectively manage its
resources to consistently profit on fixed fee arrangements can choose how much, if
any of its productivity benefits to share with the client through reduced fixed fees.

B. Push work down.

Finding ways for junior lawyers to perform some of the work of senior lawyers, who
can then take on new work, improves the partner/principle:lawyer leverage ratio,
increases profits and reduces per-matter fees to clients.

Pushing down work in this fashion can be accomplished through additional training
and mentoring, and knowledge tools such as extensive checklists and playbooks.

C. Increase the value (and fees) of the work.

By targeting more high-value work in certain practice areas as part of a strategy to

differentiate itself, a firm can justify higher fees per timekeeper.

To accomplish this kind of initiative a practice group may decide to bring in new talent
with special expertise and undertake a program of special training and mentoring to
spread that expertise among other partners.

High hours do not necessarily mean high quality. In fact, many of the tools and
training techniques that allow lawyers to perform the same work in less time, or more
junior lawyers to perform more senior work, also improve quality and consistency of
their work product.

Conversely, sometimes having a more senior person perform the work is more
efficient and produces higher quality results.
 This is because capacity and productivity are related. One of the biggest practical
problems is how to put excess capacity to work, including capacity freed up due to
efficiency gains.

Like airlines, some firms have become quite sophisticated at understanding clients'
value perceptions and meeting them through marginal pricing. Unsold lawyer time is
like airline seats. The cost is fully borne by the firm whether or not it is bringing in
revenue. Charging even $1 for unsold time improves profitability.

Basically, these firms are selling services at whatever discount is needed to make the
sale, but only at that time for that matter. They are not undermining other fee
arrangements.

Managing deployment and pricing of lawyers to address short-term excess capacity,

long-term full-price demand, matching expertise across the firm with matters and
lawyer career development requires the firm to develop a sophisticated system.

Keeping all lawyers fully occupied on fee-paying work, even with selective deep
discounts, can be a powerful way to improve productivity.

Perennial excess capacity in certain practice areas should cause the firm to consider
how those practice areas relate to its strategy.

If they are part of the firm's strategy, re-examination of the strategy may be in order. If
they are not a focus of the strategy, the firm should consider whether to restructure
them with different talent or a different industry focus, or whether to de-emphasise
them.

Measuring productivity

Establishing productivity metrics allows a law practice to manage its efforts to improve its
productivity initiatives and incentivise its lawyers to be more productive.

Effective management includes knowing whether the law practice's productivity initiatives are
successful, and determining which initiatives are the most effective.

Existing metrics are not granular enough.

These metrics, however, are not sufficiently granular to allow comparisons across practice
groups, industry groups, groups of matters, client service teams or a single unit of production
(such as an equity partner or principle).

Traditional measures such as utilisation, revenue per lawyer and hourly rates also do not
capture productivity. Even realisation and leverage are not productivity measures, although
they may measure components of productivity.

Eliminating unproductive equity partners, while a good hygiene measure that improves profits
per equity partner, is not a sustainable way to improve productivity. It also leaves the firm
smaller and more vulnerable to larger firms.

The absence of standard granular metrics reflects the fact that law firms have not traditionally
measured productivity.
The problem with measuring productivity without the billable hour is that lawyers do not
actually produce, or output, work that clients actually value and want to pay for.

Drafting a contract is important, but clients value the end result of getting that contract in
hand to use, and not the hours of research and writing that went into it.

As such, as firms move away from billable hours, law firm managers need to get creative
when determining what factors to measure to assess productivity, and may even benefit from
using surrogate measures.

Productivity measurement should focus on overall capabilities, not on one set of costs. How
good is your law practice at taking a pile of raw materials, a bunch of machines, stacks of
paperwork, and groups of employees, and turning out useful goods or services?

That is what a productivity index should address.

It is, as much as possible, a relationship between physical inputs and outputs.

The formula is disarmingly simple:

• The organisation producing more with a given set of inputs (capital, labour, and
materials) or using fewer inputs to produce the same output has an advantage over
the organisation producing less.

• Lower input costs create an added advantage—but not the principal advantage that
productivity measures must identify. The central mission of a productivity index is to
illuminate how an organisation can get more units of output per labour hour, per
machine, or per pound of materials than its competitors.

Developing productivity metrics.

A law practice will need to develop its own metrics to measure productivity at these more
granular levels.

The relevant metrics will vary across each firm based on its own situation, such as

• its typical staffing composition for matters,

• the types of productivity initiatives being measured; and
• the financial and other data it already collects.

In many cases a firm will be able to construct metrics from its existing data, but in some
cases will need to start collecting new types of data.

For example:

Matter profitability

This can be measured without any lawyers being involved and analysed with the help of only
a few lawyers. Implementing a program to manage matter profitability does require lawyers
on each matter to change their behaviour in response to the profitability analysis for the
lawyer's matters, but failure of one lawyer or practice group to act will not hold up progress
by another group.
Create an internal benchmarking database

Create a database of information about each matter sufficient to identify similar matters for
fee benchmarking, staffing and other purposes. This will require lawyers to collect that
information at the end of every matter. Lawyer foot-dragging on data collection will prevent
the entire database from being useful. Unlike the prior example, delay by a few will delay the
whole.

Offer temporary discounts

When a law practice has less than 100% utilisation – in other words, some lawyers are not
fully occupied with client work – the firm can increase revenue without increasing costs by
winning work for the unoccupied lawyers at discounted rates – even heavily discounted
rates. Successful firms have found ways to offer discounts on a temporary basis without
undermining existing client fee arrangements.

When properly managed, this approach can produce powerful improvements to PPEP. It can
readily be implemented because it does not require much lawyer input. Identifying available
capacity and matters suitable for temporary discounts can be accomplished by practice
group leaders.

Instituting a formal process to update clients at regular intervals can reduce write-offs and
improve client relationships. For example, by outlining for the client proposed work before it
is done, the firm can clarify whether the client in fact wants the work – such as substantial
research versus initial thoughts by a firm expert.

Expand the use of checklists and playbooks

Checklists and playbooks can be powerful drivers of productivity.

Checklists can outline the contents of a type of document. Playbooks can cover steps in a
process. Either type can operate at the big picture or the granular level. They allow junior
lawyers to take on more work of senior lawyers, with less senior time spent on oversight.
This improves leverage, a direct driver of productivity and profitability.

Law firm checklists and playbooks are detailed.

Apply technology

There are two types of technological innovations for law, and neither represents a quick fix.

First, technology can automate and make more efficient an existing process.

Second, technology can bring new capabilities.

Sometimes it brings both.

Both types of technology require surveying available products and their costs (which can be
substantial), analysis of costs vs. benefits, setting up and configuring, piloting and assessing,
internal promotion, and training of affected lawyers. These efforts can be substantial,
although so can the rewards when it is done right.

Cashflow
“In 2011, jurors were told, Dewey set partner pay targets of $356 million—and paid out $295
million—despite earning just $250 million in taxable income.”

‘Legal Industry Learns From Dewey’s Mistakes’

The Wall Street Journal 19 October 2015

“Lawyers are notoriously bad at even recording their time and submitting it. According to
LexisNexis, the average law firm waits 83 days after bills are sent out to get paid. The best-
case scenario is you get the bill out a month after you do the work, but a lot of firms aren’t
even good about that. Then clients get the bill, and they might take time before paying it. So,
it’s a month or more before you even get the money—and that’s if everything goes
smoothly.”

Ralph Baxter, former chairman and CEO of law firm Orrick, Herrington & Sutcliffe, recalling
that cash flow was something he constantly worried about

“Justice is cashflow.”

Max Headroom, Episode 3

The main reason for businesses failing is a lack of cash, caused by a shortage of clients,
poor billing and collections results, or a combination of both.

Measuring, monitoring and managing cash will address this risk and also inform and tie
together your chosen measures of profit, productivity and client satisfaction.

Your practice’s cashflow is locked up in either debtors or work-in-progress (WIP). To improve

cashflow, manage activities to reduce these amounts.

Accountants typically call the total of debtors and WIP, ‘lockup”.

Your focus then, if you want to improve cash flow, should be on reducing your lockup as
much as you can and thereby freeing up as much cash as you can in your practice.

One measure of lockup is in terms of the number of days of fees that are locked up, rather
than just a dollar figure.

This makes it much easier to compare results from year to year, partner to partner or practice
to practice.

If you record time (for management purposes, not billing), then by adding your WIP balance
and debtor balance, you will get your lockup.

If you divide this figure by your expected revenue for the year and multiply by 365, this will
express this lockup figure as a number of days of fees.

In other words, lockup is the length of time it takes from accepting an instruction from a client
to collecting payment for the work.
Here is an example:

Your budgeted fees for the year are $1,000,000

Debtors $150,000

Work in Progress $250,000

Lockup $400,000

Days of Lockup: ($400,000/$1,000,000) X 365 = 146 days

On average it is taking 146 days (or nearly 5 months) for a matter to work through the
practice from initial instruction to getting paid.

Cashflow improvements for a healthy business should focus on:

1. driving WIP down.

2. drive debtors down.

3. maintaining creditors at terms.

So that surplus cash exists to:

1. make asset purchases

2. pay debts

3. pay dividends and drawings to partners or principles

Managing cashflow by focusing your measures on these areas will give you confidence in the
business decisions you make.

Pro Tips:

Firms will have greater success by focusing reporting on a small number of metrics
that correlate with strategic goals and circulating reports with those metrics broadly.

Reports that cover a multitude of metrics may be ignored, or relied on for the wrong
metrics.

Reports with limited circulation fail to influence the many supervisors and decision-
makers whose cooperation is needed to achieve the goals behind the metrics.

Kaizen - Continuous productivity improvement - is necessary for most firms, even if

they are pursuing a differentiation strategy. Because of the ease of emulating others'
improvements, the competitive standard of productivity is continually improving.
Dare We Measure Sales?

If you want to improve your law practice’s revenue, you should consider defining, measuring
and then managing the practice against a formal sales process.

I know – you are a lawyer. You hate even the mention of the word ‘Sales’.

But think like a manager.

A majority of business owners nominated selling as the one skill they feel contributes the
most to their success.

To many people, the word selling implies manipulating, pressuring, cajoling--all the used-
car-salesman stereotypes.

But if you think of selling as explaining the logic and benefits of a decision, then everyone--
business owner or not--needs sales skills: to convince others that an idea makes sense, to
show how a project or business will generate a return, or to help employees understand the
benefits of a new process.

Lawyers in particular spend a significant part of their work persuading, influencing, and trying
to get people to part with resources like time and effort.

In essence, sales skills are communication skills. Communication skills are critical in any
business or career.

Understanding the sales process, and how to build long-term customer relationships, is
important regardless of the industry you are in. Spending time in a direct sales role is an
investment that will pay dividends forever.

Successful business owners spend the majority of their time “selling.”

Thinking like a manager of a law practice, consider this: A study by the Harvard Business
Review found that there was an 18% difference in revenue growth between firms that defined
a formal sales process and firms that did not.

A simple sales process is the sales pipeline.

A sales pipeline is a snapshot of where prospects are in the sales process. Sales pipelines
show you how many matters are being developed or opened in a given week, month or year.

If you have a pipeline of matters estimated to be worth $100,000 and your conversion rate,
from lead to opening a file, is 10%, then you can expect to close $10,000 worth of new
business.

If your target is $20,000, then you will need to convert twice as many leads.

This is where sales pipeline analysis comes in. If you can identify improvements within your
pipeline that will help you move more prospects from one stage to another, then your
practice will generate more revenue.
Communicating What is Measured
In line with the observation above that reporting on a small number of metrics that correlate
with strategic goals and circulating reports with those metrics broadly is the better way to
communicate, how can your metrics and analyses be effectively reported?

Data versus information.

Financial information seemingly generates spontaneously at prodigious rates.

However, data is not information. Information arises from human intervention to arrange the
data in a way that tells a story.

The dashboard.

This term is used to describe a summary of financial information that may include graphic or
visual representations.

A dashboard is a snapshot of important indicators from your law practice’s financial

statements and related reports, which can help you see how the various elements relate and
form patterns.

In its basic intent, a dashboard for a law firm follows the same principle as the dashboard in
your car. Perhaps the more important analogy is that you cannot drive your vehicle by solely
watching your dashboard—rather, it helps you know how well you are progressing toward
your destination.

Developing a dashboard using KPIs can help your management team remove distractions
and pay attention to what is important.

For example, if your practice develops a strategic focus on specific client relationships and
supports that focus with client teams, then good KPIs for measuring the breadth of the
relationship are:

• the number of matters per client,

• the number of practice areas that serve these clients; and

• the number of lawyers with time on matters connected to this client.

The rationales for these are:

• The number of matters is an indicator of growth in the client relationship.

• The number of practice areas is an indicator of cross-selling success.

• The number of lawyers is a measure of the breadth and depth of the relationships
between your firm and the client.

All of these are quantifiable KPIs and measure progress toward your practice’s goals.

Dashboards offer:

• a law firm wide perspective of overall functional area performance

 • a clear and articulate definition of the law practice’s objectives.

• a collection point for all performance data from various sources.

• facilitation of decision-making based on fact rather than judgmental inference.

• functional performance metrics to drive productivity.

• the conversion of business data into action-oriented information.

• to coordinate actions amongst diverse stakeholders and align execution with strategic
goals.

• an effective tool for ensuring shared financial comprehension and engagement

among partners and key decision makers

• the opportunity to help define and agree on measures of success simply by

collaborating over what goes into a dashboard.

Two Types of Effective Dashboards in Law Firms

Building an effective dashboard requires the right focus and analysis upfront. The question to
ask is: What information do you as manager really need to see?

If there is too much information in the dashboard, it risks overwhelming the user. If it presents
too little, then it may not be delivering value. If it is not the right information, then it lacks a
purpose.

Context is important here too. The information that a managing partner needs to see, is very
different from what a lawyer might need to see.

To that end, there are two key categories of dashboards that deliver value: task flow
dashboards and business intelligence dashboards.

Directed action: task flow style dashboards.

A task flow style dashboard is very similar to one described in the beginning – it pulls
together information from a number of systems and helps direct the next task.

For example, a lawyer typically needs to know what client documents are active, what tasks
are completed, and what tasks are pending by priority.

This information is spread out across various systems – case management, document
management, and calendars to name a few. An effective task flow dashboard not only pulls
this information together, but does so in a manner that logically directs the lawyer to the next
step without distraction.

Business intelligence dashboards.

A business intelligence dashboard is really a presentation layer – a visual or graphical

representation of data. These are often related to law firm finances and geared to support
decision making.
Partners typically view dashboards of this nature to better understand their business. This
usually includes the WIP status, the state of accounts receivable, and actual versus budget
reports.

Pro Tip:

Do not make a lot of important information compete for

attention.

Most of the time, more than three visualizations on one

dashboard is too many.

How to Benchmark Your Law Practice’s Financial Performance

The idea of benchmarking – setting up statistical guidelines to identify best management
practices – has long been used in industry, and it can also apply to law practices. The
appropriate statistical benchmarks can help you:

• explore operating deficiencies;

• understand where you are currently relative to your goals, and;

• provide fact-based information to gain consensus among your colleagues.

The most important benefit of benchmarking is to measure your progress toward achieving
your goals and strategies.

The performance standards to which other organisations aspire can give you a target. But
they are of little help if you do not use them in accordance with your practice's culture, the
capabilities of your personnel, and your aspirations.

Managerial Competency

Your law practice cannot aspire to achieve your benchmarks unless you understand the
operation of the practice as a business (budget, collections, profit, loss), the practice’s billing
structure, how each lawyer determines practice profitability, and the importance of clients
and their own businesses.

How many lawyers, even partners, would possess the business competency to calculate, or
even understand, the traditional key measures of law practice performance: realisation,
utilisation, leverage and expenses? How many know, or understand, the practice’s collection
rate – or their own personal one? Lawyers must possess that kind of business competency
for benchmarking to be meaningful.

Performance Factors
Benchmarking focuses on profitability.

A number of performance factors determine a practice’s profitability, including:

• billing rates, whether hourly, blended (an average), fixed fee or other measure;

• utilisation, the percentage of a work week (usually expressed as an annual average)

that a lawyer actually bills;

• realisation, the amount of time actually billed and collected;

• leverage, defined as the ratio of non-partners (associates, paralegals, staff) to

partners, and;

• costs, related to both operations and compensation, as a percent of revenues.

Realisation Rates

As discussed above, realisation is a significant KPI.

One insight into any law practice’s performance can be achieved by integrating how much
the practice bills with how much money it collects.

Revenue, especially for a small practice, can be variable. A good method for estimating
revenue and when you will receive it is the accounting measure of turnover ratio: accounts
receivable balance divided by the result of billings per days in the billing period (either
monthly or annually). The turnover ratio tells a lawyer to expect payment for billings X
number of days after a client receives a statement.

The average for law practices, according to one survey, is between 120 and 150 days—as
much as five months. That means that a typical practice should have funds sufficient to
operate for at least six months without new billings coming in. But no practice should ever let
things reach that point.

Collecting the money that clients owe you should be your first financial priority.

Improved Practice

Lawyers who understand financial benchmarking can better assess the value they provide to
clients, and better reflect the value of the service in their bills. They begin to think in terms of
anticipated travel, staffing plans, and strategies for effective structuring of matters. They
develop an appreciation of those areas where costs can be controlled and where costs are
inherent. In short, they do a better job for their clients—and that is what the practice of law is
all about.

Conclusion
Managing includes controlling the organisation. Control in turn requires metrics to measure
what is being controlled.
Determine what is important to you as a manager to control and then customise performance
measures – whether financial ratios or KPIs – to produce the information you want.

Communicating the information helps build culture and improve performance.

Practical tips/reflection
• Keep it simple.

• 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.

• Firms will have greater success by focusing reporting on a small number of metrics that
correlate with strategic goals and circulating reports with those metrics broadly.

• Reports that cover a multitude of metrics may be ignored, or relied on for the wrong
metrics.

• Reports with limited circulation fail to influence the many supervisors and decision-
makers whose cooperation is needed to achieve the goals behind the metrics.

• Kaizen4 - Continuous productivity improvement - is necessary for most firms, even if they
are pursuing a differentiation strategy. Because of the ease of emulating others'
improvements, the competitive standard of productivity is continually improving.

• With dashboards, do not make a lot of important information compete for attention. Most
of the time, more than three visualizations on one dashboard is too many.

4 https://www.mindtools.com/pages/article/newSTR_97.htm