Summary
Many law firms track “busy” numbers that look impressive but don’t improve profitability. This blog breaks down what real law firm KPIs should measure: profitability, time efficiency, and accurate billing, and organizes them into three key categories: financial, productivity, and billing/collections. It highlights the most meaningful KPIs to monitor, including billable hours, utilization rate, realization rate, collection rate, A/R aging, work in progress (WIP), billing cycle time, profitability by matter, effective hourly rate, and trust/retainer balances. The article also warns against misleading vanity metrics like total hours worked or number of matters opened and explains how often firms should review KPIs to stay financially healthy and reduce billing issues.
Law Firm KPIs That Actually Matter: Identifying the Factors That Make a Difference
Anyone can create the illusion of swimming by simply standing in place and flapping their arms wildly in the pool. However, that is a far cry from making genuine progress and truly swimming. This is what happens when law firms track data, but don’t track real progress. These days, plenty of law firms have data about their activities, but they aren’t using that data in any meaningful way. Thus, they are tracking data simply to be tracking it.
The problem with tracking these vanity metrics is that they don’t contribute to the bottom line. After all, at the end of the day, a law firm is a business, and it needs to have a healthy profit margin to survive. With this in mind, we must explore what true key performance indicators (KPIs) look like within a law firm, and which of these factors you ought to track most closely.
What is a KPI in a Law Firm?
Litera offers this explanation for what a KPI is in the context of a law firm:
Key Performance Indicators (KPIs) are measurable values that indicate how effectively a law firm is achieving its business objectives. In the legal context, these indicators go beyond traditional financial metrics and encompass a range of factors that impact overall performance of a law firm.
Simply put, a KPI within a law firm should answer some simple, but important, questions, including:
- Are we profitable?
- Are we billing our clients correctly?
- Are we using our time well?
These questions can be answered with hard data when such data is collected properly.
The 3 KPI Categories Every Firm Should Track
With all of this in mind, it is essential to understand the various KPI categories that a law firm should track. When these metrics are all tracked appropriately, they can help any law firm better understand where it stands in terms of its stability. The categories that ought to be tracked extensively are:
Financial KPIs
These KPIs are meant to answer the most basic and fundamental question: Are we profitable? They are also useful in the sense that they can help a law firm understand how much cash is available at any given time to conduct its various obligations.
Productivity KPIs
Measuring team effectiveness and productivity means examining KPIs that track that type of data. These KPIs should also be measured carefully to ensure that the team is operating on all cylinders.
Billing and Collections KPIs
The activity within a law firm is important, but the most important aspects of that activity are the aspects that directly contribute to monetary gains. Billing and collections KPIs measure the data revolving around how clients are billed and how much of that money is properly collected.
The Core KPIs That Actually Matter
It is not a stretch to assume that you might only be able to measure certain KPIs throughout the course of your day. After all, there are only so many hours in the day, and it is imperative that you use those hours effectively. As such, we have a list of “core KPIs” for you to measure above all else.
KPI #1: Billable Hours
Comparing the true number of billable hours that the firm logs against the target number of hours that the firm would like to log is something that every firm ought to do. This is an excellent way to track true output compared to desired output. It is common for law firms to make mistakes when it comes to this metric, including:
- Tracking hours, days, or weeks after they occur
- Forgetting to track small tasks, such as responding to e-mails
- Attempting to recall billable hours from memory instead of logging them accurately
KPI #2: Utilization Rate
Not every hour of work performed within a law firm is billable to the client. Thus, it is necessary to take the number of billable hours and divide them by the total number of hours worked within the firm to obtain your utilization rate. In other words, what percentage of your total hours are billable to the client? This is a metric that you should always measure.
KPI #3: Realization Rate
How many hours are you able to bill your clients for, compared to how many hours you are at work? This is your realization rate, and it is an important figure to keep in mind when thinking about how efficient your law firm truly is.
KPI #4: Collection Rate
You can only add hard cash to your accounts at the end of the day. Thus, you don’t want to overly emphasize the importance of billable hours if you aren’t converting those billable hours into real money. In fact, a law firm that conducts its collection processes effectively often outperforms a firm that has more billable hours. It is all about collecting on the work that you have already done. If this metric is lacking, then the firm isn’t making the money that it should be.
KPI #5: Accounts Receivable Aging
This metric shows you how long your current invoices have remained unpaid. This is work that has already been completed, but the invoices remain uncollected. Ideally, a firm wants a low number when it comes to their accounts receivable aging because they don’t want to sit on a pile of unpaid invoices that they have no realistic hope of collecting on.
KPI #6: Work in Progress (WIP)
Work that has been completed but hasn’t been invoiced out yet is known as work in progress (WIP). It is valuable because the job has already been done. However, it is pending in the system because the client has not yet been invoiced. As such, it is important to keep an eye on your WIP metric regularly to identify when it is climbing too high. When that is the case, you should take measures to reduce how much WIP you have out there.
KPI #7: Billing Cycle Time
The length of time between when work is completed and when the client receives their invoice is called billing cycle time. The goal is to make this time as short as possible. As soon as your work is completed, you can invoice the client for the efforts that you have made for them. A long billing cycle time might indicate issues within your billing process.
KPI #8: Profitability by Matter
Not all legal matters are equally profitable. Some client issues take very little time to resolve from a legal standpoint. Thus, you cannot bill them as much as you can for clients who have matters that are more involved. Keeping a finger on the pulse of the profitability of various matters that come across your desk will help you better understand where you ought to spend more of your time and energy.
KPI #9: Effective Hourly Rate
Knowing how much the firm effectively earns per hour is a good way to determine just how profitable you are likely to be over a given period. Your effective hourly rate helps you determine this. It is calculated by dividing the collective revenue brought in by the total number of hours worked. That produces a figure that represents your true effective hourly earnings rate.
KPI #10: Trust Account/Retainer Balance Tracking
This figure concerns both compliance with reporting regulations and touches on cash flow stability. It helps to present a clearer picture of what your cash flow truly looks like. There may be spikes and valleys in your revenue throughout the year, and this has a direct impact on cash flow. Tracking your trust account and retainer balance makes it easier to see what your true cash flow picture looks like.
KPIs Firms Track Too Much (and Why They Mislead)
While it is unquestionably true that all the KPIs mentioned above should be tracked, there are some KPIs that are frequently tracked by law firms even when they shouldn’t be. These are KPIs that feel good to track, but that ultimately don’t add any real value to the overall examination of the firm’s outcomes.
A few examples include:
- Total Hours Worked – The total number of hours worked doesn’t matter if those hours aren’t leading to productive outcomes.
- Number of Matters Opened – Once again, the sheer quantity of matters opened isn’t nearly as important as how profitable those matters are.
- Busy Calendars – It feels significant to have a jam-packed calendar, but those calendars are nothing more than a vanity project. Just having a packed schedule doesn’t mean the firm is being productive.
How Often Should You Review KPIs?
Different KPIs should be reviewed on different schedules. Depending on various factors, you may need to review some KPIs on a daily, weekly, or monthly basis. Here are some that fall into each category:
Daily
- Time entries
- Snapshots of work in progress
Weekly
- WIP lagging
- Billing lag
- A/R check-ins
Monthly
- Collection rates
- Profitability by matter
These schedules will provide you with the details that you require without overly burdening you or those in charge of collecting such figures.
Best Tools to Track These KPIs (and What to Look For)
It’s easy to log some information in spreadsheets, but they don’t provide the complete picture for you about many matters. Therefore, you will need additional tools in your arsenal to track KPIs how they ought to be tracked. Consider using platforms that get real results for you. At a minimum, those platforms should have the following reporting features:
- Timekeeper stats
- WIP aging dashboards
- Easy to navigate realization reports
- A/R aging dashboards
These features, among others, can help you to keep tabs on the essential stats that speak to the health of your law firm.
Get a Free Trial of LawBillity Today to Start Tracking Your KPIs
Are you ready to start tracking your KPIs and build a better future for your law firm? If so, contact us and let us set you up with a free trial of LawBillity to help show you just how powerful our platform is. Once you have seen what we can do for you, you will never want to go back to the days before you tracked such matters.
FAQs
What is the most important KPI in a law firm?
This will differ from firm to firm. Instead of trying to track “the most important KPI”, it is important to track a range of them to see the full picture
What KPIs should small firms track?
Small firms should focus on KPIs that directly impact the bottom line. They need to continue to grow their profits to stay in business, and anything that impacts profitability will matter greatly to them.
What’s the difference between realization and collection rate?
The realization rate refers to the dollars collected with lag time factored in. Collection rates refer to the percentage of funds that are collected as a part of the whole.
How do you track profitability by matter?
Break out each matter individually and review how much profit was brought in for each category.
How do KPIs help reduce billing disputes?
KPIs can help you to identify any kind of billing error or issue before it gets into the category of full-blown issue.
