How a law firm can be managed by metrics
INSIGHT ARTICLE |
As law firms position themselves to survive the peaks and troughs of the economy, a number of trends have emerged in the legal industry. Most of these trends help law firms become more efficient, productive and competitive in the global market.
Although law firms are not very different from any professional services company, like architecture, engineering or audit firms, they differ in that the ownership of clients lies with the individual partners. As a result, managing a law firm by metrics and data becomes ever more important, as it allows the firm to uncover relationships and identify client retention opportunities. It comes as no surprise that many technology trends directly affect the legal sector and can empower legal firms to be more data-driven.
The trends that affect most legal firms
Maybe the first and obvious one is cloud and mobile technology, which means you can access your personal and business data everywhere anytime. Cloud computing allows legal professionals to access client files, old cases and other legal resources anywhere on any device - even in court during litigation.
The second one is getting to know your clients. Law firms are putting the relationships with their clients at the core of their business. Client relationship management tools (CRM) enable firms to collaborate and consolidate client files. Professionals can update them with the latest information and do a quick read-through before the next meeting. Average annual revenue from a client increases the more teams work together on a single client engagement. CRMs allow teams to track conversations and activities with a particular client or target, report on relationships and can even integrate with a number of other financial and enterprise systems to consolidate data. CRMs do not just save face. They save time and improve case management, as well.
Finally, the last trend is the ability to accurately measure the firm’s performance. More and more, we see a focus on using technology for analyzing data, managing caseloads, forecasting outcomes, and even deciding on whether or not to take on a new client. More than 50 per cent of top global law firms today are using some form of business intelligence to enhance performance management. When it comes to understanding your business, having the right tool is required.
What are the main KPIs to manage a law firm?
Now, being equipped with the right tool does not automatically mean you can effectively manage your organization. In order to “manage what we can measure”, we need to set Key Performance Indicators (KPIs).
When choosing KPIs, law firm should consider that KPIs should:
- Reflect the firm’s strategy and goals
- Be seen as key to firm’s success; and
- Be quantifiable
As a reminder, no one KPI tells the full story; rather, KPIs must be viewed collectively to ensure the firm's decisions are made on an informed basis. Therefore, law firms can have different KPIs depending on their strategic focus as well as the type of clients they serve.
Usually, KPIs have a focus on different aspects: financial, operational and business development.
From a finance point of view, the revenue per employee is the most common one as it measures the productivity of your employees and the efficiency of the organization. This ratio allows to compare it against other firms or look at historical changes in a firm’s own ratio. Oftentimes, this ratio is calculated by exporting and calculating data from a law firm’s invoicing and HR systems.
In terms of operations, one interesting KPI to look at is the staffing ratio, which measures the number of support staff to fee earners. In the legal industry, it is still common to find a 1:1 ratio, which is not the most efficient in terms of employee productivity. With modern tools, this ratio can be improved to 1:4 and sometimes 1:8, allowing to reduce salary cost and through technology, growth is enabled without having to hire more support staff. A mix of spreadsheets and time tracking systems are the most common source of this information.
Finally, in terms of business development, law firms should measure the dormant client percentage. This represents the number of clients that the firm has not worked with in two of the past three or three of the past five years to the number of total clients. The goal of this ratio is to make sure you retain your clients by offering them a variety of services and by nurturing the relationships. In the absence of a CRM, reporting on this percentage is often done manually based on clients that were invoiced from the billing system in the past three to five years.
You’ve identified your critical KPIs – but how do you get them efficiently?
Using KPIs to manage an organization is key, but information value and credibility hinges on your firm’s ability to access accurate information on a timely basis.
Measuring different KPIs can indeed be a challenge as several stakeholders may need to access the information at the same time or from different places, and many different systems may be used to generate insights.
Cloud solutions, and more specifically Software-as-a-Service (SaaS), can be efficient tools to provide real time and ready access to data. Implementing cloud solutions gives any organization flexibility, efficiency and strategic value by:
- Providing automatic software updates at no additional cost;
- Reducing capital expenditure since the firm reduces its ownership of hardware;
- Reducing the risk of losing data, because it is stored in the cloud and back-ups are done automatically.
Additionally, consolidating systems to generate insights into one single view can allow law firm leaders to gain a better understanding of the performance of the law firm across different operational functions – whether it is the abovementioned KPIs or additional KPIs that are relevant to your firm. These software solutions are known as enterprise resource planning (ERP) tools, and help to streamline data from different departments and their reporting tools including HR, finance, sales, into one business view. Law firms can gain a competitive advantage by substituting manual consolidation of data for automatic, real time consolidation into dashboards. That said – in selecting cutting edge solutions, the software needs to meet and fit the firm’s specific business processes as well as support them in their day-to-day operations.
What are the next steps?
Before making a decision on a solution, start by compiling data to analyze your KPIs. From there, you can do benchmarking to assess your competitiveness by accessing data from associations and industry-focused literature. Depending on the outcome of this analysis, a business process review can be completed to identify potential areas of improvement and assess fit with a cloud solution – one that allows you to have access to key performance indicators by functions in real time and wherever you are. There are many examples of ERP cloud solutions in the market – one such example is NetSuite, which integrates business development, finance, resource utilization and operations into a 360-degree view of your organization. Your decision of a solution will ultimately be based on the fit with your organization, your strategic and growth objectives.
Your law firm may choose to put together a task force of IT professionals and operational leaders to assess the needs, possible solution and drive implementation. Alternatively, you could work with an advisor to guide you and your stakeholders through this process.