As the legal landscape continues to evolve in the digital era, the drivers of law firm profitability also change. Yet, law firms often track the same KPIs out of habit. A global Workday study found 48% of professional services firms agree that their KPIs are not reflective of the digital era in which we now operate. If you don’t measure the right metrics, you remain in the dark, unaware that fixable issues exist.
Your profitability metrics should lead to insights that support long-term drivers of profitability, such as increased efficiencies in timekeeping, billing, and collection processes and higher client retention rates. Here are the top five profitability metrics you should track to drive healthier profitability rates in your firm:
1. Profitability Metric: Time and Billable Hour Analyses
Your profitability analyses should include the ability to drill all the way down to time entries to examine the details that make up a metric. You want to see how lawyers and staff members spend their time. This will help you detect any underperformance issues and make any changes necessary to ensure every timekeeper records more billable hours.
In-depth reporting on billable hours and fees collected by department, client, and matter shows which are the most profitable. You’ll discover which areas of legal work to seek and which clients to pursue for repeat business. With insights like these, you key into your firm’s strengths and optimize business development efforts.
Time analyses also enable you to understand the time and effort it takes to complete tasks and projects, which helps you develop alternative fee arrangements and offer discounts that attract clients without harming your bottom line. Anomalies such as too many billable hours on a single matter can reveal inefficient work styles. On the other hand, not enough billable hours can indicate difficulties entering time in a precise and timely manner. And excessive unbillable hours can help you spot manual workflow hurdles that the use of technology can eliminate.
2. Profitability Metric: Billing Hygiene.
When you detect unexpected delays between time entry dates and final invoicing times, it’s a sure sign that you need to improve pre-bill and billing processes. Many firms don’t realize they can easily switch to a digital environment that speeds editing and approvals. Your firm can use technology to eliminate the back-and-forth hassle of error-prone manual pre-bill activities. Adopting e-billing software also accelerates final invoicing and eases payment. When you speed these processes, you send invoices faster, get paid sooner, and increase firm profitability.
3. Profitability Metric: Realized Against Worked (Agreed)
This metric compares the amounts (hours or dollars) billed to a client versus the amounts agreed upon between the firm and the client at the beginning of the engagement. Your firm will have based its forecast and budget on the expectation of receiving the agreed-upon amounts. But discrepancies can arise, and you want to know what causes them. For example, the pandemic led many clients to request repriced and rescoped services.
In many instances, you can attribute the unexpected differences to the billing lawyer. They may add a discount to the final bill or write-off inefficient lawyer time. Discovering that you billed less than expected tells you to direct your efforts to increase profitability at issues such as ensuring that billable hours are entered in time to appear on invoices. Other focus areas include helping lawyers capture more billable hours with more modern capabilities such as remote time entry, automated time tracking and recording, daily AI-generated timesheets, and time gap analyses.
4. Profitability Metric: Collected Against Worked (Agreed)
This metric compares the amount the firm agreed upon with the client (and therefore expected to receive) versus the amount the firm received. It gives you a unified view of combined losses from write-offs and discounts. Discovering that your firm collected not just less than expected but also less than was billed shows that clients pushed back on their bills. That indicates that you may need to:
- Improve client communications to ensure firm efforts align with client expectations and vice versa throughout the engagement.
- Better understand which activities clients balk at paying for and assign that work to support staff who don’t bill for their time.
- Adopt software that ensures all time entries are consistent with client billing guidelines and include consistently worded narrations.
5. Profitability Metric: Matter Leverage
Are the right lawyers working on each matter? Matter leverage refers to the ratio of partner hours to associate hours. If your firm bills more partner than associate hours on a case, it can mean you’re not effectively leveraging the partner’s ability to book more business. However, lower leverage rates can indicate that because fewer associates are working on each matter, more of your associates get to work directly with partners who provide one-on-one mentoring and legal training. Different practice areas may naturally generate higher or lower leverage rates, depending on the inherent complexities involved. Tracking matter leverage rates gives you critical insights into how shareholders and associates are contributing to overall matter and firm profitability.
Build your firm’s profitability rates by bringing the right metrics to light.
Tracking these metrics will show you where and how to focus on driving long-term profitability. However, it’s not always enough to know what metrics to track and analyze. You also need BI and financial analytics software that consistently retrieves data from source systems to ensure results are up-to-date and reliable. You need answers to ad hoc requests in minutes, not hours or days, and you want highly targeted reports to help your firm to make data-driven decisions. Any time you want to think differently about your KPIs or add customizations, the Iridium team’s depth of knowledge, expertise, and technical talent ensures you will get access to the data you need. See how we can help you boost your firm’s profitability rates: Schedule your demo now!