Don’t mistake activity with achievement. – John Wooden
This is the 4th post in our discussion of Profits Per Partner. As the three previous posts reflect, I believe that PPP is a poor measure of an organization’s performance, and its use often drives destructive behavior. (See Profits Per Partner – A False God For Law Firms here; Profits Per Partner – A Brief History here; and Profits Per Partner – Damage Done here.)
So, if not PPP what metric(s) should law firms use to monitor performance?
I would suggest that for any metric to have value it must provide insight into an organization’s pursuit of its goals. And though every firm is unique, possessing its own set of goals (short and long-term), there are a handful of categories that, if monitored and measured, will deliver this insight for most law firms. Here are three that provide an excellent yardsitck:
- Client loyalty
- Workplace satisfaction
- Financial performance
For an organization to do more than simply survive it must nurture a continuity of client relationships. In today’s market this means, among other things, that you consistently meet and exceed client expectations. An increasing number of firms are developing processes that routinely monitor performance as seen through the eyes of their client. Client surveys, face-to-face interviews and strategic focus groups are effective mechanisms. And, when framed and constructed appropriately, these mechanisms can deliver meaningful performance benchmarks.
Here is an interesting example of a questionnaire used by the Reese law firm. And this survey the Kuck firm employs the easy-to-use and affordable Survey Monkey tool. Regardless of the approach, an on-going awareness of how clients feel about your firm’s service is a key metric.
A second (and sometimes overlooked) critical area for an organization to monitor is how professionals (lawyers and other professional support personnel) feel about the firm as a place to work.
How exciting it must have been a few months ago when Baker Donelson was named the 31st “Best Place to Work in America” by Fortune Magazine . Baker Donelson has appeared in the top 100 on this list for several years running and was 1 of 6 law firms to win the honor this year. The other five were Alston & Bird #40, Perkins Coie #41, Bingham McCuitchen #60, Arnold & Porter #81 and Cooley #100. By any accounting, this is an impressive measure.
It is widely acknowledged that happy professionals produce the highest quality work product, are more likely to stick with a firm during periods of stress and are central to the ability to recruit other professionals. Yet, notwithstanding the fact that HR handbooks and recruiting platitudes often speak of “our greatest resource” when talking about the people that comprise the firm, this “resource” is often forgotten when it comes to the metrics used to identify value and performance.
In fact, there are multiple ways to measure employee satisfaction. These include rate of turnover, rate of internal referrals and employee participation in “firm culture initiatives.” Additional benchmarking can be accomplished through internal communication efforts, surveys and interviews.
Whatever tools might be tapped, when professionals believe their input is valued and taken seriously, the results become quantifiable.
Certainly, a law firm must remain financially viable. Our analysis and critique of the PPP metric is not intended to suggest that financial metrics are not a key part of the equation. Some indicators of a high-performing, healthy law firm include:
- Prudent Debt Management. An inability to service debt has led to the premature death of far too many law firms, including a few reporting veryattractive PPP numbers right up to the end.
Firms generally utilize two types of debt: a line of credit for operating purposes; and term debt for financing growth, and asset purchases.
A basic indicator of the financial health of a law firm is the degree to which the firm leans on this credit. A healthy firm minimizes the use of a line of credit, and is totally out of it for six to nine months — certainly by fiscal year-end. Prudent firms will strive to eliminate the use of a line of credit for operating purposes.
Term debt should never exceed the net book value of a firm’s hard assets. Over time, healthy firms manage term debt down to less than 50% of the value of net hard assets. A debt free law firm has much less stress, and is likely on a high-performance path.
- Accurate Financial Planning and Budget Realization. All well run law firms operate with a budget that includes an anticipated net profit. How frequently a firm meets its financial plan is an indicator of a strategy that is aligned with realities of the market; and consistent monitoring of this measure will result in better planning and greater confidence in the firm.
- Margin Percent. The difference between Revenue Per Lawyer and Cost Per Lawyer* yields a firm’s Gross Margin. As long as gross margin is increasing, the firm is generating enough profit to distribute an increase in income to lawyers. If this gross margin is declining, raises are inappropriate and you should look for other signs that indicate stress.
There are many approaches to developing appropriate metrics for a law firm, and they all begin with a clear understanding of and agreement on the firm’s goals and aspirations. Don’t believe the one-size-fits-all metric of Profits Per Partner will provide you and your firm with any insights into real productivity or long-range stability.
What other metrics does your firm use?
*Cost Per Lawyer for this purpose is all cost (excluding lawyer compensation) divided by the total number of lawyers