Peter Noyce – Partner and Legal Sector Specialist
The legal sector has possibly for too long focussed its benchmarking around Lock-up and Profit Per Equity Partner (PEP).
The constituent parts of both of these are vital to forecast trends in the key areas of performance in any legal firm, but perhaps we ought to step away from those equations and understand some other Key Performance Indicators (KPIs) and how that may well make your practice even more attractive to talent (recruitment and retention) and more profitable.
To put Lock-up and PEP to bed, it is vital that the controls around Debtors and WIP remain, as that is the best way of preserving cash, and PEP is undoubtedly going to remain a headline that all partners have an interest in. That said, in modern day law firms, other factors do come into play due to the increasingly competitive nature of the sector, the increasingly informed client base and technology efficiencies being introduced.
There undoubtedly needs to be a policy on pricing throughout the practice, as this will lead to profitable work and clients. When backed up internally by correct behaviours, this will lead to a more valued work force, as all your key client contacts will be doing the right work at the right rate for the right clients.
It is always evident that getting the pricing right will show through any increased productivity rates, given that time worked on all clients will then be recorded, as there will be a greater expectation that it will be recovered. Again this creates a great work environment and satisfaction for your teams.
Operational KPIs in this area will be:
- The amount of pricing and collaboration going on internally
- Productivity rates
- How accurate and timely prepared people’s time sheets are and done on a real time basis
- Overall recovery and cash received.
It is increasingly important to understand your own sector specialisms and the positioning of the firm with regard to the clients you are trying to attract, as these will all come together in a pipeline of work that is firstly very identifiable and secondly convertible into real and profitable fee paying work.
This often can be monitored by not just time sheet activity but also the number of file openings, as file openings at an average rate per case equals future fees.
Sector KPIs in this area will be:
- Prospective fees per service line and the firm as a whole
- An indication of conversion rates on those prospective clients
- Good data on the number of file openings
- The average value of each file opened in each department. This will also greatly assist your finance team and the ability to project cash flows.
Projected cash flow is vital to ensure that any upcoming problems can be dealt with well in advance, rather than a mad panic at the time. This may result in disgruntled partners receiving delayed drawings or none at all or even key suppliers receiving later than expected payments. This is where the Lock-up equation of Work in Progress and Debtors and your finance team being fully empowered to follow through on agreed procedures is vital for the firm as a whole, teams and individuals.
Financial KPIs in this area will be:
- Lock up in quantum
- Lock up in days
- How these feeds into projected cash flows which can vary incredibly from different work types.
I am delighted that the phrase “collaboration” is being talked about more and more in law firms. It is finally being accepted that clients having more than just one partner touch point are more “sticky” to a firm and more profitable. What this also produces is a partner group and other key fee earners working together more collegiately, which will undoubtedly be another important cog in succession planning, or at least identifying talent as it progresses through the practice.
Linking in with activity, productivity and cash is the capacity of the people within the practice when analysed on a team or a whole firm basis, as it is absolutely crucial to ensuring the identification of shortfalls or surpluses and whether you need to recruit or streamline. This will also hopefully ensure that client service and client experience is as you would wish, or at least you being aware of teams that may be short of capacity and, therefore, able to rectify that at an early stage. The benefits here being satisfied clients, but also an effective, valued and well-resourced team that are suitably structured to perform effectively.
People KPIs in this area will be to focus on:
- Team capacities as monitored by heads of department
- The amount of collaboration between those teams as monitored by an effective objective setting and appraisal system.
An article that started with an accountant saying that certain numbers were not as important as first thought, has hopefully produced an understanding of where some of the lesser known KPIs can make for a more profitable and also less risky, more valued internally and externally, practice of the future.