We at Lodestar Solutions get asked by law firm clients what should they be doing with IBM Cognos software specifically their TM1 and/or IBM Cognos BI? The answer usually is, “a lot more than what you are probably doing”. Many times they use TM1 to plan budgets, but under-utilize it for streamlining data analysis. Other times they use IBM Cognos BI to create all kinds of jazzy reports that only tell a story about the past. For those that already own IBM Cognos software, expand your usage and get all that you can from your investment. For those that are looking for tools to solve their KPI reporting needs and especially for legal firms wanting to determine the best law firm KPIs, IBM Cognos can do it. With IBM Cognos, you can create your financial dashboard, performance dashboard, and KPI analysis on top of meeting your budget and forecasting needs.
Here is an excerpt from the American Bar Association regarding key law firm KPIs reporting. While this does not specifically mention IBM Cognos software, it definitely has good points you can take away. Check the list and see if you can currently answer questions for these KPIs in your firm. If you can, are you getting them answered timely enough? If you can’t answer them, is it due to lack of access to source data? Is data not being captured? Is there no time to produce answers? Do you not have the tools or just no one was asking?
Three criteria to qualify as law firm KPIs:
- It must be key to the firm's success.
- It has to be quantifiable.
- It must reflect the firm's strategies and goals.
However, we would offer a couple of cautionary notes, with the most important being that law firm KPIs should serve as a guide and not a hitching post. KPIs are simply a tool. They are no substitute for the use of common sense and good judgment when it comes to the management of your law firm.
LEADING OR LAGGING INDICATORS
To translate this point into meaningful terms to firms, the following chart divides a sample of common law firm KPIs into the two categories:
|LAGGING KPIs||LEADING KPIs|
|Fees billed in a month||Number of matters opened|
|Hours billed||Hours worked|
|Cash receipts||Number of average days billing in lockup*|
|Revenue per lawyer||Number of matters per client; number of lawyers billed per client; number of types of matters billed to clients|
|Effective hourly rate||Average fee per matter; average fee per new matter; ratio of average billed to average worked rate (realization)|
*This is the sum of the unbilled work in progress and accounts receivable divided by the average fees billed on a daily basis for the past 12 months on a rolling basis (the most recent 365 days, not a fixed year).
Table 1: Business Development KPIs
|Client Growth Rate||This is a simple measurement to quickly determine if your practice’s client base is growing, or whether growth in revenue has all come from existing clients. This helps firms to focus their business development spend accordingly.||This is the ratio of the number of clients that the firm handled its first matter in the past 12 months to the total number of active clients (active can be defined as having handled a matter for in two of the past three years).|
|Average Fee per Client||You would track this to see if your client legal spend with you is growing, flat or declining. It allows you to think about whether the change is rate-driven, client-driven, etc., and then you can respond accordingly.||This is the fee revenue for the year divided by the number of clients billed during the year.|
|Average Fee per New Client||Firms use this indicator to measure whether the clients being added are contributing to the overall revenue growth as it is, compared to the same ratio for existing clients, from a cost-of-doing-business perspective; in the long term, firms want to generate more revenue from fewer clients.||This is the related fee revenue for the year divided by the number of new clients (clients that the firm handled its first matter for in the past 12 months).|
|Number of Matters per Client||Firms use this as another indicator of growth, because of the focus on existing clients and the ease and lower cost of generating work from them, compared with searching for and landing new clients.||This is the ratio of number of matters billed to the number of clients billed and is calculated by dividing the former by the latter.|
|Client Retention||Again, firms use this as another indicator of the health of the practice, because of the focus on existing clients and the ease and lower cost of generating work from them, compared with searching for and landing new clients.||This is the ratio of number of clients billed in the last 12 months to the same clients that had been billed in the 12 months before that.|
|Growth in Top Clients||Firms, while growing the business, also want to make sure they don’t become overdependent on any one or small group of clients that could adversely impact the firm’s finances if those clients left. Also, firms want to understand where the bulk of their fees are coming from and where they should focus the bulk of their business development efforts.||This is the ratio of fees billed to top 100 clients (number can be adjusted to size of firm) in the past 12 months to the fees billed to the top 100 clients in the 12 months prior to that.|
|Dormant Client Percentage||Clients that you once had are the easiest ones to pursue for new work, so this is important for that reason and also as an early warning sign of whether you have a quality-of service issue to follow up on.||This is the ratio of the number of clients that the firm has not handled a matter for in two of the past three years to the number of total clients.|
Table 2: Productive KPIs
|Percentage of Partners' Hours||Firms track this to see who is doing the work in their firms, to address potential issues such as work delegation, complement imbalance, etc. It is seen to be an overall barometer to determine whether partners are working harder or smarter.||This is the ratio of partners' hours worked to the total hours worked by all timekeepers.|
|Billable Hours per Full-Time Equivalent Timekeeper||This measure is more relevant than just measuring change in gross billable hours, as the total hours can increase as a result of more timekeepers, but the actual workload per lawyer could be shrinking, resulting in firms facing a situation of more lawyers than work and an imbalance in their complement.||This is calculated by taking the gross number of billable hours worked by paralegals, associates and partners and dividing by the number of full-time equivalents in each category.|
|Ratio of Average Billed to Average Standard Rate||Firms use this for a variety of reasons, including extrapolating what the likely impact will be on billed fees of potential rate increases, as an early warning flag of possible quality issues depending on the magnitude of the gap between billed and standard, and to see if there is a billing issue.||This is the ratio of the average billed hourly rate for a timekeeping category—which is calculated by dividing fees actually billed by the hours billed—to the average standard hourly rate for the category of timekeeper— which is the value carried in work in progress of the hours that were billed.|
|Billings per Full- Time Equivalent||Some firms look at this in conjunction with their average overhead to ensure profitability is being achieved, to identify potentially underperforming timekeeper groups, to balance complements, and to determine appropriate levels of compensation.||This is calculated by dividing the gross amount of fee billings by paralegals, associates and partners by the number of full-time equivalents in their respective categories.|
|Billable Hours per Legal Assistant||Firms use this as a basis for targeting staff levels and increasing or reducing existing complement on a basis that most lawyers understand—the billable hour.||This is calculated by dividing the total billable hours for all timekeepers by the number of legal assistants.|
|Number of Matters Opened||Firms, particularly those not driven by billable hours, use this as another measurement of workload, often in conjunction with the Average Fee per Matter.||This is calculated by totaling up the number of new matters opened in the past 12-month period and comparing it to similar totals from prior years.|
Table 3: Financial KPIs
|Net Income Ratio||Firms use this for a variety of reasons, including the direction their overhead is going, as a benchmark of profitability that is not subject to the manipulations of how many partners one has today, and as a comparative for compensation.||This is the ratio of the firm's net income (income prior to any distributions to partners) divided by the total fee billings of all timekeepers.|
|Average Net Overhead||This is the net cost that each partner must cover before any profits are generated by his or her billings. It is a handy tool for putting relativity into compensation levels.||This is calculated by taking the total expenses of the firm before any distributions or salaries are paid to partners minus the billings of all nonpartner timekeepers. This number is then divided by the number of partner full-time equivalents (equity and nonequity|
|Unbilled Days||Firms use this KPI to measure the length of time it takes to bill the work they do.||This is calculated by dividing the fee portion of unbilled work in progress by average billings per day (which is calculated by dividing the firm's total fee billings for the past 12 months by 365 days).|
|Uncollected Days||Firms use this KPI to track the length of time it takes to collect their accounts after they are rendered.||This is calculated by dividing the fee portion of accounts receivable by average billings per day (which is calculated by dividing the firm's total fee billings for the past 12 months by 365 days).|
|Charge-Off Percentage||Firms use this to track how much of their accounts receivable are actually going uncollected.||This is simply the amount of billings written off as uncollectible divided by the fees billed for the year.|
FIVE COMMON LAW FIRM KPIs
Approaching the list of KPIs enumerated in Tables 1 through 3 is similar to the challenge of a buffet. There’s a desire to sample everything, but if you are not careful, you will miss out on the “good stuff.”
Given the breadth of experience of the readers of Law Practice, we have selected five KPIs that most firms, irrespective of the type of work or clients they focus on, are likely to track because of both their ease of calculation and practicality.
Context is critical to the effective use of a KPI. Too many firms only benchmark against their own past experience rather than comparing their KPI metric to the same KPI of other law firms. In part, this is because access to benchmarking data in the legal profession is limited. However, we have managed to obtain benchmarking data for these five KPIs for 2012 and 2011, which is presented in the chart after each KPI description. The source of the benchmark information is Lexis Firm Insight, which is an online solution that provides information ranging from billing rates to collection days and is updated quarterly.
Our brief analysis of the five law firm KPIs follows:
1. Lockup measures the combined time it takes to bill and collect a firm’s accounts. This is critical to projecting cash flow and projecting when you might need to borrow against your bank credit facility. It is the sum of the Unbilled and Uncollected Days, which is calculated by dividing the unbilled fee portion of a firm’s work in progress and the fee portion of the receivables by the average billings per day. This latter calculation is derived by dividing the Fees Billed for the 12 previous months by 365 days.
|LOCKOUT/YEAR||TOP 25%||MEDIUM||BOTTOM 25%|
|Unbilled Days 2012||50||63||87|
|Unbilled Days 2011||51||62||81|
|Uncollected Days 2012||67||76||80|
|Uncollected Days 2011||68||78||89|
|Total Lockup 2012||117||139||173|
|Total Lockup 2011||119||140||170|
2. Billable Hours per Full-Time Equivalent Timekeeper measures the number of hours worked by paralegals, associates and partners. This is more relevant than just measuring change in gross billable hours, as the total hours can increase as a result of more timekeepers, but the actual workload per lawyer could be shrinking, resulting in firms facing a situation of having more lawyers than work and an imbalance in their complement. This KPI is calculated by dividing the gross number of billable hours worked by paralegals, associates and partners by the respective number of full-time equivalents in each category. Note that a full-time equivalent reflects how many actual timekeepers your firm had for the period in question. For example, a lawyer who was with the firm for six of the past 12 months would be treated as one-half of a full-time equivalent in determining your lawyer count.
|BILLABLE HOURS//YEAR||TOP 25%||MEDIUM||BOTTOM 25%|
|Equity Partners 2012||1,676||1,526||1,440|
|Equity Partners 2011||1,646||1,559||1,482|
|Nonequity Partners 2012||1,584||1,438||1,311|
|Nonequity Partners 2011||1,727||1,504||1,383|
3. Average Billed Rate measures the effective rate actually billed by the timekeepers (which will frequently differ from their standard or work rate by anywhere from 5 to 11 percent) and is key to monitoring and raising flags as to whether it is potentially client discounting, lawyer discounting or work quality issues. This KPI is calculated by the gross value of time billed for a timekeeping category divided by the related hours billed.
|AVG.BILLED RATE/YEAR||TOP 25%||MEDIUM||BOTTOM 25%|
|Equity Partners 2012||$512||$401||$322|
|Equity Partners 2011||$514||$390||$315|
|Nonequity Partners 2012||$393||$334||$285|
|Nonequity Partners 2011||$378||$334||$271|
4. Leverage measures the ratio of associates to partners. This measurement is still thought be a critical driver of law firm profitability through the leveraging of a high ratio of associates to partners. (Note that in 2013 and beyond, this should be broadened to include all nonpartner timekeepers ratio to partners.) It is calculated by dividing the associate full-time equivalents by the partner full-time equivalents.
|LEVERAGE/YEAR||TOP 25%||MEDIUM||BOTTOM 25%|
5. Billings per Full-Time Equivalents measures the revenue generation by each timekeeper type, which is important to both budgeting for the future and historical analysis with the intent of not repeating past mistakes, which has included losing overachieving partners due to impact on the firm’s overall profitability. It is calculated by taking the gross amount of fee billings by paralegals, associates, and partners and dividing it by the respective number of full-time equivalents in each category.
|BILLINGS/YEAR||TOP 25%||MEDIAN||BOTTOM 25%|
|Equity Partners 2012||$693,391||$532,146||$405,765|
|Equity Partners 2011||$699,782||$541,316||$430,595|
|Nonequity Partners 2012||$478,845||$427,130||$339,679|
|Nonequity Partners 2011||$568,266||$466,581||$333,892|
Another, but less timely, source of benchmarking data is ALM’s annual Survey of Law Firm Economics. However, it does have the benefit of providing data both by geographical region and firm size.
Before moving on to our conclusion, one note of caution: No single KPI tells the full story. Rather, they must be viewed collectively to achieve the best-informed decision-making results.
The messages that we hope you take away from this law firm KPI article can be summarized as follows:
- Determine what is required for your firm to successfully execute its strategy and then select the law firm KPIs that help you know how you are progressing toward these goals.
- Ensure you have a balance of leading KPIs and lagging KPIs so they enable your firm to act in a preventative mode as well as measuring progress.
- No single KPI will provide all the answers that firms seek but rather collective vision is required.
- KPIs are not that complicated to calculate but you need to be able to mine the data in your systems in order to have proper input.
As IBM Cognos consultants and business analytics coaches, Lodestar Solutions can guide you in your Business Analytics Roadmap (BAR) to make the most of your IBM Cognos investment. We can also guide you through getting the most functionality out of your IBM Cognos software.
If you are interested in collaborating with other TM1 users in law firms to expand and share your IBM Cognos software knowledge, please contact Serena D'Arpa at sdarpa@LodestarSolutions.com.
For the full article to which this blog is attributed, please visit the September 2013 article Your Financial Dashboard from the American Bar Association.
And if you'd like to read more about how these KPIs in relation to your dashboard, check out our previous blog on Determining KPIs & Metrics For Your Dashboard.