Key Performance Indicators for Your Law Firm: Numbers Do Not Lie.
"What is measured improves." Peter Drucker.
When I speak with lawyers the world over, I talk about creating vision-based, goal-driven, law practices. When my clients envision their law firms as what they actually are (a business) and who they are (lawyers and entrepreneurs), they almost naturally make a shift from simply doing the legal work to being outstanding attorneys who are strategic business thinkers. They move from the trenches to the "c-suite" of their law firm. Whether they are a true solo or the managing partner of a robust mid-sized law firm, my clients come to understand the importance of what are known in the business world as "key performance indicators" or "KPIs." When they create a KPI dashboard, they are able, at a moment's notice (such as at the start of one of our 1:1 coaching sessions) determine the health and trajectory of their firm.
In my opinion, which is based on owning and leading a successful law firm for more than 16 years, there are 5 metrics you must track in your law firm, no matter its size: Lead Generation; Intake Volume; Case Closure Time; Accounts Receivable.
Wait....
You might be questioning the absence of the metric all lawyers myopically focus on, the billable hour. That's right, billable hours is not on the list because, whether you have an hourly or a contingent practice, it is a given. In other words, everyone tracks it (if you have a contingency or flat fee practice and you're not tracking your time in cases, how in the world do you know if your flat fees are set appropriately?).
The other reason the billable hour is not on the list is because it is a "lagging indicator." A lagging indicator is a metric that comes downstream of a whole bunch of other activities, which must be performed consistently at a high level and which naturally result in the lagging indicator, in this case, billable hours. Four of the five metrics in the list above are, indeed, "leading indicators," meaning they will give you a good idea of billable hours before they occur. Four of the five metrics in the list above must be measured, improved, and optimized in order for the firm's billable hours to not only materialize, but to, in turn, be improved and optimized.
Let's take a bit of a deeper dive into the 5 must-track KPIs for your law firm.
Lead Generation: Is Your Marketing Effective?
There are virtually unlimited ways to create a "qualified lead" for your law firm. A qualified lead is a potential client who needs your services, is the type of client you want to serve (you must not work for just anyone who needs your services), and is ready to hire you. These qualified leads ought to be as close to an "ideal" or "avatar" client for you, but that's the topic for a different blog post.
If you don't measure your lead generation activities, how in the world can you determine whether what you are doing is generating the ROI (Return on Investment) you desire?
Three possible metrics to track for lead generation activities are:
- Cost Per Lead (CPL) – empowers you understand how much you're spending to acquire each lead. By comparing the CPL across different marketing channels, you can allocate resources more efficiently and optimize marketing strategies;
- Lead Conversion Rate (LCR) – allows you to assess the quality of leads generated and the effectiveness of its client intake processes. It helps identify areas for improvement in both marketing and client engagement strategies; and
- Return on Marketing Investment (ROMI) – enables you to evaluate the effectiveness of your marketing spend in generating revenue. It is crucial for understanding how well marketing efforts are contributing to the firm's profitability and for justifying future marketing budgets.
Intake Volume: How Healthy is Your Client Pipeline?
Make no mistake, as a lawyer, you have a sales component to your work. I know, I know..."but I didn't go to law school to be in sales!" You may also have the mindset that "my work speaks for itself." The fact of the matter is, as someone in the services industry you are in sales (call it client creation if that changes how you see the role) and your outstanding legal work needs a voice because it most assuredly does not speak with itself.
In sales terms, intake volume is a metric to track the health of your funnel or sales pipeline. Three possible metrics for you to track in this space are:
- Total Number of Inquiries (TNI) – helps assess the initial interest level in the firm's services and the effectiveness of its marketing efforts in attracting potential clients.
- Inquiry-to-Consultation Conversion Rate (ICCR) – provides insight into how well the firm is engaging with potential clients at the first point of contact and the effectiveness of its initial response strategies. A higher conversion rate indicates better engagement and initial trust-building with prospective clients.
- Consultation-to-Client Conversion Rate (CCR) – crucial for understanding the effectiveness of the consultation process itself. It reflects the firm's ability to persuade potential clients of the value of its services during face-to-face or direct interactions.
Case Closure: How Effective and Efficient is Your Firm?
Cases and your firm's work on them are the life-blood of your law firm. Case management requires much more than adhering to court deadlines Efficiency and effectiveness, as demonstrated by case closure metrics provide tremendous insight to how you and your firm can become more efficient, thereby increasing productivity and client satisfaction.
Tracking and understanding of the following metrics will empower you to set goals to improve the efficiency and effectiveness of your firm:
- Cycle Time (CT) – insights into the overall efficiency of the legal process within the firm. It helps identify how long clients typically wait for their issues to be resolved, impacting client satisfaction and the firm's capacity planning.
- Stage Duration Analysis (SDA) – empowers you to identify bottlenecks or inefficiencies in specific parts of the case management process. This can lead to targeted improvements in workflow and resource allocation.
- On-Time Case Closure Rate (OTCCR) – assesses the accuracy of initial estimates and the firm's ability to manage cases according to those timelines. High rates indicate effective planning and case management, whereas lower rates might signal the need for better forecasting or process adjustments.
Accounts Receivable: Your Law Firm Isn't A Bank.
Tracking accounts receivable (A/R) effectively is crucial for managing the cash flow and financial health of a law firm. Many lawyers carry large sums of money due and owing them, effectively transforming them from a law firm into a bank or credit card company. Madness!
Having a keen understanding of your firm's A/R is critical. Here are three metrics to track:
- Daily Sales Outstanding (DSO) – A lower DSO means the firm is collecting payments more quickly, which improves cash flow and reduces the risk of bad debts. Monitoring DSO helps the firm identify trends in payment delays and pinpoint specific areas or clients that may need more focused collection efforts.
- Aging of A/R (A/R Aging) – empowers you to understand how long invoices are going unpaid and highlight potential issues with specific clients or services. It allows for targeted follow-ups, potentially reducing the likelihood of non-payment.
- Percentage of A/R Over 90 Days (A/R-90) – A/R unpaid for more than 90 days are at higher risk of turning into bad debt. Tracking this metric helps the firm manage credit risk and assess the effectiveness of its collections strategies.
By tracking these metrics (in addition to the almighty billable hour), you, as the law firm's CEO, will have the data necessary to make informed decisions about your business. That's what CEOs do. That's how you ought to operate. Decision making in the absence of data is akin to throwing spaghetti at the wall and seeing what sticks. It is no way to run a law firm.
My clients are the best attorneys in their field. They increase revenue, master their time and focus, and improve performance while enjoying more free time and suffering less burnout. You can too. Schedule a complementary 30-minute discovery session with me here, or send me an email.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.