Financials: Law Firm Metrics – Are You Lying to Yourself?

You’ve heard it before – “What gets measured gets managed.” Key performance indicators (KPIs) are meant to give law firms visibility into what’s working so they can do more. But could metrics create a false sense of security? Do you have the right KPIs with the right targets? If not, your firm’s metrics may be lying to you.

Law firms rely heavily on metrics and key performance indicators (KPIs) to evaluate their business. However, many firms may be misusing metrics in ways that paint an overly rosy picture or allow them to ignore lurking issues. Like a partner explaining away their low billable hours, firms can contort metrics to tell the story they want to hear. Inflexible targets and misaligned KPIs can create a false sense of security. Savvy firms avoid these pitfalls through careful metric design and analysis.

Is Your Threshold Correctly Set?

It’s tempting to set targets like the industry average to make the firm look normal. Benchmarking has value, but firms must set realistic thresholds tailored to their strategy and capacity. An underperforming practice group hitting arbitrary utilization or billing minimums may need improvement to deliver its growth potential. On the other hand, unattainable stretch targets demoralize. Firms must critically assess if their metrics targets are fit for purpose.

The targets set for KPIs like billable hours, collections, and more determine whether you feel satisfied or alarmed. Setting thresholds too low leaves firms vulnerable. For example:

  • Billable targets below firm/attorney capacity signals leaving money on the table.
  • Low utilization % goals indicate excess capacity – and overhead costs.
  • Realization rate targets below industry standards show an inability to capture full value.
  • Minimal new client goals fail to fuel sustainable growth.

Of course, unrealistically high targets also set firms up for failure. Thresholds must align with genuine potential. Firms lying to themselves celebrate mediocrity or feel constant disappointment due to extreme goals.

Do Your KPIs Represent Your Priorities?

Firms measure what they prioritize. Leading indicators like new client acquisition reveal a focus on growth. Defensive firms watch accounts receivable aging. But do your KPIs really reflect strategic priorities? Tradition-bound firms tracking billable hours as the prime metric miss the bigger picture. Meanwhile, “volume over value” firms measuring caseload without assessing profitability open themselves to losses. Ensure your metrics provide the right insights for your game plan.

Law firms should align metrics with strategic priorities. However, many still prioritize billable hours above all else. In isolation, high billable hours signal productivity. But focus on profitable work, satisfied clients, and business development is also needed. If you only track billable hours, you may be:

  • Rewarding inefficiency and overwork.
  • Discounting without knowing it.
  • Discouraging teamwork and delegation.
  • Enabling high write-offs and aged receivables.
  • Neglecting client relationships, sales, and next year’s revenue.

Your metrics may indicate attorneys are busy while the firm struggles with profitability, growth, and sustainability. Real priorities need measurement.

Can Metrics Lull You into Complacency?

Hitting targets feels good, but metrics may disguise issues needing attention. Here are examples of how metrics can provide a false sense of security:

  1. High billable hours this month, but profitability and realization rates are down – inefficient work is being rewarded.
  2. Attorneys recording more hours, but collections are down.
  3. Increasing matters opened but declining new clients – more work from existing clients doesn’t fuel growth.
  4. High client satisfaction scores but poor retention – unhappy clients slip away silently.
  5. Strong recent monthly collections, aging accounts receivable growing – danger ahead.

The wrong metrics or lack of nuance in your data can mask looming threats like profitability gaps, ineffective business development activities, emerging client issues, and cash flow problems. Firms pat themselves on the back while standing on thin ice.

Good metrics should instigate probing questions, not just pats on the back. If your KPIs feel like the whole story, look deeper.

Getting Real: Design Metrics that Reveal, Not Conceal

How can firms create an accurate picture with metrics? The keys are relevancy, rigor, and transparency:

  • Ensure metrics tie directly to strategic and financial priorities. Ignore vanity metrics that don’t drive performance.
  • Set specific, demanding, and realistic goals based on firm-specific data and capacity, not industry averages.
  • Calculate metrics the same way each time, based on accurate data with clear definitions. No fudging the math.
  • Assign metrics ownership to practice leaders responsible for performance. Metrics should illuminate their work, not the finance team’s.
  • Use rolling periods to identify trends, not just point-in-time data.
  • Review metrics in an open forum, allowing debate and discussion to enrich insights.
  • Share examples where metrics failed to highlight issues to encourage healthy skepticism, not blind trust.

Well-designed and honestly appraised metrics won’t tell firms what they want to hear; they’ll reveal what they need to know. The numbers don’t lie. However, firms must be willing to face inconvenient truths and take action if KPIs illuminate areas requiring improvement.

Beware of vanity metrics that merely make your firm feel good without providing actionable insights. Thoughtfully developed and correctly analyzed performance indicators help firms know where they truly stand and point the way forward. Your KPIs should lead and challenge you, not provide comfort through ignorance. Refusing to sugarcoat the situation keeps firms focused on actual progress, not just optics. With clear eyes, mid-size firms can use metrics to steer toward their strategic goals.