November 30, 2006
Measurement Improves Law Firm Performance
People, not numbers, determine the success or failure of a law firm. Performance is created by empowered people or limited by the effectiveness of the firm’s strategies and tactics (formal or informal) and the efficiency of the firm’s practices.
That being said, make no mistake, successful law firm leaders pay attention to the numbers. Intuitively, successful leaders understand that measurement improves performance. They plan, set goals, measure performance, and hold people accountable. Partners in the firms that do those things earn, on average, two to seven times the income of those who don’t.
Numbers allow managing partners to express the firm’s targeted performance. Numbers enable the partners to compare the firm’s performance to its own targets or to the performance of other similar law firms. Financial metrics (numbers) are the outcome of the firm’s people—the degree by which they are “doing the right things in pursuit of the firm’s goals and doing those things in the right way.” Put into a simplified model, numbers help answer “what if” questions by letting the firm’s partners test the impact of various scenarios:
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How will an addition in the number of associates alter the bottom line?
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How will an increase in the firm’s fees affect distributable partner income?
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How will an increase in realization effect partner distributions?
Listed below are seven metrics that influence law firm performance:
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Productivity or Utilization
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Effective (Blended) Rate
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Margin
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Days of unbilled fees (work in process)
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Days of billed fees outstanding (accounts receivable)
Each of the seven metrics should be religiously measured and reported. Current performance should be compared to prior periods to determine if the firm's financial performance is improving, holding its own, or declining. The numbers should be compared to the firm’s targets to determine if it is achieving its objectives. They should be compared to benchmarks of similar firms. Doing so will most likely indicate areas that deserve attention and that represent lost opportunities.
While measurement alone will improve performance, combine measurement with goals and plans to achieve those objectives and the whole ball game will change. Planning, goal setting, measuring, and accountability go hand in hand with increased management and teamwork. The resulting culture in such law firms sets those firms and their performance completely apart from law firms who are not similarly engaged.
If you need help computing any of the seven basic metrics, refer to the previous posts linked below:
Measuring Law Firm Collection Realization
Measuring Law Firm Work-in-Process Days
Measuring Law Firm Accounts Receivable Days Outstanding
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com
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Filed under Law Firm Bus Model by Tom Collins