The Most Important KPI for your Law Firm’s Profit Growth

Key Performance Indicators (KPIs) are much more than just information. They measure the key revenue and cash flow activities of a law firm to ensure its performance.

Not enough firms understand the importance of measuring and taking action to improve the fundamental KPIs around production management, in order to improve margin.

The core production KPIs are:

    • File Velocity Days
    • Average Rate
    • Productivity
    • Write-on (off)

Two high-level KPIs that firms need to focus on to drive overall performance are Average Rate and Lock-up Percentage.

Focusing on these Two Numbers gives you a framework to drive improvement in profit and cash flow. Average Rate directly correlates to driving profitability, while Lock-up Percentage focuses on improving cash flow.

This article deals specifically with Average Rate.

 

What is Average Rate?

When we refer to ‘Average Rate’, we are NOT discussing an average of fee earner charge-out rates. Average Rate is the calculation of revenue billed over professional employee labour paid.

This figure represents the average amount of revenue earned, for every hour your fee earners (including principals) are paid to work.

Average Rate = Revenue / Paid hours of direct labour

This KPI can measure the performance of individuals, teams, departments, and the business as a whole. Average Rate measures performance by incorporating productivity, write-offs, and recoverability over direct labour costs. As this number increases, so does businesses profitability (margin).

Average Rate is the most important KPI in terms of profit when it comes time to review your practice.

Need help understanding how to measure and track your Average Rate? Watch the following video (4:55) to see exactly how Average Rate is calculated.

The Factory

Your efficiency has a major bearing on your Average Rate. For a legal firm, efficiency can be described as the ratio between revenue and the direct labour cost to produce that revenue.

The ultimate financial measure for an efficient practice is gross profit, and the higher your Average Rate, the greater your gross profit. To improve gross profit from an efficiency perspective, you must ensure you carry the right amount of labour.

To determine the right amount of labour for your needs, you must have a “capacity management plan”. The starting point is to determine the Efficiency Factor for each team and department and the business as a whole.

Key Activities

Below are some of the key activities you can take that will drive improvement in Average Rate:

      1. Manage file velocity daily and weekly. The shorter the period a file is in the office, the better the recoverability of hours charged
      2. Bill everything in WIP, no write-offs
      3. Always remind the client of the value in the solution you provide to them
      4. Define your core products / service offerings and set minimum prices for them firm-wide
      5. Increase your charge rates across the board
      6. Set a minimum Average Rate per hour for the entire firm and bill to achieve this rate

When was the last time you reviewed your practice in respect of these activities? Not sure where to start? Let us guide you.

MANAGE YOUR VALUE

    • If your price increases exceed perceived client value, clients will eventually leave.
    • Be wary of the impact that your production systems have on client experience in the changes that you make. Client experience is just as valuable as the advice.

Key Takeaways

Challenge what is possible within your business. From a production perspective, Average Rate will provide you with the KPI to use to monitor your progress.

Key takeaways:

    • Average Rate tells us ‘What have we billed for every hour of labour we have paid for?’
    • Gross Profit = Revenue minus direct cost to generate revenue (including fee earner labour)
    • The key to profit is leverage: The number of fee earners per equity principal and the ratio of revenue earned per fee earner to their labour cost
    • Efficiency can be described as the ratio between revenue and the direct labour cost to produce that revenue
    • Warning: Numbers don’t lie but they can tell you the wrong story if you don’t read them correctly

If you are struggling to identify which KPIs are important for your business, more importantly if collecting said data in its complete form is also an issue, start tracking your Average Rate. This KPI will set your professional business on the right track.

Not sure where to start? Let us help guide you.

On-Demand Webinar:

The Most Important KPI for your Law Firm’s Profit Growth – Average Rate

Interested to learn more? Watch our recorded webinar to further drill down on how Average Rate can set the foundations for your firm’s profit growth. .

Watch Now

Our webinars are an opportunity to tap into our knowledge and challenge your thinking.

 

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