Management Matters: Using metrics and key performance indicators to improve efficiency and create a shared vision
Vol. 78, No. 3 / May - June 2022
Erica Fujimoto is the director of default services at Affinity Consulting.
Law firms typically follow one of two models: In one model, a firm analyzes data and understands its business based on reports. In the other, a firm eyeballs its circumstances and hopes for the best.
You might assume the former firm has a clearer sense of direction and the latter is surviving from day to day. In reality, neither firm's approach to self-assessment may be accurate.
While guessing is never the best way to run a business, many firms manage to achieve some level of success because their owners and leaders have a hands-on approach and are intuitively aware of their firm's strengths and weaknesses. Conversely, running reports based on unreliable, irrelevant, or misleading data is a waste of time. If a business report is like a map, how can it help if you don't know where you want to go?
Metrics can help a firm refine its direction and collect and measure data to determine whether it's on the right track. High-achieving firms use metrics to gauge the market, improve internal performance, promote staff accountability, open lines of communication, increase profitability, and facilitate future planning.
What to measure and analyze
Key performance indicators (KPIs) are quantifiable measurements specific to a firm and its business. KPIs reflect the effectiveness of an organization's strategies and goals. KPIs can be used for, and by, all levels of an organization to analyze performance, make improvements, and identify issues before they become critical.
For KPIs to accurately measure the effectiveness of a firm's strategies, the firm first needs to establish a baseline. This requires a discussion of how the firm currently is operating, what is and isn't working well, and what plans and actions are needed for desired improvements. Answers to these questions usually lead to clear, measurable target indicators.
There is no better time than now to start mapping your desired KPIs. You might be encouraged by the amount of useful data that can be extracted from case-management software; time, billing, and accounting software; and document-storage and other systems. If you don’t use these software, many third-party exporting solutions exist. In any case, you probably have access to more useful data than you realize for measuring your newly developed target indicators.
KPIs reflect your firm's strategies and goals. Metrics are measurements used to assess present and future patterns, trends, and behaviors. For simplicity, the table in this article lists financial metrics. Most law firms would benefit from a set of similar standard metrics when assessing the health of their bottom line. Other metrics may be useful for specific specialties and industries.
Aim for continuous improvement
Once you establish relevant and measurable KPIs and metrics, the next step is to create reports that track them. In some cases, you may need to manually track this information. But, if possible, automate as much of the data collection, reporting, and delivery process as you can. An ideal process is one that takes care of the data collection, storage, and delivery itself, placing minimal burden on staff. Make sure your data reports are sent to the appropriate lawyers, managers, and staff at useful intervals. The goal is for these reports to be reviewed regularly to inform decision making.
When reviewing your data, it's important to focus on potential issues and opportunities for improvement. Once those improvements have been made, continue to learn from the data and adjust your KPIs and metrics to ensure your business processes provide truly helpful – and rewarding – feedback loops.
|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. This enables a firm to know how much money is needed to sustain business.||Realization rates that are low could be indicative of too many write-offs, an efficiency problem, billing delays, etc.|
|Aged accounts receivable||Invoiced fees and costs that have not yet been paid to the firm.||Overdue amounts can reveal issues with collection or billing processes.|
|Utilization||Billable hours divided by total hours, expressed as a percentage.||Establishing a utilization policy and creating a foundation to consistently measure it can help uncover scheduling problems; productivity, motivational and morale issues; whether people are billing all the time they worked; and whether they are productively managing non-billable hours.|
|Hourly billed charges||The amount of hourly fees billed by timekeepers during a specific period.||Used for setting a daily or weekly billing target, determining whether processes are broken or if there are not enough or too many files per timekeeper, calculating whether bonuses are needed, etc.|
|Client costs advanced||The amounts that are paid out of pocket by the firm and reimbursed later by the clients.||Amounts not being paid in full by clients may be a result of untimely or incorrect billing, high outside vendor rates, etc.|
1 Erica Fujimoto is the director of default services at Affinity Consulting.