The Improvement Process Starts With
Choosing Your KPIs: Key Performance
Indicators

Before you can even begin to improve, you have to decide what to improve. Once you have chosen a few critical metrics, you can make targeted changes in your daily activities and overarching processes to improve those metrics.

There are dozens - really, hundreds - of viable metrics to track, but your firm will want to focus on a key few. These are your Key Performance Indicators or KPIs, and you'll use them to guide your way to efficiently and effectively begin earning more and keeping more of it.

The process begins with taking the current temperature of the KPIs, and seeing where they're at now. Then you'll take the following steps:

  • Set KPI target goals, and implement improvement initiatives.
  • After a period of days, weeks, or months, measure to see if the KPI(s) improved.
  • Reflect on the outcome - Did you achieve what you expected? What factors affected the success or failure? Both outcomes provide information for step 4.
  • Use your findings to adjust initiatives or create new ones, attempting to hit your previous targets or improve upon them.

It all starts with knowing what you want to be looking at, metric-wise. Decide: What does "profitability" even look like? Some firms may decide that they are bleeding money through overhead and need to cut costs. Others will look to raise earnings per associate or catch low-earners up to the high ones. The truth is that goals and priorities will differ for each firm, so you must be able to analyze your own data to see your primary drivers of profits vs. costs. You must also decide on a firm strategy for achieving profits in the long run, helping you run the type of firm that aligns with your view of success. Once you've defined priorities and settled on KPIs, it's all about identifying low-hanging opportunities to improve: both by capitalizing on your strengths while shoring up your weaknesses.

But you have to agree, at the partner and operator level, on what's important in order to start the process of improving. Getting everyone aligned on what's important can help make strategic planning easier, while also ensuring that your firm's top leaders are all engaged together on improving the KPIs you prioritize. To help you kick off your own firm's improvement process, here are a few key metrics worth tracking, analyzing, and prioritizing.

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Realization Rate

  • Defined as: projected revenues for all cases/matters currently in pipeline.
  • Can be broken down into individual attorneys, departments/teams, firm-level.
  • Why it matters: Projecting future earnings enables the firm to take the temperature right now of where revenues might be in a few weeks or months (however long it takes to close case).

A realization rate KPI answers the direct question, "are our attorneys making as much as they possibly can?" While it's true that not every hour of work time can be contributed directly towards billable case matters, the time that is supposed to be dedicated to client service can and should be quantified. Realization rates then compare the actual earnings to how much money the attorney could have been making had they been able to bill (or actually receive payment for) more.

Note that this same type of calculation can also be used for firms working on contingency. The total earnings for a successful case can be divided by the total amount of "working" hours spent on the case, representing the final "effective billing rate."

A high realization% (or effective billing rate) means a firm is doing everything possible to generate revenue through daily activities. At that point, the only ways to increase profits further would be to free up more hours, cut costs, bump up the hourly rate, or seek out more profitable clients/cases. However, most firms are understandably not yet at this level of 100% realization.

When realization rates are low, then it means attorneys are not being efficient. Their time is being taken up by tasks that aren't directly moving matters toward completion. Low realization may be self-induced through the attorney's own work habits, but it could also indicate time spent grappling with inefficient technology or processes.

The goal isn't to point fingers but to take a snapshot and then try and enable attorneys to improve. Collectively, you are asking the question: what's taking up our time, and why can't we bill for it? And, if you can't bill for it, how can you spend less time doing it?

Per Affinity Consulting Group: "Although lawyers must spend some of their time on administrative matters, for maximum productivity, their goal should be for their utilization rate to be as close to 100 percent as possible."

A good target for firms is to be earning at around 80% - 85% of their total possible realization, says one CPA group. Firms that dip down below 60% - 70% should consider themselves badly in need of some greater efficiency and other revenue-generating changes.

Pipeline/Work-in-Progress Value

  • It can inform short-term initiatives to make up for predicted revenue shortfalls/declines.
  • Reports of this KPI can be prepared on regular cycles to answer important questions later on: did these WIP revenues pay out as expected? The firm can then compare the estimated WIP value to cases closed-unsuccessful to see where revenue opportunities are lost.
  • The firm can see if case value is concentrated in certain areas or upon certain people. One person with a high pipeline WIP value can mean they need help capturing that potential revenue, through more resources or legal assistants, for example.

Truve helps firms determine the estimated value of proposed cases based on their average earnings, including new cases that haven't even been entered into billing yet. The value of everything in your pipeline can automatically be calculated, even at the onset of a possible case, in order to predict exactly how much you could earn in a given period. This information enables you to start to plan, predict, and prioritize cases at early stages of client acquisition.

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Projected Net Revenues

  • Defined as: total estimated revenues minus total estimated costs
  • Why it matters: Demonstrates the firm's current trajectory while tracking changes in performance over time

This metric acts as a rolling prediction of earnings. It can be calculated by expanding on the predicted pipeline value, accounting for possible closed-unsuccessful outcomes based on historical averages. Projected net revenues can also be extrapolated from the "run rate:" multiplying the past three months of revenues to estimate revenues for the next 12 months. This figure must then be compared to the projected annual overhead to determine estimated profits. Similar to net WIP value, leadership can determine if they like what they see predicted or if they want to implement strategic changes to correct course. They can also use these figures to set goals for cost reductions in order to keep as much of those projected earnings as possible. Targets for lowering costs can include: Overhead per attorney Case lifecycle costs Outstanding accounts receivable (old unpaid client bills) Projecting revenues can also inform sources of lost potential. Did your firm realize the projected profits at the end of the period? If not, what assumptions turned out to be incorrect? This sort of analysis enables better predictions over time, while also pointing to opportunities to capture and keep more revenue.

Matter Profitability (Profits by
Category or Case Type)

  • Defined as: net profits, broken down by category of practice/case/matter area
  • Why it matters: Optimizing firm operations to focus on bigger returns, achieving higher efficiency and returns-on-investment

Simply put: certain types of cases are more profitable than others. Such a designation may be true across-the-board for all firms (e.g. "spinal cord injury cases have a high close-success rate and net revenues") or true only in the case of individual firms (e.g. "we have a high close-success rate for occupational injuries"). Breaking down profit data by matter/case type yields a trove of information that can be analyzed to determine the juiciest profit centers and highest potential for firm earnings. One of the biggest decisions a firm can make is "what clients do we go after?" This decision can affect client relations, marketing focus, and policies like when to refer out a case. Focusing on certain case types raises value of the WIP, too, and so it can improve profits even with lower performance of something like realization rate. Truve helps you determine the optimal mix of cases according to your past performance and our platform benchmarks. It predicts the value of individual cases coming into your office, and it also tracks trends to help you see with clarity where your biggest earning centers are.

Marketing Cost Per New Client

  • Defined as: net marketing costs in the period divided by the mber of clients acquired during the period
  • Why it matters: shows you overall ROI for marketing in the form of new client acquisition, while empowering granular analysis of areas like ROI per-channel, cost-per-closed-lead, etc.

A high cost-per-new-client (or cost-per-lead) indicates low returns from the marketing channels currently being used. Even when considering that some forms of advertising inherently cost more than others, the other side of that coin is that those channels should bring in more new clients, proportionally. In other words: there's little excuse for high costs per lead, especially when there's no measurable difference in client quality from those high-cost channels.

Improving cost-per-client-acquisition involves pinpointing where your most effective sources of reach are and comparing it to how well they convert (conversion rate = new leads/total reach). Marketing can be a huge budget drain, and also a huge source of profit reduction if not approached scientifically. Focusing on the right channels can significantly grow a firm, though, so it's a risk/reward proposition.

For that reason, it's good to keep tabs on costs-per-acquisition. Analyze the cost-per-acquisition overall, as well as broken down by case type and for performance by marketing channel Determine how to best reach the audience that offers the biggest promise of profits, at a low cost but a high conversion rate, to dramatically improve profit-generating potential.

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Other KPIs to Consider

It helps to focus on just a few KPIs at a time. Commit to 3 - 5, for example, for a period of six
or so months, and then consider switching if you have strategic reasons for doing so.
In addition to the KPIs highlighted above, consider including the metrics below in the KPI mix,
or as context-providers worth tracking to complement your KPI improvement efforts.

Conversion Rates by
Marketing Source

Unless certain marketing channels bring in particular high-dollar cases or clients, your best channels will always be the ones that tend to convert at the highest rate.

Conversion Rates by
Intake Specialist

Intake specialists are there to keep the matter pipeline fed. Study your top converters, and then see what behaviors and approaches they use that can be adopted to raise the success rate for others.

Client Dropoff Rate

Where are you losing clients in the case pipeline? It's not always when a case is closed with an undesirable outcome. It can also be at early stages: after a consultation, prior to matter filing, or even in the middle of a case. Pinpoint what stages of the pipeline may lead to low satisfaction and client churn, affecting your projected vs. actual WIP fee values, and then try to improve both the client experience and the case process overall at those particular stages.

New Consultations/
Acquisitions Per Month

The pipeline must be fed! More clients mean more revenue, although there may be some exceptions. It's important to recognize that revving up the client pipeline won't lead to profits if attorney realization rates are low, clients are dropping off at certain stages, marketing costs are high, etc. So while many firms prioritize this KPI, it's important to lay a foundation of high productivity, efficiency, and client satisfaction so that each new acquisition actually spells new profit-generation opportunities on a consistent basis.

Partner Leverage

This metric is measured by the average number of associates versus equity partners on cases/matters. Ideally, partners are driving client acquisitions, helping matters stay on-course strategically, and working at key stages to close the matter successfully. However, when partners are wrapped up in day-to-day tasks, they don't have the breathing room to keep all of their portfolio in line while managing larger aspects of the firm. The numbers don't lie: "top-performing law firms had significantly higher leverage than lesser performers," according to a study by Thomson Reuters.

Client Concentration
(80-20 Pareto Analysis)

A client concentration study compares total revenues to top-billing clients. One common method is to perform an 80-20 Pareto analysis, comparing your top 20% of clients to the remainder in order to determine what qualities make them unique. You can then seek to acquire clients that more-closely reflect the ones that generate the most revenue, making your portfolio more profitable overall. Such an analysis also reveals your level of risk when it comes to "putting all your eggs in one basket." While having a loyal set of profitable clients is great, a low diversity in your portfolio isn't. Focus on diversification, growing revenues-per-client, improving realization rate, etc. to make form more robust and less dependent on a few "patrons."

Number of Client Referrals

Client satisfaction" is subjective and difficult to measure, especially when reliant on pestering clients to complete surveys they have no investment in. "According to the American Bar Association, referral-generated business continues to dominate the field because it creates a personal connection," says Martindale-Avvo. "Unlike prospects that come to you from paid advertising or content marketing, the referred client has heard from someone they trust that you are skilled, effective, and likely to be a good personal match." Further, referrals will always have a higher conversion rate compared to traditional marketing, owing to the sheer fact that we trust the opinions of the people we know over the sales pitches of advertising. According to one study, 62% of people say they've gone to a lawyer because of recommendations from friends or family, and 31% say they've chosen a lawyer after a referral from another attorney.

Key Ratios to Track

These ratios are excellent temperature gauges for controlling costs and guiding strategy.

  • Marketing-to-revenue ratio
  • Attorney compensation-to-revenue ratio
  • Non-attorney compensation-to-revenue ratio
  • Closed-successful cases compared to closed-unsuccessful by matter

Kick Start Your Own Pathway to Bigger Profits by
Committing to Track These KPIs

After convening your firm's lead strategists, your own KPIs you choose may differ from these ones listed above. Even still, consider each one for the predictive and descriptive potential they offer, which can help inform major decisions while tracking larger trends that effect profitability. In any event, it's critical for firm leaders to settle on what matters most and why because that's the only way to get the entire firm to commit to efforts to improve. "The firms that have come the furthest along the profitability spectrum are those where these initiatives have started from the top," says one report from a prominent consulting group. "That means getting senior leadership's buy-in to use of profitability methodology in decision making throughout the firm from the get-go." Without any sort of alignment or sense of buy-in for the proposed strategies, "inevitably partners who don't like what they're hearing will complain to management, find a work around, or ignore the initiative entirely." On the other hand, getting everyone to pay attention to the same KPIs can have a transformative effect. Decide what to measure, then be surprised when the very act of committing to monitoring it can begin to spark new improvements - starting you on the journey to achieving your goals for better performance ...and bigger profits.

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