Measuring your law firm’s profitability can be a daunting task. Evaluating lawyer and staff performances can be stressful, making it even more important to quantify your firm’s profitability as fairly and objectively as possible. Regardless of how your firm charges your clients, measuring productivity will be key to better understanding your firm’s profitability.
There are many ways to measure your firm’s performance and qualify your firm’s financial and operational health. Improving profitability is about much more than implementing cost-cutting measures. In fact, reducing your budget for staff, technology, and professional development may even be detrimental to your profitability in the long term. Nevertheless, there are three primary key performance indicators (KPIs) that should be included in every law firm’s regular profitability reviews.
1. Utilization Rate
Measuring your lawyers’ utilization rates is instrumental in understanding their productivity. It is a measure of how much time is spent on work that is billable to clients. Utilization is expressed as a percentage and is calculated by dividing a lawyer’s billable hours by the total hours worked.
Although most lawyers spend at least some of their time on administrative matters, your law firm should aim for utilization rates as close to 100 percent as possible to ensure maximum productivity. Moreover, utilization rates should be tracked on a monthly, quarterly, and yearly basis.
Tracking this information will allow your law firm to analyze trends over time, determine which attorneys are working most effectively, and make any necessary changes as soon as possible.
2. Realization Rate
Realization rate is another important KPI that will provide your law firm with important information related to your attorneys’ productivity. The realization rate is a measure of how many hours an attorney records in comparison with the fees that are ultimately collected. It is calculated as a percentage, with fees recorded divided by fees collected.
As with utilization rates, your law firm should aspire to achieve a 100 percent realization rate, and strive to track it monthly, quarterly, and yearly. Anything less may be an indication that problems exist. Negligent clients, inefficient billing and collection practices, and redundant workloads are just some of the common productivity challenges that prevent law firms from realizing a 100 percent realization rate.
3. Outstanding Balances and Fees
Tracking outstanding balances is crucial to accurately measuring the productivity of your law firm’s attorneys and staff. Outstanding balances and unpaid invoices are a problem that plagues many law firms. Although unpaid balances may be an indication of poor attorney performance and client dissatisfaction, they may also be evidence of poor invoicing and collection practices on the part of your firm’s staff.
Evaluating your firm’s work-in-process (WIP) fees can help you better determine whether outstanding fees are, in large part, due to lawyer performance or billing staff shortcomings. WIP fees are a measure of those fees that have been captured by lawyers but not yet invoiced. Issues like failing to regularly invoice your clients can be quickly uncovered by analyzing WIP fees.
By adequately tracking all of your firm’s balances and fees, you can make strategic improvements to your firm’s billing practices across the board.
In The End...
Utilization rates, realizations rates, and the accumulation of fees all point to the efficiency and productivity of your firm’s attorneys and staff. Understanding that productivity drives profitability is key to identifying other key performance indicators to measure in addition to the ones laid out here. While measuring these KPIs is an important first step, evaluating your firm’s practices – and improving your firm’s workflow and technology – is the next step necessary to activate your profitability measurements and achieve real results!
