Key Metrics All Firms Should Consider
Authored by Liz Lamar, This piece originally appeared in the APRIL issue of ALM's LJN Legal Tech Newsletter
Measuring profitability means measuring lawyer and staff performance. Regardless of whether law firms bill on contingency, flat fee or by the hour, they must measure productivity in order to understand their profitability.
How do law firms measure productivity, and more importantly, how do they turn that productivity into revenue for the firm? In large part, turning time into money begins with which metrics the firm has in place and whether the right key performance indicators are being measured and tracked.
Increasing revenue is about much more than cost-cutting be it by slashing headcount, reducing technology budgets or curbing professional development and staff training. Partners and firm administrators must also focus on measuring those activities within the firm that increase firm income.
Although there are many ways to measure firm performance and derive metrics that will reveal a firm's financial and operational health, this article explores four distinct metrics that should be included in every law firm's performance dashboard.
Measuring a lawyer's utilization rate is instrumental in understanding his or her productivity. It is a measure of how much time is spent on work that is billable to clients. Utilization is expressed as a percentage and is calculated by dividing a lawyer's billable hours by the total hours worked. For example, if a lawyer works 3,120 hours in a year and bills 2,340 hours, his utilization rate for the year is 75 percent. That means that 75 percent of that attorney's time was spent on work that is billable to clients.
Although lawyers must spend some of their time on administrative matters, for maximum productivity, their goal should be for their utilization rate to be as close to 100 percent as possible. To most effectively measure performance, utilization should be tracked on a monthly, quarterly, and yearly basis. Tracking this information allows law firm administrators to analyze trends over time. Tracking trends reveals:
- If are attorneys utilizing their time effectively
- If they spending too much time on administrative tasks
- If lawyers capturing their time properly
Another cause of low utilization rates may be inadequate technology to capture billable time. Often, the consequence of not having a good practice management solution in place is that billable time is not captured, or if captured, it never makes it on to a bill. Thus, having low utilization rates may be a sign that the firm could use better technology.
Aside from using their technology to capture the necessary data, firms should be using their technology to report on lawyer utilization rates. Custom reporting can be created within most case management or time/billing systems which looks at the total lawyer time worked (billable and non-billable) and compares that data to a lawyer's billable time. Law firms that leverage their technology in this way are better adept at tracking lawyer performance and at addressing any productivity challenges.
Realization Rate is another important key performance indicator that provides law firm management with information related to attorney productivity. Realization is a measure of how much time an attorney records in comparison with the fees that are collected. Realization is expressed as a percentage, and it is calculated as fees recorded divided by fees collected. For instance, if an attorney records 2,340 billable hours in a month but clients only pay for 1,755, then the realization rate for that attorney is 75 percent.
Every lawyer should aspire to realize 100 percent of their billable time. Anything less may be an indication that problems exist. Some common productivity challenges that prevent 100 percent realization are:
- Clients do not see the value in the time recorded, and they challenge time entries
- Time may be written off for business reasons
- Work is not being done efficiently; there is duplicative work
- Problems related to pricing exist
- Work is not being billed in a timely fashion
Realization should be tracked on a monthly, quarterly, and yearly basis to establish trends. Further, just as with utilization, trends should be consistently analyzed as they can be indicative of issues that prevent lawyers from realizing 100 percent of their billable time.
When law firms are unable to realize 100 percent of their billable time, administrators should analyze their processes and their existing technology. Is there a process problem that is affecting the delivery of services to the client? Does the firm's technology support its process, and does it create efficiencies for the lawyer?
Many of the obstacles that prevent lawyers achieving from 100 percent realization can be traced back to the firm's technology. Having inadequate technology can affect the quality of the services delivered to the law firm's clients. Mistakes caused by a failure to automate documents are a perfect example. As is duplicative work where there is no work flow supported by a robust case management system.
Just as with utilization, firm administrators should be leveraging their technology to track realization rate trends. Custom reporting can be created within a firm's case management or time/billing system, if the report is not already included in the solution's canned reports. A report that captures and compares billable time recorded against fees collected should be run at least monthly and that information should be included in management's productivity and financial dashboards.
Outstanding A/R Balances- with Aging
Tracking outstanding Accounts Receivable (A/R) balances is instrumental to measuring productivity for both the attorneys and the firm's billing and collections staff. It is a measure of the firm's receivables that remain uncollected.
As a measure of attorney productivity, A/R balances indicate lawyer efficiency and effectiveness. A firm's A/R is directly linked to attorney performance and is a true indicator of whether clients are satisfied with the attorney's delivery of services. High A/R balances could be an indication of unhappy clients who refuse to pay their bills because they question the value they have received.
Although old, high balances may be an indication of poor attorney performance and client dissatisfaction, it may also be indicative of the poor performance by the firm's billing and collection staff. Typical productivity challenges include:
- Invoices generated but not submitted for payment
- Discrepancies in bills
- Inefficiencies in collections process
Ideally, firms want their outstanding A/R balances to be tracked by two criteria: aging and period. Aging is a measure of how much time has elapsed between the time a fee is billed and the time it is collected. Typically, aged A/R balance reports show outstanding balances that are current and older than 30, 60, 90 and 120+ days. Administrators should also track A/R balances on a monthly, quarterly, and yearly basis to establish trends, monitor productivity and identify potential problems that prevent high collection rates.
Technology is management's friend when it comes to tracking aged outstanding receivables. The aged A/R balances report is normally included as a canned report in most billing and collection solutions.
Outstanding WIP Fees
Outstanding work-in-process (WIP) fees are a key metric for law firm administrators who wish to track lawyer performance and billing staff productivity. WIP fees are a measure of those fees that have been captured by lawyers but not yet invoiced by billing staff.
WIP fees are an important key performance indicator of how much the firm's attorneys are billing. Work In Progress fees can be tracked periodically throughout any given month to confirm whether the firm and its individual lawyers are on track to hit their billable goals. By tracking progress throughout the month, firm management can make strategic staffing and operational decisions.
WIP fees are also important in understanding the efficiency of a law firm's billing procedures and the productivity of the firm's billing staff. If the right processes are not in place, captured time will not make it on to bills and will not, therefore, be paid by the firm's clients. Law firms should strive to invoice all of their outstanding WIP fees on a monthly basis, and any WIP fees should not remain outstanding for more than 30 days. WIP fees that remain unbilled past 30 days are an indication that the firm's billing department staff may be underperforming. In addition, the firm should have a policy for how long lawyers can elect to "hold" bills. In some instances, the request to hold a bill is the first indication of a potential problem with the case or the client. Held bills should be monitored very closely.
Just like the aged A/R balances report, the outstanding WIP fees report is typically included as a standard report in most billing and collection solutions. Outstanding WIP fees should be monitored throughout the month to ensure that the firm's lawyers are on track to meet their billable goals and so that the firm can adequately project revenue based on collection trends.
Measuring profitability means measuring productivity and performance. When firms understand that productivity drives profitability, they can begin to measure the right key performance indicators and gain control of their fate. Turning time into real money depends on a firm's willingness to establish comprehensive metrics and to measure what's important. Key for firms is their ability to leverage their technology to support their metrics and improve the performance that will ultimately drive their profitability.