Law Firm Operational KPIs and Metrics
This is blog number four in my dashboards, KPIs, and Metrics, series. In the last blog, I spoke about law firm financial KPIs and Metrics. In this blog, I will focus on law firm operational KPIs and metrics.
What are Law Firm Operational KPIs and Metrics?
Let us begin by reminding ourselves what the difference is between financial and operational activities.
- Financial activities are activities undertaken to achieve a company’s economic goals and objectives. Anything to do with the movement of money.
- Operating activities are activities of a business directly related to providing its goods and/or services to the market. These are the company’s core business activities in a law firm related to the professional services provided to clients.
A good rule of thumb is that most of the law firm’s operational KPIs and metrics help measure productivity. Among others things, I will discuss billable hours, billed rates, utilization, and leverage, in this blog.
Why should we track KPIs?
In a previous blog, I mentioned the three main reasons for tracking KPIs: they help provide accountability; they provide the real-time measurement of goals; and, help in strategic decision-making.
From an operational standpoint, the tracking of performance and productivity goals in real-time can be a valuable tool. Giving the management team access to real-time KPIs relating to hours, rates and billings is helpful in any sort of strategic decision-making. Showing how a group, individual, or whole firm is doing in real-time, compared to budget, or a similar period last year is essential.
KPIs and metrics are not only helpful to firm management. Individual timekeepers need to have some ownership for the hours they work. That means understanding what happens to the time once they post it. Many of these operational KPIs will allow individual timekeepers to take ownership.
If you asked a senior associate how they were doing compared to their goal on say billed hours and a billed rate would they answer without looking through reports? Should they know this information?
I would say yes.
Operational KPIs and Metrics
Basic productivity KPI (every timekeeper should have access to) – Timekeepers need to know their billable hours, billed hours, and the billed rate is compared to a goal (expectation) and possibly a similar period last year. All timekeepers should be encouraged to take ownership of the hours they work, and access to this KPI will help. The legal industry is one of the few where you are encouraged to groom future owners of your business.
Billable Hours/Billings per full-time equivalent timekeeper (FTE) – Tracks billable hours and billings per timekeeper. It can be compared to prior periods, industry benchmarks, or as a firm benchmark for a similar category of timekeepers in a similar practice area.
Calculation: Total billed hours/total FTE timekeepers = billed hours per FTE
Calculation: Total value billed/total FTE timekeepers = billings per FTE
Utilization rate – This is to measure. It reports how efficiently an individual uses the hours they have available to them. The trick comes when deciding what hours a timekeeper has available to work. Is it 40 hours per week or a little less to account for PTO time? I would suggest you use an expected hours’ goal, if your firm has one, or for more senior shareholders, a personal goal. The higher the utilization rate, the more efficiently your timekeepers are working.
Average billed rate and average worked rate – In addition to using this calculation in the ‘Basic productivity KPI’, these numbers can also help calculate break-even points or profitability levels. This information can also help show what hours each FTE requires to produce a certain level of profit. These numbers can be compared to similar periods or goals.
Calculation: Total billings/hours billed = average bill rate
Total value worked/hours worked = average worked rate
Staffing ratio – This is often compared to an industry benchmark. According to a recent blog on the Williams Lea website, the recent COVOD-19 crisis exposed law firm overcapacity, particularly in support staff. Following the pandemic office closures, some Law Firms may use this as an opportunity to reduce expenses.
Calculation: Billable hours/worked hours X 100 = utilization rate
Calculation: Total # of attorneys/total # of non-timekeepers = staff ratio
Cost recovery – Hopefully, your legal accounting system will allow you to track and report outstanding costs. You should report on total client costs paid by the firm, but not yet paid or billed to a client. The WIP and AR reports will show this. Controlling those expenses is vital, you do not want to be a bank for your clients.
Leverage rates – The rates are tracked and most often compared to an industry benchmark number. The leverage rate shows numbers of non-equity partners in a firm compared to numbers of equity partners. The assumption is that the higher this number, the more distributable income will be at the end of the year. The reason is that equity partners will benefit from the revenues earned by more lawyers.
Calculation: Total # of equity partners/Total # of lawyers = leverage rate
Write-offs/write-downs – This is beneficial to management and individual timekeepers. Timekeepers should want to know what time is being written down or written off. Many times, this write-down or write-off could be a teachable moment.
Workload metrics – These metrics can take many forms. For example, how many new matters have been on-boarded? How many files have progressed to a certain point? How many closings have been prepared? Answers to these questions can help with the utilization of resources. In addition, this KPI may also show bottlenecks, a need for more training, or a need for redistribution of resources. Before you start measuring this metric, you need to understand what is being measured and what the expectations are.
Work-in-process (WIP) fees and costs – Like the Accounts Receivable reporting, this is an essential report. The WIP report will show what fees worked, and expenses paid, have not been billed to a client. Your legal billing software should allow you to report by a client, practice group, office, timekeeper, or the entire firm. Regardless of how this number is displayed, knowing whether fees are not being billed is important.
I have gone through many KPIs and metrics in these last two blogs, which can be overwhelming. These KPIs and metrics are merely suggestions. The intention is not to implement them all. You may be surprised at how many you are doing regularly. Each firm is different, you know what would be most appropriate for your management committee and owners, so those are the ones you should tackle first.
I would suggest you replace some regular reports that you currently produce with KPIs or graphs. Reporting the numbers in different ways is change, and some people are not always fond of change. It will take some education, but in time I think the ability to grasp and digest so much more information in a relatively short amount of time will win folks over.
If you would like any information about the contents of this blog, please contact me.
About Rob McKay
Rob McKay, CLM serves as Product Manager at Coyote Analytics, where he focuses on helping the company’s developers design new and innovative additions to our software applications. Rob previously spent more than 25 years managing law firms in Florida and Texas. He can be reached at firstname.lastname@example.org.
About Coyote Analytics
Coyote Analytics offers a complete financial software system (time, billing, accounting) and a full practice management solution (calendar, docketing, forms, contacts) to assist firms in managing the business of law. Coyote Analytics’ program was built through a collaborative effort with clients. It offers a simple, easy-to-navigate interface, a robust feature set, and excellent customer service, all at a reasonable price point.