One of the most ethical things we can do is to run a law firm like a business and be good stewards of our finances the budget of our clients said Christopher T. Anderson in a webinar titled Moneyball for Lawyers.
The webinar dovetails on the popular 2011 movie by the same title, which is built on the premise that the philosophy of the Oakland A’s baseball team management is “medieval.” Likewise, Mr. Anderson points out that law schools do not typically train lawyers in businesses and instead are taught if attorneys simply build a great practice, the rest will fall into place.
However the industry has changed and Mr. Anderson, who has spent time as a managing partner, offers six business metrics every law firm should track. The webinar slides are embedded nearby, and the full webinar is viewable in a downloadable format (Windows Media); it runs just about an hour and is well worth watching in its entirety.
Six Business of Law Metrics to Track
1. Cost of servicing a client. The cost of servicing a client includes all of the fixed costs – rent and utilities – and the fixed marketing expenditures to determine what it costs to merely bring a new client in the door.
2. Measures of profitability. Dissecting portability is useful for understanding the impact, or contribution each respective area has on the bottom line. One practice area may be more profitable that another and the same is true of clients.
- Firm profitability
- Profitability by practice area
- Profitability by partners
- Profitability by client
- Profitability by timekeeper (all levels)
3. Marketing expenditure as a percent of revenue. Mr. Anderson says especially among smaller firms, such as solo- and duo-firms tend to limit marketing to personal networking and the management of a website. A common fear of marketing he hears from small firms is that marketing will work – bring new clients in – and then not have the resources to serve the clients properly. He argues that this places the firm, or its attorneys, in a position to become “more of the lawyer you to become” by having a choice among the good clients. As a benchmark, research suggests law firms spend approximately 3% of revenue on marketing.
4. Technology expenditure as a percent of revenue. Technology spending not only includes computers and hardware, but today also entails mobile devices and secure client portals. Mr. Anderson points to several trends reports indicating about 60% of all law firms have a budget for technology; spend between 2% and 4% of revenue on technology which runs on average between $8 and $17k per lawyer.
5. Realization. Realization boils down to how much a firm works compared with how it realizes in earnings. Realization rates tend to slip along these areas:
- How much work versus how much is billed
- Discounts and write-downs before billing
- How much is written-off after billing
- The amount collected
- The lifecycle of accounts receivable – the span between service performed and payment
Here’s a great resource for ideas to manage past due clients: Un-Billable Hour: Law Firms, Invoicing and Collections.
6. Industry benchmarks. Many of the metrics in 1-5 are aimed at helping firms create a baseline of metrics to understand where a firm stands. Benchmarks help firms understand how it measures relative to peers in the industry. Several industry organizations or industry-wide surveys can provide good data for benchmarking a firm:
- ABA’s Technology Survey
- Legal Marketing Association’s Roles & Compensation Survey
- ILTA provides a range of surveys across staffing and technology
- LexisNexis Billable Hours Survey: Infographic and Report (pdf)
- LexisNexis Firm Manager Cloud Survey
- LexisNexis InterAction CRM Survey
- LexisNexis Enterprise Legal Management Trends Report
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