December 29, 2008 5:45 AM

Welcome to the Future: Metrics Count

Posted by Paul Lippe

I recently spent some time with a reporter who remarked that there was a range of thought processes about business, strategy, and management that lawyers don't experience unless they've been exposed to environments outside a law firm. Michael Huber has a background that straddles law and other businesses--he worked in senior level positions at Anderson (now Accenture) before becoming an independent consultant focusing on process, technology, operations, strategy, and customer service for  professional services firms, including law firms. He has given a lot of thought to how efficiency-oriented approaches like Accenture's can be applied to law, and what firms must measure in order to achieve greater efficiency.

Mike, you state that there is great opportunity for law firms to look at a new set of metrics versus the ones they have been using for years. Tell us more about this opportunity.

Law firms, for the most part, have been fortunate enough to have a long boom period, and therefore the need for different measures has not really existed. Firms have always known their bottom line via monthly, quarterly, and annual financials, focusing on one of the most fundamental measures of law firm success--profits per partner (PPP) But as the last few months have shown us, volatility is here in a big way and PPP is under attack. For the foreseeable future, the top line likely will shrink, and with expenses high the bottom line will look weaker and weaker. While you may be able to cut costs somewhat to improve the bottom line, growing the top line is in question.

Until now there has not been a burning platform for change. However, much has been written recently about the end of the heyday of annual double-digit PPP growth. A lot of signs seem to support this belief: an uncertain economy, increasing wage costs, decreasing productivity, and slowing collections. Add to this the evolving legal marketplace and its implications: growing client sophistication, convergence,  fee/rate pressure, an increasingly competitive environment for both clients and talent, and the need for more enabling technologies to lead to better, faster, cheaper work. The profit squeeze is on.

Law firms have made significant investments in their business over the past few years, particularly in marketing, business development, and sales training. How, if at all, have these efforts been effective?  And is it enough?

These efforts have likely been effective in generating awareness and helping firms to acquire new clients and additional revenues, but I am not sure the [necessary] tools and metrics are in place to quantify the impact. How can you brand if you do not validate, quantitatively, that who you are is supported by what you do? How can you target clients and develop business if you do not know what your current clients are buying and what industries/practices/matter types are the most valued? A deeper look at operational and profitability measures can help answer this.

What kinds of measures would you suggest firms capture?

Most firms have always looked at a standard, backward-looking set of metrics which include: timekeepers by level, hourly rate, hours billed, revenue per lawyer, revenue by practice area,  revenue by office, top 10 clients, and realization rates, etc. They usually look at these over a three- to five-year period. That set may have sufficed in the past, but a lot more sophistication is needed [today]. You need to evolve from being backward looking, and moving to present-day analysis. Eventually you will use these new metrics for future strategic planning.

It's about capturing the information and acting on it to be able to provide the feedback to the other disciplines to enable continuous improvement and effective tactical decisions. The analysis provides a feedback loop to other disciplines--i.e., marketing for client satisfaction surveys, industry analysis, competitive analysis, client teams, lateral recruitment, attorney education needs, confirmation of market strengths and potential areas for growth, and M&A. It's about running the law firm more as a business--a concept frequently mentioned but likely far from universal in application.  While firms may aspire to make this transformation, they lack many of the tools required to get there and stay there.

Who in the firm do you think is best suited to take on this challenge?

There’s a lot going on every day between the top and bottom lines, and I am not sure who in the firm can bring it all together in a meaningful way. It requires a multidisciplinary look at a number of items, including financial statements, client teams, marketing and business development, and strategy [--among other things]. These all intersect, and the analysis and interpretation of the information likely lies beyond the COO, the CFO, the Exec Director, or any other single senior management team member. This is a new way of looking at the business of law. It requires a new set of eyes and a new set of data. The information flows from a number of different areas, but since no one is there to catch it all at the intersection point a lot of it likely falls into a black hole. The activity intersects in an area of what I call Operational Metrics - what is the nature of your work saying about who you are, and as important, how do you use the information for adapting your strategic and tactical plans.

It sounds like this will require a lot of work and will need to be constantly monitored.

Absolutely, this is not a one-time thing or something to do as part of a strategic planning exercise. Firms will need to put a process in place to regularly monitor the measures, interpret them, and decide on corrective actions to send back out to the various firmwide areas. It takes discipline and focus to use the information to develop innovation and enable transformation and change. 

Firms will have to consider and analyze several questions, including:

-What is our client segmentation/revenue banding--does the 80/20 rule apply?  Or does more than 80 percent of our revenue come from less than 20 percent of our clients?

-What lies beneath the averages?

-What has been commoditized?

-What has been our overall change in number of clients, especially high-value/high fee?

-How much revenue is predictable or recurring?

Have you done this type of analysis before?

I have done some of this type of analysis as a part of various projects at Am Law 200 firms, and I think the results can be very eye-opening at first and could challenge the internal view of what the firm really is. Do you view yourself as a full-service shop, a specialty shop, somewhere in-between? How has that changed over the last 3 to 5 years? You may believe that you have a broad base of corporate clients that is the backbone of your practice, but when you dive down, the numbers may say you look more like a retail shop with the majority of your matters being of low dollar value and for individuals.

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