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Are You Measuring Your Law Firm’s Performance on Yesterday’s Business Model?

Once again, I am very happy to welcome Loretta Ruppert, from LexisNexis Practice Management, as a guest writer.  As Senior Director of Community Management, Loretta works to bring together the community of product users, consultants and technology leaders and to create a resource to facilitate better communication and cooperation between these groups.  I have extended an open invitation to Loretta to guest post on this blog on any topic related to Law Firm Practice Management.  Today, she writes on Law Firm Performance Management.  Jeff Krause

In the October issue of Harvard Business Review (HBR), Andrew Likierman wrote about The Five Traps to Performance Measurement. If you don’t have an HBR subscription you will only be able to see a portion of the article using the link, however with this in mind, I’ve summarized the five traps to performance measurement with insight on how they apply to law firms.
 
Trap 1: Measuring Against Yourself

If you are like most law firms, billable hours or fee targets are set sometime in the third or fourth quarter for the upcoming year. In other words, they are set looking inward. The drawback of looking solely at your last year’s performance to set next year’s performance is that you may not be doing as well this year as the same time last year according to your firm’s budgets and financials skewing your forecast. But perhaps compared to the broader legal industry and other firms, you are doing better than they are. Look beyond your budget and plan, find relevant benchmarking numbers to see how you are doing compared to other firms similar to yours, e.g. law firms practicing similar areas of law by region and perhaps by size. (Note:  Although many surveys, including the LexisNexis Economic Survey shows size doesn’t always matter, its more about the way you manage and leverage the key metrics that drive profitability.) There are a lot of outside factors you cannot control but need to consider when measuring your firm’s performance, so don’t just depend on your numbers alone.

Trap 2: Looking Backward

A common law firm measurement is a comparison of financials from this year to last year. Although it is a great indicator of a firm’s performance, the article highlights the importance to review how decisions you make today impact your business. E.g. a decision to add write-offs as a component to consider when allocating bonuses may result in immediate decreases in write-offs or more accurate recording of time. In the end, it would also add to your profitability. Also, don’t be afraid to tweak your course along the way if you made a decision and it is not working. Change the criteria to make it relevant to meet your objective. Look for numbers that lead rather than lag the profits in your business. I would venture to say most law firms report on a cash basis or at least on a modified-cash basis. Look at your firm’s work in progress, write-offs, client advances, accounts receivable turnover and most notably your pipeline of work with existing and forecasted new clients. These numbers will be a sign of what you should expect in revenue in the coming months. However, you should not completely avoid looking backwards. In addition to looking at what lessons you have learned on matters or cases that were successful, you should look at those matters and cases that didn’t fare so well. For example, initiate debriefs’ to discuss what went well and what could have been better – don’t leave staff out of this process, include the billable and support staff on the matter so everyone can learn and take responsibility for the outcome, good or bad. The lesson here is more about learning and not repeating the same mistakes to improve your firm’s efficiency and profitability.

Trap 3: Putting Your Faith in Numbers

A common pitfall of law firms who depend highly on numbers to make decisions is understanding how those numbers are derived. You need to make sure they are relevant to your firm’s objectives. If you rely on a timekeeper analysis report to evaluate the performance of your staff, be sure to clearly communicate the expectations to your staff and provide them ongoing progress reports so they can work on shortfalls before the end of the year. Performance measurements are not just about numbers on a financial statement or billing report. Other numbers you need to consider include employee and client satisfaction scores. Studies have shown that employee and client satisfaction can directly impact profitability of a company.   As an example, surveys like Frederick Reichheld’s Net Promoter Score (NPS), measures the likelihood of a customer to recommend a product or service and the Employee-Customer-Profit Chain, a program used by Sears measures employee satisfaction levels in relationship to customer satisfaction.  Both have proven value in the marketplace. However, when it comes to NPS, I believe it is good for law firms who depend on client referrals as their main source of new clients.  A prominent Philadelphia lawyer I interviewed this past summer said, “the value of a referral from an existing client is like gold.” But NPS is not for every firm. There is an array of satisfaction surveys available to use, and which one you use can depend on how you manage client development and the areas of law practice.

Additionally, how information is obtained can greatly compromise the value of the numbers or data being collected.  An example of this is providing your clients or employees with a satisfaction survey that is not anonymous or standing over them while they are completing the survey. The surveys will likely be skewed and not provide the feedback your firm truly needs to improve. One way to mitigate this problem is to hire a third-party company to conduct the survey for you.  This way they can ask additional questions or get verbatim feedback to help explain a rating. This may provide more confidence in the participants knowing that they are anonymous but provides you with the information you need to know if your administrative staff is unhappy or if clients who are being managed by a particular partner are not satisfied.

Trap 4: Gaming Your Metrics

Using performance metrics to measure staff may also invite unwanted gaming by them. In law firms it could mean some staff pad their hours worked in order to meet the expected billable hours. That’s why it is critical to diversify the metrics. If you are going to set billable hour or fee targets for your lawyers, you also want to set metrics like realization rates. Realization rates will measure how much they collect vs. how much they billed. Likieriman’s article references the Clifford Chance law firm who replaced a single metric measurement system with seven metrics. Not all of the metrics were based on billable hours and included measurements for soft skills as well, i.e. respect and mentoring, excellent client service, integrity, and community service to name a few. The type of skills you want the up-and-coming lawyers to develop as part of your law firm’s succession plan.

Trap 5: Sticking to Your Numbers Too Long

When a law firm is young and just starting out it is more about survival, but at some point your firm begins to mature, and mature firms often become complacent with how they operate. Don’t get stuck in this trap. Don’t be afraid to grow! Know when to start benchmarking your law firm performance to others and honing in on profitability. David Maister identifies in his book “Managing the Professional Service Firm,” the Law Firm Economic Business Model. Under this model, Maister cites five key metrics that help drive profitability: (1) Standard value of production – commonly known as fees worked (pre-adjustments), (2) Utilization – fee capacity, (3) Realization – Amount net of any write-ups or write-downs performed at billing and any credits or write-offs done at receipt, (4) Leverage – how well you utilize your staff based on their relative costs, what is their profitability, and (5) Margin- how well you manage your expenses and how you stack up to other firms. These are the key metrics to hone in on achieving a higher profitability. According to the 2008 LexisNexis Law Firm Economic Survey, the top performing law firms were managing multiple key business drivers resulting in 55% higher profits per partner compared to the next level of law firms.
If you are stuck in survival mode by choice, consider an off-site retreat with your partners and a law firm management expert, just Google” law firm management expert” and you will find a source  to help you develop a plan to higher profitability.

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