Are we measuring the right things in our firm?
The problems with traditional management information
Most firms still produce monthly management information in a very traditional way, showing the profit and loss account for the month and year to date and the month end balance sheet. While this does provide an overview of performance, I am not convinced that such information necessarily results in a change in many behaviours.
More sophisticated firms understand that costs are normally heavily fixed and that really revenue maximisation is therefore the key driver of profit. To understand revenue, they will often look at drivers of revenue such as fee earner numbers, chargeable hours recorded and realisation rates. The problem now is that often senior fee earners will focus too much on their personal performance and not notice or care if the performance of more junior fee earners suffers consequently.
It’s time to try something different
I am regularly asked by firms “so what should we measure?”. There is no perfect answer and the answer will often depend upon the priorities for individual firms, but here are a few measures that would often be appropriate:
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- Team utilisation
While there is nothing wrong in measuring the recorded billable hours of fee earners, it can and does lead to senior fee earners keeping work for themselves, resulting in junior lawyers not achieving their time recording targets. Putting the emphasis on team utilisation should encourage everyone to record all of their time and now senior fee earners might appreciate that they have to focus more on making sure that everyone has enough work to do. In a subtle way, moving the focus from individual hours to team hours is encouraging more work to be delegated which should in turn lead to greater efficiency and profitability.
- Hours leverage
Hours leverage can be calculated by dividing the total number of hours recorded by all fee earners by the number of hours recorded by partners. The higher the resulting figure the greater the level of delegation. If a partner needs to score well on this measure, then they will probably encourage their junior colleagues to record all of their time. In many firms where partners look too closely at realisation, the opposite is true as partners encourage under recording to avoid the write off of time.
- Billed rate per hour
This is calculated by dividing fees raised by the number of hours billed. It goes without saying that we would like to be able to bill as much as possible per hour worked and therefore it is a number that should be tracked. If however work is delegated to a lower cost base then maybe the selling price per hour will also fall. We should be tracking both the billed rate per hour and the salary cost per hour if we are to better understand our gross profit margins.
- Number of clients or average annual billings per client
Most firms see a higher number of clients as a good thing. Many of the most profitable firms target a reduced number of clients but with clients that can generate higher levels of fee and profit than the existing clients. Each year it is helpful to measure what percentage of income was generated by the 20 largest clients. Profit is likely to grow quickly if this percentage increases over time.
Looking at too much information or the wrong information is unlikely to help people to perform better. Maybe it is time to sit down with your colleagues and reflect on what you currently produce and decide whether it is fit for purpose?
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