Harnessing the Potential of Operational KPIs and Metrics

What are Law Firm Operational KPIs and Metrics?

Let us begin by reminding ourselves what the difference is between financial and operational activities.

• Financial activities are activities undertaken to achieve a company’s economic goals and objectives. Anything to do with the movement of money.
• Operating activities are activities of a business directly related to providing its goods and/or services to the market. These are the company’s core business activities in a law firm related to the professional services provided to clients.

A good rule of thumb is that most of a law firm’s operational KPIs and metrics help measure productivity. Among other things, this blog post will discuss billable hours, billed rates, utilization, and leverage.

Why should we track KPIs? 

The three main reasons for tracking KPIs are: they help provide accountability; they provide the real-time measurement of goals; and they help in strategic decision-making.

From an operational standpoint, the tracking of performance and productivity goals in real-time can be a valuable tool. Giving the management team access to real-time KPIs relating to hours, rates and billings is helpful in any sort of strategic decision-making. Showing how a group, individual, or the entire firm is doing in real-time, compared to budget, or a similar period last year is essential.

KPIs and metrics are not only helpful to firm management. Individual timekeepers need to have some ownership for the hours they work. That means understanding what happens to the time once they post it. Many of these operational KPIs will allow individual timekeepers to take ownership.

Operational KPIs and Metrics

Basic productivity KPI

Timekeepers need to know their billable hours, billed hours, and the billed rate is compared to a goal (expectation) and possibly a similar period last year. All timekeepers should be encouraged to take ownership of the hours they work, and access to this KPI will help.

Billable Hours/Billings per full-time equivalent timekeeper (FTE)

Tracks billable hours and billings per timekeeper. It can be compared to prior periods, industry benchmarks, or as a firm benchmark for a similar category of timekeepers in a similar practice area.

Calculation: Total billed hours/total FTE timekeepers = billed hours per FTE

Calculation: Total value billed/total FTE timekeepers = billings per FTE

Utilization rate

This is to measure. It reports how efficiently an individual uses the hours they have available to them. The trick comes when deciding what hours a timekeeper has available to work. Is it 40 hours per week or less to account for PTO? I would suggest you use an expected hours’ goal, if your firm has one, or for more senior shareholders, a personal goal. The higher the utilization rate, the more efficiently your timekeepers are working.

Average billed rate and average worked rate

In addition to using this calculation in the ‘Basic productivity KPI,’ these numbers can also help calculate break-even points or profitability levels. This information can also help show what hours each FTE requires to produce a certain level of profit. These numbers can be compared to similar periods or goals.

Calculation: Total billings/hours billed = average bill rate

Total value worked/hours worked = average worked rate

Staffing ratio

This is often compared to an industry benchmark. According to a blog post on the Williams Lea website, the COVID-19 pandemic exposed law firm overcapacity, particularly in support staff. Following the pandemic office closures, some law firms may use this as an opportunity to reduce expenses.

Calculation: Billable hours/worked hours X 100 = utilization rate

Calculation: Total # of attorneys/total # of non-timekeepers = staff ratio

Cost recovery

Your legal accounting system should allow you to track and report outstanding costs. You should report on total client costs paid by the firm, but not yet paid or billed to a client. The WIP and AR reports will show this. Controlling those expenses is vital; you do not want to be a bank for your clients.

Leverage rates

The rates are tracked and most often compared to an industry benchmark number. The leverage rate shows numbers of non-equity partners in a firm compared to numbers of equity partners. The assumption is that the higher this number, the more distributable income will be at the end of the year. The reason is that equity partners will benefit from the revenues earned by more lawyers.

Calculation: Total # of equity partners/Total # of lawyers = leverage rate

Write-offs/write-downs

This is beneficial to management and individual timekeepers. Timekeepers should want to know what time is being written down or written off. Many times, this write-down or write-off could be a teachable moment.

Workload metrics

These metrics can take many forms. For example, how many new matters have been onboarded? How many files have progressed to a certain point? How many closings have been prepared? Answers to these questions can help with the utilization of resources. In addition, this KPI may also show bottlenecks, a need for more training, or a need for redistribution of resources. Before you start measuring this metric, you need to understand what is being measured and what the expectations are.

Work-in-process (WIP) fees and costs

Like the Accounts Receivable reporting, this is an essential report. The WIP report will show what fees worked, and expenses paid, have not been billed to a client. Your legal billing software should allow you to report by a client, practice group, office, timekeeper, or the entire firm. Regardless of how this number is displayed, knowing whether fees are not being billed is important.

Conclusion  

These KPIs and metrics are merely suggestions. The intention is not to implement them all. You may be surprised at how many you are doing regularly. Each firm is different, and you know what would be most appropriate for your management committee and owners, so those are the ones you should tackle first. Try replacing some reports that you currently produce with KPIs or graphs. Reporting the numbers in different ways is a change, and it will require some adjustments. It will also take some education, but in time, you will have the ability to grasp and digest so much more information in a relatively efficient and effective way.

This blog post was originally published on July 23, 2021.

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