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
- 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.
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.
Below are some of the key activities you can take that will drive improvement in Average 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
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.
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.
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. .
Our webinars are an opportunity to tap into our knowledge and challenge your thinking.