5 Profitability Metrics Every Law Firm Should Monitor
The discussion of key performance indicators, also known as KPIs or metrics, isn’t something you often hear regarding the legal profession. Instead, you’re more likely to hear it when people are discussing the internet or website traffic. Investopedia defines a KPI as a set of measurements that may determine a company’s long-term performance. Within the legal profession, KPIs take a handful of different forms. Their end goal is always the same – to determine the performance of the business over time. If we’re looking at a firm’s profitability, five of these performance metrics stand out as the most crucial. In this article, we’ll explore what these critical performance metrics are and how firms can seek to measure them.
1. Utilization Rate
The general definition that Metric.ai offers us is that utilization rate reflects the number of hours spent on billable projects compared to the number of hours worked overall. In the legal profession, we can work out the utilization rate of a firm by dividing the billable hours that are on record by the number of hours the lawyer worked overall. A firm’s profitability depends on these billable hours. While 100% efficiency in utilization rate is utopian, a professional should seek to manage as close to 100% utilization as possible. Ideally, firms should track these hours and review them monthly or quarterly, with an overall yearly performance comparison. It will help them to spot which lawyers are more efficient at their jobs, and which need to be putting in more billable hours with clients.
2. Realization Rate
The realization rate reflects how a lawyer’s recorded time compares with the fees they pay for. In the legal profession, we can see this as a percentage based on the fees recorded divided by the fees collected. Problems with the realization rate affect the firm’s bottom line and speak to more pertinent issues that may exist within the business. Among these are inefficient or duplicative processes or clients challenging the billable hours. If the realization rate is consistently low, the issue may be with the firm’s technology or administrative procedures making it difficult for the lawyer to get their billable hours in.
3. Case Lifecycle Cost
Within a legal firm, efficiency is always a concern. Most firms have a general idea of the average cost of a case, but they aren’t aware of each case’s specific value. Tracking this data allows a business to see on a phase-by-phase basis where most resources are being utilized by the case. It will also enable the firm to break down cases by the volume of resources put in compared to the time it takes each case of a specific type to come to completion. By studying these metrics, a legal firm can adapt its pricing to suit the resources required for more difficult classes of cases.
4. Work-In-Progress Fees
At its heart, a profitable law firm needs to have a viable cash flow solution. The money coming into the business needs to meet its expenses. Essential billing metrics such as accounts receivable (the money that the company is owed) and what the firm still has to bill (Work-in-Progress or WIP accounts) are essential to keep in mind. Retainers are a valuable source of recurring income, and a firm should seek to ensure that they are renewed and what bills the payment from those retainers can cover. Periodically, a firm should go through its accounts receivable and determine which clients are paying and which are utilizing services but aren’t meeting their obligations. The firm can then choose to suspend service to those clients until they pay off their balance, freeing up lawyers for other paying clients.
5. Percentage of Referred or Repeat Business
If you run a firm that deals with repeat clients, its crucial to understand how much of your business comes from repeat customers. Repeat business is a measure of customer loyalty. Constant Contact mentions that a company that intends to be profitable needs to rely on repeat business to do so. An additional depth to repeat business is referrals. Word of mouth remains the most impactful marketing tool that firms have at their disposal. Knowing which clients are referring others to your business can help to reward them in the future and keep those referrals coming in.
How Are These Helpful?
While a lot of legal professionals don’t think of your firms as businesses, the fact is that they need to generate a profit. If lawyers aren’t utilized efficiently, or the company isn’t collecting billable hours from clients, the firm cannot post a profit. Like any business, it needs to meet its obligations, and for that, it requires income. These metrics are essential to help a company increase its profitability while relying on data-based metrics to inform their decisions.