While there are countless KPIs a firm may be able to track — from realization rates to client acquisition costs and billable hours — the most telling number for measuring a firm’s success should be profitability at both the individual and firm-wide levels. However, this number isn’t as easy to calculate as one may think on an individual level, and, as Sullivan says, every firm assigns its costs differently and that can have a huge impact the profitability of any one individual timekeeper. This can seriously impact your understanding of individual profitability and affect your decision-making and bottom line.
So what can your firm’s profitability tell you? And what KPIs are the metrics that matter? Let’s take a look.
1. BILLING
Your billing structure can be an indicator of how well your firm is performing, Sullivan says, and he doesn't just mean billable hours. It’s possible you may have staff on payroll who aren’t billing their time because they serve in a more administrative function. If this is the case,
then you may want to get creative and figure out a way to track their
performance as it relates to your operations.
For example, if an employee is responsible for new business or prospect intake, how does their output compare to your client conversion rate? If their responsibilities are more task-based, is it possible
to track their efficiencies or workflows? Forbes recommends tracking staff
utilization to compare how much staff time is dedicated to billable compared to nonbillable work.
Of course, there is also the easy — although not always so simple — task of tracking your time to figure out how you’re spending it, regardless of whether you’re working
in a flat-fee, contingency or hourly model.
“If you’re not keeping track of your time, you will never know if you’re profitable enough,” Sullivan says. “You will never know if you’re charging enough. You won’t understand your margins or your numbers well enough to adjust to any changes within the market.”
If you have a small or solo practitioner, they may just be flying by the seat of their pants, without a plan and just trying to get billing out once a month and doing nothing more.
2. MARKETING ROI
Not all law firm expenses center around billing and conducting business. Remember: You can’t bill a client if you haven’t even gotten them through the front door. With that in mind, take note of what you’re spending on marketing to bring clients to your firm and whether the return on investment is worth it.
As you begin to dig through your metrics, consider a few common marketing KPIs that can help you gauge how your costs compare to your revenue, and if your marketing expenses are worth the results you’re
seeing. Some examples include:
Qualified Leads
This is the number of overall leads your marketing campaigns generate compared to how many of those leads fit your client profile. You can also take a look at your cost per lead, which can help you figure out
how much you are spending on marketing efforts to generate each lead.
Conversion Rates
These comprise the number of leads that are either taking action with your firm after receiving a communication or signing on as a client after a consultation. You can track conversion rates for different types
of actions, from filling out an inquiry form to signing a contract with the firm.
Customer Lifetime Value (CLV)
This metric equates to the total amount of revenue a law firm can expect to earn from a client during the entirety of their relationship. According to an article from SaaS marketing firm Semrush, “CLV is a vital metric for understanding your business. To be profitable, your CLV needs to be higher than your sales and marketing spend for acquiring a single customer.”
3. REALIZATION RATES
You can generate all the business in the world, but it won’t matter if your clients aren’t paying their bills. Low realization rates — which
is the percentage of how much a law firm bills compared to how much it receives in payment — can be a sign that something is amiss, whether the issue revolves around client relationships, poor contract parameters or an administration issue in house.
There are different types of realization rates, so taking a look at your stats for both collections (invoiced
time) and billing (how much you are billing compared to the hours you’ve put in) can reveal a lot about your profit margins.
4. PRACTICE AREA
If you’re trying to get a handle on your firm’s profitability, Sullivan recommends trying to figure out your organization’s main source of income. “If you have multiple practice areas,” he says, “figure out which practice areas are profitable and which ones aren’t.” Which ones are cross-selling well and which are bringing in the most revenue? Also, take a
look at how effectively you are leveraging different areas of your business to cross-sell.
“If you have multiple practice areas, figure out which practice areas are profitable and which ones aren’t. Which ones are cross-selling well and which are bringing in the most revenue? Also, take a look at how effectively you are leveraging different areas of your business to cross-sell."
THE BOTTOM LINE KPI: FIRM PROFITABILITY
While profitability is typically a key indicator in how well a firm is performing, it can still be tough to figure out which KPIs are driving that take-home number. However, Sullivan says, looking at your numbers through the lens of who is receiving the information and as part of a larger equation can help.
“The context to those numbers actually matters,” Sullivan says. “If you’re just looking at numbers in a black and white fashion, you’re going to wind up pulling your hair out.”
His advice to help better track more convoluted or not-so-obvious outcomes: Explore. “If you’re trying to gather more information, be creative. Challenge yourself on what data you’re going to grab and how you’re going to grab it.”
