Small law firms are founded by lawyers with diverse backgrounds. Some are brave enough to hang a shingle right out of law school. Others toil away at big firms for years, only to decide that small firm life better aligns with their personal and professional goals. In either case, it is rare that the person starting the firm is well versed in the business side of things. As one salty older lawyer told me early in my career, “just because you’re a business lawyer doesn’t mean you know anything about running a business.”
Years later, when I attempted to start a solo firm, his words rang true. Indeed, it wasn’t until I was thrust into a corporate (non-legal) executive position later in life that I truly began to understand business metrics. Of course, in recent years, with all the technology surrounding data and data analysis, tracking key performance metrics (“KPIs”) has become a bit of a sport.
This article discusses the top four KPIs that will help you evaluate and evolve your small firm for success. For those of you unfamiliar with the term, KPIs are “quantifiable measurements specific to the firm and its business that reflect strategy, goals, and success factors of the organization. They are essentially the measurements a firm utilizes to perform internal analysis and make improvements and can be critical to identifying issues in the firm.”
Sounds interesting, right? Let’s take a look at the KPIs you should be tracking now:
#1: Revenue per attorney
Let’s face it, most of us are in this profession to make money. The principal way we do that, of course, is by billing clients for legal services. If, however, your attorneys aren’t billing enough hours to cover salaries and expenses, your law firm is going to go south fast.
So, how much revenue should each attorney bring in? The answer, of course, is “it depends.” According to some sources, “well-run” firms bring in between $500,000 to $1,000,000 revenue for every attorney on staff. Keep in mind that this KPI is calculated by dividing gross revenue by the total number of attorneys on staff. Not every lawyer is going to generate those sums. Worker bees might generate a fraction of that amount while the gold-star business developers bring in substantially more. The goal is to have an average revenue somewhere in that range.
#2: Revenue per employee
Of course, very few law firms are made up exclusively of lawyers. There are paralegals, administrative assistants, research clerks and the like, all of whom contribute to the overall success of the firm. Some lawyers, however, are chronic over-hirers. If you’re one of them, this statistic will tell you that.
To calculate revenue per employee, divide total revenue by the total number of employees in the firm. If that number comes out to less than $100,000, you probably need to consider cutting back on staff. Remember, we haven’t even begun to calculate your total overhead. Employees are just one piece of that.
#3: Are you hitting your revenue targets?
The first two KPIs discussed in this article are great for evaluating things like staffing levels and overall productivity. If you’re a solo practitioner or partner in a very small firm, you might want to start with the most critical KPI of all – overall revenue targets.
This is a figure that is going to be highly personal within each firm. To keep things simple, let’s consider a solo practice. First, you need to determine what you need to make from the firm each year. We’re talking here about the money you personally take home in order to pay your bills, go on vacations, buy new suits, or whatever.
Now, look at your actual annual income from the last year. Subtract from that your total annual expenses. Don’t skip anything … include subscriptions, client entertainment, employee salary, bar dues, etc. Now, look at what’s left. Does it match or exceed your revenue target? If not, you know you need to increase revenues or decrease expenses.
#4: Client satisfaction
Believe it or not, it’s probably best if your KPIs are not entirely focused on money. In order to make money on a sustained basis, you’re going to do a couple other things really well. One is to consistently make your clients happy. So, how do you measure that?
Consider crafting a survey that encapsulates the client experience. If you develop a survey that uses a Likert scale, it will be easy to quantify and analyze the data you receive. From there, you can make adjustments to your practice that will address client concerns and keep them coming back to you for all of their legal needs.
What other KPIs does your firm track? Tell us about it in the comments section, below.