Benchmark your firm – How do you compare against the market?

 In Practice Management

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.

The importance of benchmarking

There is a real danger that experienced solicitors can convince themselves that they are perfect and know everything. Nobody likes to be told that they are imperfect and inefficient, but measured feedback can put people back on the road to improved performance. If a solicitor compares their performance with their previous year then they can be reassured that they are still improving. If they compare against a colleague then they can both learn from each other. It would however be far better to benchmark against all lawyers if the solicitor is to really understand their own performance and what is possible.

Availability of good benchmarking data

Most firms will tell you that they understand the importance of benchmarking but then don’t benchmark because they feel that other firms are not the same or because they think that such benchmark data is not available. No two firms will ever be identical, but there are always a number of firms that are not that different to your firm. Increasingly, good data is available as more and more surveys are undertaken in the legal sector and, in any event, you can always do your own research on your competitors to obtain some information. Arguably the largest and most comprehensive is the NatWest legal benchmarking report that I author each year. This is available for free download.

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What do we need to benchmark?

There are 5 drivers of profitability which when multiplied together calculate the profit per equity partner. These drivers can be best understood in the table below which shows how each benchmark is calculated and which shows what needs to be done to maximise the variable.

Profit Driver Calculated as…. Which means…
Gearing Total fee earners divided by total equity partners Getting the correct excellent people to do the legal work
Hours Total recorded chargeable hours divided by total fee earners Ensuring that all time spent on matters is recorded, rather than simply the time which can be billed
Rate Total value of time recorded divided by total recorded chargeable hours Doing the right work at the maximum price which the market allows
Recovery Total fees raised divided by total value of time recorded Ensuring that work is done with optimum efficiency and client satisfaction
Margin Equity partner profit divided by total fees raised Structuring resources to provide optimum support to fee earners

In addition to profitability, firms should also benchmark cash flow by looking at WIP days and debtor days. A firm goes bust when it runs out of money, not when it fails to make a profit.

The need for measurement

It is unlikely that any firm could ever be the best at all 7 of these key variables. When benchmarking, it is probably best to measure the performance of your firm against the upper quartile performance of comparable firms. Once you get to an upper quartile level it will become increasingly difficult to improve further. It is the variables where you score below upper quartile that time should be spent, as these are the areas where it should be easy to improve if you simply replicate what other firms are already doing.

If you don’t benchmark it is hard to improve. If you do benchmark it is easier to improve performance and to get buy in to the necessary actions.

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