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If you have data, decisions about law firm management, such as work load, aren’t merely about “feelings” according to Haley Odom Ackerman. More importantly, Peggy Gruenke added, tracking key metrics is the only way to effectively manage costs and grow a law business profitably.
The duo teamed up to co-present a session at the ABA TECHSHOW titled 5 Reports your Law Firm Isn’t Running but Should Be. The session proved to be far more than a few recommended reports as it came across to this writer as a 60 minute crash course in law firm business management.
Empirical Evidence vs. Gut Feelings
The continuous tracking of numbers will convey what observation and intuition might miss – and that insight helps a firm understand where and what is making a firm successful (or unsuccessful).
For example, the panel explained how one law firm crunched some numbers and discovered an associate had earned $5 million in revenue over a few years for the firm. Previously the firm had attributed that successful account to a managing partner – who brought in the client decade earlier.
Tracking the numbers demonstrated, however, it was the associate that had been working the case, making the calls, taking the client to lunch and generally owned the relationship. Tracking numbers helps a firm in other ways too – balancing workload, identifying the most profitable cases and understanding how a firm wins those profitable accounts.
Finding a Law Firm’s “Monthly Nut”
A study LexisNexis conducted last year found that of attorneys have purchased legal specific billing and accounting solutions 72% are not using the reporting features. Such reporting can help a firm better understand their business, identify market or client trends, and drive more profitable growth (see the 8th point here for a similar anecdote: 12 Essential Metrics for Law Firm Rainmakers).
While the co-presenters listed several numbers or metrics law firms will benefit by tracking on a regular basis (usually monthly). Here’s a few that stood out for us:
1. The “Monthly Nut.” The monthly nut was Ms. Gruenke’s terms for the amount of revenue a firm must earn every month to keep the doors open. “Anything above that number is profit,” she said.
2. Profitability by case. Some cases might be more profitable than others, but a firm can only know that for sure if it’s diligent about keeping track of costs. In addition, a firm may notice seasonal trends, or that a particular type of case is becoming less profitable.
New equation for small law profitability: Revenue less expenses = profit + financial monitoring = growth says @PeggyGruenke #ABATECHSHOW
— LexisNexis Software (@Business_of_Law) April 17, 2015
3. Realization rates. Realization is the actual revenue collected as a percentage of billed. Experts say few firms collect 100% of what they billed. In other words, if a firm bills $100 and the client pays $90, the realization rate is 90%.
4. Expenses. Keep track of expenses both on a monthly and annual basis – it’s the foundation for the “monthly nut.” In addition, the speakers made a point to note it’s useful for tracking expense by case or by client.
Most #smalllaw firm realization rates hover around 85-90% says @PeggyGruenke #ABATECHSHOW
— LexisNexis Software (@Business_of_Law) April 17, 2015
5. Revenue by lawyer. This number is useful for comparative measures of staff across the firm.
6. Revenue by type of case. This metric focuses on the topline rather than the bottom line as it does in profitability. It’s an indication of the growth opportunity.
"Many of you do pro bono whether voluntary or involuntary," said @PeggyGruenke [collective chuckles] #ABATECHSHOW
— LexisNexis Software (@Business_of_Law) April 17, 2015
7. Client acquisition. The session proposed several metrics for tracking which are related to law firm business development. Specifically, the panel recommended tracking prospective clients (think leads), prospects that turned into clients (think conversions) and new cases by month.
8. Unbilled hours. The panel referee to this as WIP or work in progress. It’s an accounting of the hours a firm has worked but for which have not yet been billed.
Average profit margin for a small law firm? 17.8% – 2nd most profitable business model #ABATECHSHOW
— LexisNexis Software (@Business_of_Law) April 17, 2015
9. Accounts receivable. This is the amount of money not yet collected after billing (i.e. 30, 60 or 90 days past due. Survey research on law firm billing suggests the chances of collecting on bill that’s 90 days past due narrows significantly.
10. Write offs. Keeping track of write offs will help a firm determine its effective hourly billing rate. For example, an attorney may have billed $200 per hour at the beginning of the case, but after discounting legal fees, the effective rate is actually $150 per hour.
* * *
The session was packed with a range of other measures and resources for consideration. For those interested readers, both speakers have other contributions of a related in nature, that may prove useful:
- Attorney at Work: Take the Guesswork Out of Flat Fees
- Attorney at Work: Five Checklists to Make Your Law Practice More Efficient
- Odom Ackerman Consulting: Five Analytics Reports You Aren’t Running and…
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Six Business Metrics Every Law Firm Should Measure
