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How to measure your firm’s performance

 

Applying financial metrics within the framework of the Law Firm Business Model — developed by professional services firm management guru David Maister to express the fundamentals that determine law firm profitability — is a useful way to measure the overall effectiveness and efficiency of your firm.

 

The Law Firm Business Model uses key metrics to help you track your daily financials, analyze the past, and gain valuable benchmarking information to help strengthen your firm’s current and future financial performance. Although no one metric can stand on its own, all are useful in pointing out trouble spots.

 

5 metrics

 

Simply put, metrics define what is to be measured. According to the Law Firm Business Model, there are five key metrics that influence law firm performance:

 

1. Productivity or utilization: client hours recorded,

 

2. Blended rate: average hourly billing rate,

 

3. Realization: revenues divided by standard value of time recorded,

 

4. Margin: partners’ profits divided by revenues, and

 

5. Leverage: ratio of associates to partners.

 

Regularly measuring and reporting on key metrics and comparing them to current and prior financials will help you determine if your firm’s financial performance is improving, remaining steady or declining. It also points out other areas where objectives are being met and those needing greater attention.

 

Formula for success

 

One important measurement for law firms is average income per partner. The Law Firm Business Model can be expressed as a formula for determining this important figure:

 

Average partner income = (1 + leverage) ´ blended rate ´ utilization ´ realization ´ margin

 

To test the outcome of various scenarios, you can plug projected or target numbers into the formula. Let’s say, for instance, that you’re changing how your fee earners track time worked and you project that each partner will be able to improve accuracy to pick up about half an hour a day in billable time, increasing utilization from 1,800 hours to 1,930 hours per year. This change won’t increase costs, so your margin will also increase. That means the increased revenue goes directly to the bottom line.

 

You can also use the formula to assess the potential impact of more strategic changes, such as how starting a new practice area, opening a new office or recruiting a targeted partner from another firm might affect your firm’s bottom line.

 

Developing your own metrics

 

Unfortunately, the Law Firm Business Model doesn’t provide a complete financial picture. Some financial metrics important to a law firm aren’t considered here. So you’ll want to look at others, such as unbilled fees (works in process) and billed but uncollected fees (receivables).

 

Similarly, you should consider nonfinancial metrics that also impact your bottom line. For example, look at how well partners are achieving their marketing goals and whether business development is on track.

 

Moving forward

 

Measuring your firm’s performance is important to see where you are and help you determine what you need to achieve to move forward. If you don’t measure your performance, you may continue to make the same mistakes or miss out on opportunities to grow your firm and set it apart from others.

 

K. Jennie Kinnevy is the Director of the Law Firm Services Group at Feeley & Driscoll, P.C., a business consulting and accounting firm.  Jennie is a member of ALA's Boston Chapter and has been active within the Association for many years.  Jennie can be reached at JennieK@fdcpa.com or (617) 456-2407.