At the outset, it's important to establish some context for the subjects we cover in this article to maximize what you learn and minimize any stress brought on by the topics of performance analytics.
A financial dashboard for a law firm works on the exact same principle as the one in your vehicle. You don't drive your vehicle by watching it alone; rather, it helps you know how you are progressing in getting to your desired destination.
Law firm financial dashboards should focus management and partners on those key performance indicators (KPIs) that are critical to the success of the firm. Because we tend not to use that which we don't understand, the presentation of the information must be in a style—that combination of words, numbers and graphs/charts—that is most meaningful to the audience. As with a car dashboard, too many gauges simply distract and lessen their value—and warning lights may be ignored until it's too late.
Converting indicators to KPIs
When a group of lawyers get together, it's not uncommon to hear them talk about indicators, some of which your firm may track and some you likely have no earthly idea what they are talking about. This is no cause for panic. No firm will use all of the potential analytical measurements of law firm performance, no matter how large or small the firm. One of the key reasons for this is the importance firms place on specific KPIs, which will change over time as the firm changes and evolves.
So the question is, what makes one or more of the various performance indicators change from being "that's nice" to a key performance indicator for your firm? An indicator should meet the following three criteria to qualify as a KPI for your firm:
- It must reflect the firm's strategy and goals.
- It must be key to the firm's success.
- It has to be quantifiable.
The nature of your firm's practice will also affect its selection of KPIs. For example:
- Transaction-focused firms will undoubtedly have different KPIs than relationship-focused firms.
- Billable-hour-driven firms will have different KPIs than tariff-driven firms.
- Firms at a growth stage in their life cycle will have different KPIs than firms at a succession or mature stage.
This is not to suggest that all that matters in a law firm can be counted, but rather that what gets measured is what gets done. Therefore, if an indicator is not quantifiable, it is not likely that it will be incorporated into your firm's decision-making process—which may, in fact, cause underlying issues to go unaddressed and not enable you to achieve maximum financial performance.
Leading or lagging indicators
Continuing the car dashboard analogy a little longer, some of the gauges are important to understanding potential issues down the road, such as the fuel gauge, the temperature gauge, the tire pressure gauge and so on. And some are meant to tell you how you are progressing to your original destination: the speedometer, the odometer, the fuel gauge and so on.
KPIs that make you consider issues that may be just over the horizon are referred to as "leading" indicators, and those that measure the results at a particular point in the firm's evolution are referred to as "lagging" indicators. As you can see from this example, a KPI can be both leading and lagging based upon what you are using it to measure.
Ian Gotts, in a March 2009 BPTrends article on leading versus lagging indicators, coined the question, "Are your managers operating as company doctors or coroners?" His premise is that "things can start to go wrong in a business well before the performance measure turns the traffic light on" a financial dashboard that is focused on lagging indicators.
To translate this point into meaningful terms to law firms, the following chart divides a sample of common KPIs in law firms into the two categories:
*This is the sum of the unbilled work in progress and accounts receivable divided by the average fees billed on a daily basis for the past 12 months on a rolling basis (the most recent 365 days, not a fixed year).
Do-It-Yourself Financial Dashboards
Due to the stage at which the legal profession finds itself regarding its usage of KPIs, much of the accounting software suitably priced for solo practitioners and midsized firms does not make the tracking of leading indicators an easy exercise. In fact, only in recent years have the large law firm software packages offered "dashboard modules"—and they are still of questionable sophistication, with many firms developing their own internal remedies for mining the required data.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.