Measuring the difference: law firm metrics

One reasonable response to my recent posts suggesting KM delivers most value when it acts as some kind of irritant to conventional law firm practices is to ask “how can one know when things have improved?”

I have tried answering a question like this before, but this time I want to approach from a different direction. Previously, I looked at how much a firm might reasonably invest in knowledge management (the input). This time, I am more interested in outcomes.

When considering law firm financial matters, my first call is usually to Bruce Macewen’s site. As expected, I was not disappointed. A commonly used public measure of law firm health is a simple one — profits per equity parter (PPEP or PEP). The legal media like it because it gives them a handy figure to build into headlines and league tables. But actually it tells us nothing meaningful — it is too easily gamed. Bruce dislikes it too, and in one article suggested a host of alternatives that firms could use for themselves.

• On the quantitative side:
  • Revenue Per Lawyer
  • Compound annual growth rate (CAGR) of revenue over a multi-year period
  • Realization rates (implying, I would argue, clients’ perception of value-for-services-received)
  • Associate retention rates (or attrition rates, measured negatively)
  • Percentage of business from clients of long-standing duration (say, more than 3 or 5 years)
  • Percentage of all legal spend from top 10 (20/50/100) clients
• On the qualitative side:
  • Client satisfaction
  • Lawyer morale
  • Commitment to and investment in professional development
  • Commitment to and investment in such things as diversity and pro bono
  • The quality of firms the firm takes lateral talent from and the quality of firms they lose lateral talent to
  • The quality of firms the firm wins assignments from and the quality of firms they lose assignments to
  • Quality and morale of professional and support staff.

Any one of these would be a good starting point for assessing the value of any activity within a firm. If one makes a change and then sees a shift in one or more of these measures, it is possible to ascribe the shift to the change. However, there are two very important caveats.

First of all, it is important not to cast any of these metrics as targets. Setting a target doesn’t help people understand what they should do to meet it (and also implies, rather rudely, that people aren’t already doing all they can to help the firm perform at its best).

Secondly, many of these performance indicators depend on a huge number of interrelated variables. Take the first, for example: revenue per lawyer. (I would prefer to measure this by reference to all employees, not just lawyers, especially as law firms come to rely increasingly on non-traditional roles for client service.) This is a metric approved by McKinsey, and is easily measured and reported. It makes particular sense in a business that depends on people to deliver a service. A large firm with significant fixed costs (buildings, insurance, technology and other infrastructure, for example) will find it hard to make a real change to this number without also affecting some of the intangible factors — client experience, staff turnover, etc. It would be foolish to hope that a single activity (whether that be better knowledge management or improved marketing) could be responsible for a real change in the firm’s financial health. Things are too messy for that.

So how should we approach the problem? This raises four questions for me:

• Which factors matter most to the firm?
• What variables might affect the selected metrics?
• What does the firm know about those variables?
• What can be done to improve things?

The first should be obvious. There is no point addressing revenue per lawyer (or profit per employee) if the firm is actually more bothered about its exposure to a small number of key clients than about its profitability at present. This is a strategic question, but I think few firms have such a clear view of their priorities without seeing a list such a Bruce’s of the issues that might concern them. Once they do, it is important to work out which factor is the most important — which will always command more investment than any other?

The second point is an expression of my second caveat above. Once we know what really drives the firm — what is its highest priority — we need to understand how performance in that area is influenced by activities, actions and culture within the firm as well as the wider environment. That might be possible as a desk exercise, but it is a task better done by engaging with a wide cross-section of the firm.

This is the third point — in most situations, the collective knowledge of the firm itself will give the best insight into how things are now and what might be possible in the future. That engagement could uncover knowledge about clients and their markets, about the firm itself and the people within it, and about infrastructural or other opportunities and challenges. Exposing this knowledge is something that should be at the heart of the firm’s knowledge activities. A survey won’t do — what people say when they mean what they say needs to be carefully uncovered and intelligently analysed.

Once there is a better understanding into the way things are, the firm can start to think about what activities and actions might change things for the better. Sometimes that will be an obvious choice, but often it will be necessary to test a number of different actions and see which ones make a lasting difference.

Sadly, many firms start with the fourth step. Worse than that, they invest significant sums in large-scale activities that they cannot then prove to have the benefits they expected. The result? At least, wasted time and money. At worst, disenchanted clients and people, to the extent that the firm risks collapse.

If you are interested in going about things the right way, using this four-stage process (or something tailored to your needs), please get in touch: I can help.