July 21, 2005
Key Performance Indicators - KPI
The most important set of measurements to develop are the firm’s KPI’s. These are the top line metrics that must be achieved for the firm to meet its strategic objectives. KPI’s can be both financial and qualitative, but should be highly correlated with the top priorities of the firm and the firm’s business model as developed during strategic planning. Furthermore, if you have more than 10 KPI’s you probably have too many. For example, Colgate-Palmolive Company manages its entire worldwide operation with 10 Key Performance Indicators. The first thing every business unit general manager would review when presenting to the CEO would be their results against those 10 KPI’s. The rest of the meeting was explaining why or why they did not meet their goals. It’s hard to believe a huge Fortune 500 company can manage a global operation using 10 measurements of success but it’s true and it was VERY effective. Colgate is one of the most reliable businesses when it comes to consistency and predictability of revenue and earnings growth and their KPI system is a key element of success in this regard.
Obvious choices for law practice KPI’s might include leverage, rate, productivity, realization, etc. Other obvious choices include fee revenue, cash generation and the balances of WIP and accounts receivable, or related ratios such as day’s fees outstanding. If you have designed a target business model as part of strategic planning, you will know what these values must be if you are to achieve your strategic objectives. If realization is coming up short, you can probably bet that the firm will not achieve targeted levels of partner income. So a key element of selecting the most critical measures for the firm to manage is that a target or goal outcome must exist. In addition, the measurement must be clear and objective. Other less obvious choices for KPI’s might include market share related measures, client profitability or measures of staff diversity if those issues are top priorities of the firm. To develop KPI’s, we suggest that you begin with the list of priorities identified in strategic planning and that during the development of the strategic plan, a means of measuring success for each is identified. The partners can then come back together to review and approve the KPI model as developed by the managing partner or whomever has been delegated the task.
An important pitfall to avoid in designing a measurement and accountability model is reporting for the sake of reporting. As a CPA, I can attest to the fact that accountants often measure success by the quantity and complexity of reports we could develop and distribute. Having stacks and stacks of thick reports with full detail are basically useless for managing a business. Detailed reports are for analysis to find the reasons why a given key performance measurement is failing to meet expectations or perhaps to analyze pricing or customer profitability for the purpose of making decisions on rate increases. So, don’t design your measurement system around reports. Select the top-line measurements you need to track to ensure success, set a goal level and a minimum level of performance and simply report on those few measures. If results don’t meet the target, THEN and only then, dig into detailed reports to find the root cause. This approach implies that the managing partner only needs to see a very few measures at any given time. Such measures can be distilled into dashboards that simply show a graphic indicator. We’ve called this “happy face/sad face” management reporting. If you only track realization, daily cash flow and billed hours against a goal level as your KPI’s, then you might design an e-mail that is sent every day that looks like this:
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Filed under Management by Tom Collins