So your law firm is up and running. You’ve hired great people, implemented a marketing strategy, and got the right technology in place, and now your client retention strategy is in full swing. Things are going great, right? Well, unless you’re measuring your performance, there’s no way of knowing for sure.
For many law firms, the idea of measuring and tracking KPIs, or key performance indicators, is a new one. Mary Juetten, founder of Traklight and author of Small Law Firm KPIs: How to Measure Your Way to Greater Profits, says it’s common to make the mistake of never even starting.
“So many small law firms,” she adds, “Just run their business based on, ‘How much money do I have in the bank?’ which is a lagging indicator.”
Lagging indicator: A piece of information that tells you what’s already happened. So, if your bank statement is looking less than ideal, it’s likely a lagging indicator that your business has been struggling for quite some time.
There are also leading indicators, which have the opposite effect—“You can use them to predict the future,” says Juetten. In other words, they tell you where your business is headed and can be used to help you hone and readjust your strategy as a law firm.
“Many lawyers mistakenly think they have a monopoly,” says Juetten. This is why they feel they don’t have to measure anything; the clients will surely come to them either way. But this simply isn’t true.
The fix, Juetten suggests, is to shift your mindset towards how you think about your business—because it is a business, after all.
Once you start implementing the right KPIs, you’ll begin to see your firm in a different way. But which KPIs are important for a law firm that’s just starting out? And where should you start? This chapter will take you through the types of KPIs you can measure as a small law firm, what they’ll tell you, and how you can implement them.
Measuring client development
Client development means the same thing for law firms as business development does for sales-centric organizations. In other words, it requires you to think about clients in terms of a sales pipeline, or how many potential clients are coming your way.
“Having an idea of how much you have in your pipeline is really important for lawyers. It’s often feast or famine, and many haven’t looked at it as a tool they can use,” says Juetten.
The main KPI to measure client development is Adjusted Prospect Pipeline, which is measured in dollars. It ultimately tells you how much sufficient potential revenue you have upcoming from potential clients. It should be measured monthly and can be calculated as:
Adjusted Prospect Pipeline = Total Adjusted Value of Prospective Clients’ Matters ÷ Attorney
For example, let’s say you anticipate you’ll be working on new matters for seven clients in May. To calculate your pipeline, you would estimate the revenue billed for that month, divided by the number of attorneys working on those matters.
You should have a target amount to hit for this KPI each month, based on your firm’s ideal work volume.
In order to start getting an idea of potential clients, Juetten says it comes down to the conversations you’re having. “It’s just a matter of asking ‘How many other lawyers are you talking to?’ during that initial conversation,” which most lawyers don’t bother with.
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Measuring client acquisition cost
It’s also important to understand how much, on average, your law firm is spending to acquire each new client.
The goal for Client Acquisition Cost (CAC) is for it to be as low as possible. Let’s go back to our previous example of relying on how much money you have in the bank as your sole indicator of success. When you start to look at KPIs like CAC, it’s easy to see where you could be losing that hard-earned money.
This is another metric that should be measured and reported on monthly and can be calculated like this:
Client Acquisition Cost = (Sales & Marketing Spend + Opportunity Cost of Staff or Lawyer Time) ÷ Number of New Clients
For example, let’s say you spent $7,500 this month on local search engine ads for your law firm. And let’s say that your firm is very small, so one of your tech-savvy attorneys set up and ran this campaign. You have your marketing spend, but you also have to factor in the opportunity cost of the hourly rate your attorney is not charging because he spent that time working on this campaign.
Additionally, let’s project that you landed 10 new clients as a result of this search campaign. Your client acquisition cost would be:
($7,500 + {your tech-savvy attorney’s hourly rate x the amount of hours they spent on this campaign}) ÷ 10
Looking at each aspect of your CAC can inform how well other strategies in your firm are operating. Juetten uses the example of marketing spend: “If you feel like you’re putting all this effort into finding new clients and you’re not getting any, you can look at your cost of client acquisition. That’s important.”
Over time, you’ll be able to see how different marketing initiatives influence your CAC and which tactics you should drop or continue with as a result.
Measuring productivity
Turning an eye to the actual matters that your firm is actively working with, measuring productivity will tell you a great deal about whether your firm (and each attorney) is putting an appropriate amount of time and effort towards the right tasks.
As Juetten clarifies, “Productivity metrics are your traditional ones, like Revenue per Matter. If you’re going to sell a whole bunch of little matters, it’s going to cost you so much administratively to manage all of those. That can be a problem, and something that people don’t always look at.”
Revenue per Matter is calculated exactly as the name suggests:
Revenue per Matter = Revenue ÷ Matter
If your law firm is bringing in $75,000 in March for 15 matters overall, your revenue per matter is $5,000.
Examining productivity also encourages you to be realistic about your time. “You have to look at how many hours you have available,” says Juetten. “The whole idea that you have 2,000 billable hours targeted—it’s really just too high-level.”
She suggests, rather, that you look at what your objectives are.
“Let’s say you’re a sole practitioner in a small firm and you want to make sure that you have enough time for business development or continuing legal education. This idea that you would strive for 2,000 hours would mean no vacation if you also did all those other things. You have to look at productivity in terms of not just a billable hour target, but analyzing what you’re doing with those hours.”
For example, see how MHP&S Law increased their billable hours by using an app integration to look for not just phone calls with a client, but also SMS texts, internal team messages and file-sharing tasks regarding that client, and even video meetings held to discuss the case.
Measuring profitability
Profitability, of course, is ultimately one of the most important KPIs that will tell you whether your firm is doing things right in all other areas of the business.
To measure profitability, Juetten recommends calculating Aging Tolerance, which tells you whether the rate at which you’re collecting payments is efficient. Aging Tolerance is expressed as a percentage and can be calculated monthly in the following way:
Aging Tolerance = Total Collected Within 60 Days ÷ Total Billings
For example, if you’re looking at the months of April and May, you would divide the total revenue you were actually paid by clients within that 60-day period by the amount your attorneys billed, overall, for that same period.
As the name suggests, this KPI will tell you how much your firm is able to tolerate late payments. “Let’s say your average receivables are $100,000,” says Juetten. “How much do you have to pay between paying yourself, paying your overhead expenses, and paying your staff?”
“If you have a burn rate each month of $50,000,” she continues, “And if you have a revenue of $100,000, then you’re doing pretty good. But if you don’t collect the hundred, it doesn’t really matter. When you’re evaluating how an attorney has done as far as profitability, it’s realization of the billings that are collected that actually matter.”
Measuring performance
To measure firm performance, Juetten recommends Billings Collected by Attorney, which represents the percentage of revenue billed that attorneys are actually collecting.
Like the other KPIs mentioned previously, this metric should be measured and reported on every month. It is measured the following way, for each attorney:
Billings Collected by Attorney = Total $ Collected Within 60 Days ÷ Total Billings
As with Aging Tolerance, this KPI measures how much you are actually collecting as a percentage of what’s been billed for that period, but this time you’re looking at it per attorney rather than for the firm as a whole. As Juetten stresses, focusing on collections is an integral part of keeping your business healthy. “I once got a call from an attorney saying, ‘I have $2 million in receivables, and I’m not quite sure how to deal with this.’ Well, you start by phoning your clients,” she deadpans.
Keeping track of this number month over month will make it abundantly clear how well you’re staying on top of collecting your receivables and whether you need to focus more on how you’ll collect money owing.
Measuring client experience
Moving away from financial metrics, another important category to focus on is your clients’ perception of, and willingness to recommend, your practice. This is measured with a KPI known as Net Promoter Score, or NPS.
Essentially, NPS measures how likely a client of yours would be to recommend your law firm’s service to friends or family (on a scale of 1 to 10). A “promoter” is anyone who rates your firm a 9 or 10 out of 10. A “detractor” is anyone who rated your firm at less than 7 out of 10.
NPS can be calculated as a percentage, like this:
NPS = % of Clients Who Are Promoters – % of Clients Who Are Detractors
Knowing your NPS score is important, but it only scratches the surface of actual client satisfaction, says Juetten. “There’s the actual score part of it, but the whole idea of asking, ‘Why or why not?’ along with it can really give you some great information. To be competitive now, you actually have to be client-centered.”
The consequences of not taking this feedback seriously, Juetten warns, are just as dire as not focusing on how much revenue you’re earning. “Unless you understand what makes your clients happy or satisfied,” she says, “You could be putting a lot of effort into something that nobody really cares about. You know, you can buy a piece of technology or implement a change in process, but you could be offering a service that actually is a pain point for your clients, without even knowing it.”
Client feedback will tell you if you’re going in the right direction as a firm, and it will also tell you which areas you might need to train your staff. Ultimately, measuring and asking for client feedback is a valuable KPI that should never be overlooked.
Measuring firm culture
Finally, it’s important to not forget that what’s going on inside your own firm can tell you a great deal about how your business is doing. This is measured the same way you’d measure NPS, but reworded slightly: “On a scale of 1 to 10, how likely would you be to recommend working at this firm to a friend or family member?”
Juetten is careful to add one caveat: Employee NPS should always be recorded anonymously. “If you ask clients for feedback, you keep track of who said what so you can follow up.” With employees, however, they might not be as likely to offer honest feedback if their name is attached to it.
Juetten adds that firm culture can be measured observationally as well: “You can also look at things like participation in company events or firm events.”
Remember: You don’t have to measure everything at once
Juetten concludes the discussion on firm KPIs with a healthy dose of reality. “Ultimately, the idea for KPIs is, it depends on what your pain points are. You can’t just say, ‘Everybody should do these five things,’ because every firm has something different they need to address.”
Still, for a small firm that is just starting up and may not necessarily know which pain points they’re facing, there are a couple of safe bets to start with.
“Look at your accounts receivable and your aging tolerance, because otherwise you’re going to go out of business. Look at what you’re collecting from your clients, and whether your clients are happy. Then, instead of looking at billable hours, look at the dollars that are associated with the matters, and look at whether, overall, you’re profitable.”
If you’re doing things right, Juetten notes, measuring KPIs will be an ongoing process. “There isn’t so much an end product as there should be constant learning taking place. Tracking KPIs allows you to always have your finger on the pulse of your business so that there are no surprises and you always have an eye to improvement.”
