Key performance indicators for law firms

Help your law firm to be more profitable and efficient.

Key Performance Indicators (KPIs) are essential for all businesses as they provide insights into performance and growth and help you to set goals for continuous improvement. However, the issue with KPIs is that there are so many different ones that it’s important to focus on which are right for you and your business.  Our research indicates that the top four KPIs preferred by legal firms questioned are:

• Productivity (billable %) – 46%
• Recover rate % – 23%
• Fees per Fee Earner – 8%
• Debtor days – 23%

But research showed that the frequency with which they were shared varies:

• Monthly – 23%
• Quarterly – 15%
• Annually – 23%
• Never – 39%

When deciding which KPIs to measure, it’s important to consider the frequency which you will measure them and how you will use the data. Some of the most common KPIs include revenue, working capital, client satisfaction, profitability, team performance, and team satisfaction. However, it’s easy to be overwhelmed by a long list of KPIs that provide a lot of data but perhaps little real insight to help you make decisions.

Other KPI factors to consider include leading indicators versus lagging indicators. Don’t just rely on those that tell you what has happened – think about those that will tell you about the future and remember to think about the relationships between KPIs. For example, if work in progress (WIP) and Debts are falling, it’s important to know if this is better management or falling productivity.

In an output-focused business, people often say that the inputs don’t matter but there is one input that really matters, and that is chargeable time. It doesn’t really matter if you are working on fixed fees arrangements or time cost basis. This is valuable data, but to be of value, it needs to be accurate and reliable. It also underpins a whole series of other KPIs.

The accuracy of billable hours drives the recovery rates %. Recovery rate should be a proxy for gross profit %. Your data should be so strong that you know what recovery rate you need to achieve to hit your gross profit target.

So, recovery rate = fee billed/time cost is a good measure of efficiency and a key factor in looking at how effective the fee earner is, whether the pricing is right, whether there is over-production, and whether the systems and processes lead to overproduction.

You really need to measure these by fee earner and business unit, whether this is department or location.  Everyone should know their expected chargeable % and the budgeted recovery rate needed to deliver the required fees per fee earner and fees per full time equivalent (FTE). These are simple but effective tools.

Leverage tends to work better in less complex areas where leverage can be achieved with paralegals or trainees or where higher quality work can be achieved to support a generally higher cost base.

The impact on cash flow and the value of one day of lock are important factors to consider. How much cash would a small reduction in lock up release? If you would like further information, please get in touch.