People run the systems he said, but the systems run the law firm. Removing either of these components and it becomes even more challenging to maintain a financially successful law firm.
His observations came by way of a webinar hosted by LawMarketing.com titled: 12 Numbers That Determine Your Law Firm’s Success Or Failure.
By the Numbers: Components, Steps, and Systems
Mr. Fairley walked participants down a logical sequence of steps to land at the final stage – the metrics for measuring law firm operations – on which the webinar was focused. That logical sequence looks like this:
- There are two critical components in law firms: people and systems
- There are three aspects for every system to be effective
- There are seven major systems required in law firms
- The seventh system is metrics; there are 12 essential metrics
Three Steps in a System
Every system has three key steps:
>>>Identify the data requirements. What are the information requirements your firm needs to track to ensure the business is healthy? Mr. Fairley advises law firms “tackle the major data components first,” focusing on the big picture items or the “stuff that’s relevant.”
>>>Data manager. Someone needs to track the data – whether that’s a dedicated role or an additional duty – law firms should appoint someone one to track and measure the data. As an additional duty, the likely candidates for this appointment might include the IT team, front office help or the marketing staff. It is likely marketing is already tabulating data relative to their duties already.
>>>Analysis and Reporting. There is little value in collecting data if it is not being analyzed and used to make decisions. Mr. Fairley says the analysis should not be conducted by a law firm partner – and the frequency should be at least quarterly, monthly is better and even weekly might suit some firms.
7 Major Law Firm Systems
Mr. Fairley – and by extension – The Rainmaking Institute, advocates that there are, or ought to be, seven major systems in every law firm. Law firms are by definition a business and these systems represent the fundamentals of business. These seven systems are:
1. Marketing system – a system to generate leads.
2. Sales – a process for converting those leads to sales.
3. Services – a client retention system (which should include a client feedback system)
4. Profits – cash flow system for keeping the lights on, or so to speak
5. People – a methodical approach to hiring and retaining people
6. Procedures – these are standard operating procedures specific how a firm does business
7. Metrics – the numbers that provide a “snapshot into the performance” of the firm
While a fairly lead in, it’s this final point – metrics – that sets the stage for the 12 essential metrics for law firm rainmakers.
Also see these related posts:
12 Essential Rainmaker Metrics
The metrics Mr. Fairley espouses also follow a logical sequence – starting with marketing and ending with profit. These, he said, are the key performance indicators (KPIs) that provide insight into the health of a law firm.
1. Number of leads per month. Leads are a straight-forward metric until the conversation of qualification ensues. Mr. Fairley applies, by his own admission, a controversial definition of a lead: Someone who contacts a firm, who the firm has never done business with the firm before, and who has expressed an interest in the firm’s services. “There’s no such thing as an ‘unqualified lead,’” said Mr. Fairley. “A lead is a lead.” What happens to that lead depends on how the law firm nurtures it.
2. Source of leads. In a web-enabled world, the source of leads can come from a number of sources ranging from client referrals to social media to pay-per-click (PPC) advertising. Mr. Fairley notes some law firm partners will say they ask every client where they heard about the firm – but that’s not a reliable method of tracking a lead source. Ideally, firms want to apply a unique way to identify the lead source – for example using different landing pages for different web promotions or providing a unique phone number in response to advertisements, billboards or mail promotions.
3. Average cost per lead per month. Cost per lead, or CPL, is a simple equation – the number of leads divided by the investment a firm has made in marketing. If a firm spent $20,000 on marketing and earned 40 leads, the CPL is $20k/40 = $500. The question, Mr. Fairley suggests firms ask, is whether that CPL is good or bad. The answer of course depends on the total value a given client has to the firm.
4. Number of appointments set. This metrics begins to transition from the marketing system to the sales system – and process for converting leads. Mr. Fairley makes several points:
- Speedy follow up – even on a Friday afternoon – improves conversion
- Never have a lawyer do the follow up; they are simply too busy
- In person appointments tend to convert at a higher rate than phone appointments
- Leads from the internet convert at a rate that’s 22% higher
- If a firm has 50 or more leads per month; hire a dedicated intake specialist
- 93% of leads are converted on the 6th touch; follow up on every lead 6-8 times
5. Appointments completed. Another step along the conversion process is tabulating how many leads attended an appointment that has been set. If a law firm hires a dedicated intake specialist, then incentivizing that person for appointments completed is a better technique than incentivizing them for appointments set. He offered several tips for improving this conversion rate including:
- Send an immediate appointment confirmation by email or text message
- Include driving directions, a map and possibly a photo of the building
- Check the map to ensure it is correct – sometimes these are not
6. Client retention and referrals per month. A good indication of whether a client is satisfied with law services provided isn’t just that they remain an existing client, but that they are willing to refer business to the firm. Mr. Fairley says attorneys have a hard time asking for referrals – but examining the subject more carefully – can improve this important source of leads:
- What does a good referral look like for a firm?
- How should clients make a referral – by phone, email or even in person?
- What should clients to say about the firm?
- Will you charge for a consultation?
- Is there marketing collateral available for a client to share?
7. Average cost per client. This metric is an extension of CPL explained earlier – but instead of dividing by leads the process is to divide by the number of new clients. If a firm spends $20,000 on marketing, earns 40 leads that convert into 10 new clients the cost per client is: $20k/10= $2,000. The same question Mr. Fairley posed earlier also applies here – the resulting number may be good or bad for a firm depending on the value of the client account. In this way, a partner can begin to see how these metrics, or KPIs, impact the performance of the firm.
8. Conversion rate by attorney. Which attorneys in a firm are best at closing during an initial consultation and earning a new client? Usually, Mr. Fairley said, the law firm owner has the highest closing rate, but that’s not always the case. More importantly, just tracking the firms overall conversion rate can miss important details. One law firm he consulted with had a break down as follows:
- Managing partner – 47% conversion after 220 initial consultations (ICs)
- Associate 1 – 48% conversion after 40 ICs
- Associate 2 – 7% conversion
- Associate 3 – 7% conversion
When the law firm examined the data by attorney, it demonstrated an opportunity – a consideration – to shift some of the legal workload and task the first associate with more appoints.
9. Cash flow. This is the total amount of cash the firm receives each month.“Cash solves a lot of problems” said Mr. Fairley.
10. Aged accounts receivable. In a separate podcast, Christopher T. Anderson said 20% of legal bills are past due, which underscores the importance of knowing which bills are outstanding. Aged accounts receivable or ARs, are calculated in 30, 60 and 90 day time frames. The chances of recovering ARs that are 90 days or older are “very low” according to Mr. Fairley. Overdue ARs can “sink your law firm,” he said.
11. Monthly profit and loss. The monthly P&L is likely a familiar metric and it is calculated by adding the cost of goods sold (COGS) to the general and administrative (G&A) expenses and subtracting that from the firm’s gross revenue: Gross revenue – COGS + G&A = P&L. While a common metric, Mr. Fairley’s point wasn’t just about calculating the metric – but how it is calculated. He noted one law firm owner was tracking the P&L in a word processing program, rather than a program like the Intuit® QuickBooks® software. We’d be remiss if we didn’t point out that some of our law firm practice management solutions support integration with such programs.
12. Net operating income. Mr. Fairley defined net operating income, or NOI, succinctly as “how much is left at the end of the month.”
* * *
A link to the webinar is provided in the introduction to this post and it was recorded for those that might have missed it live. Mr. Fairley delivered a presentation, filled with plenty of colorful examples and anecdotes, in about 60 minutes. Connect with Mr. Fairly on Twitter, Facebook, Google+ or The Rainmaking Institute’s blog.
If you enjoyed this post, you might also like:
Six Business Metrics Every Law Firm Should Measure