As a service-based profession, law firms have to keep a careful eye on their production metrics: That means understanding how busy their people are but also how efficient.
Under the umbrella of production metrics, we have several Key Performance Indicators that partners can use to gauge the success of their firm at any point in time. But we refer to them as ‘levers,’ because we want to empower firm owners to think about the ways they can ‘pull’ these non-financial metrics to boost their profitability.
Let’s take a look at how production metrics work, as they relate to hourly billing firms.
Lever Number One: Utilization
We define utilization as the number of hours billed to clients compared to the time available to work. This can be calculated in several ways: you can assume a standard work week for everyone, or you can deduct PTO, CLE, and other non-billable time when calculating utilization. For legal staff with considerable administrative or managerial work, you may want to calculate utilization using this latter approach so that when it comes to compensation review, it doesn’t appear that they are less productive than those who bill higher in terms of gross hours but do less non-billable work.
If your utilization is low, this is the lever you need to pull. How? By developing more business or freeing up your high-paid attorneys from their administrative duties so they can dedicate more time to billable work (and avoid burnout).
Lever Number Two: Charge Hour Expectation
Part of utilization, this number is calculated by looking at a weekly expectation for a normal work week, without holidays or training courses. If an attorney has 45 hours per week, the maximum available hours for the year would be 2340 – but then there is PTO, CLE, etc. that might bring down the charge expectation to 1800 hours. That would mean a weekly hour expectation in the low 30s.
Lever Number Three: Standard Bill Rate
That’s the amount you price the client matters. For an hourly firm, your standard bill rate is what’s in your quote, or your signed agreement with the client. But even if you don’t bill hourly, the standard bill rate still applies for flat-fee quotes: You estimate the number of hours the matter will take, times your standard bill rate. A lot rides on your ability to successfully estimate those numbers, so we recommend you track time and verify how close you come each time you provide flat-fee services.
Lever Number Four: Average Bill Rate
This number is important in comparison to the standard bill rate. The average bill rate captures what actually happened, so instead of multiplying expected hours with the standard bill rate, we look back at the revenue and divide that by the number of billable hours worked.
If it comes out to a completely different number, that’s likely because you worked more than expected and can’t bill for it. But if you finish the job quicker than expected and there’s client value, you can mark up the hours, which increases your average bill rate. That’s when you know it’s time to raise your rates.
The main issue here is to keep on top of how accurate your quotes are. A one-off markdown isn’t going to break the bank, but if it happens across the board you need to figure out what’s going on.
Lever Number Five: Increasing or Decreasing FTEs
An FTE is a full-time equivalent professional, and in this case, we’re talking about time-chargers, the people who generate revenue. We want to look at how many FTEs you have, what you’re paying them, and how much revenue they’re producing. That allows you to answer several important questions: Do you have the right number? If you add an FTE, how much increased revenue and profit will result from that investment? On the flip side, do you need to reduce your staff?
Within the category of FTE, a law firm will want to consider how many partner- to non-partner attorneys you have on staff. If your ratio is on the low side, you want to look into improving your leverage and, along with that, figuring out what repeatable tasks you can pass down to the less experienced staff. You’ll need to create processes with appropriate training and supervision, but then your partners will free up valuable time to work on the business, allowing exponential growth.
Using the Utilization and Standard rate metrics, the following calculation determines what each professional should generate in revenue. Assuming 10 FTE professionals, you can calculate the potential revenue that your firm is able to produce. Plug in your own numbers and see how far off you are.
Together, these five metrics allow you to answer important questions about your firm, including one of the most essential: Your effective rate – How many hours does a staff member have to bill before you start earning a profit?
When you can answer that question, it becomes much easier to figure out if now is the right time to bring on more attorneys, because you can see how much work you need for them right now to break even. Then, you can compare the answer to one of our other favorite metrics: pipeline. Do you have enough client work signed – or about to be signed – to justify a new hire?
If you bring on an FTE without having the client work to support that addition, the overall firm Effective Rate will go down, which we try to avoid.
By pulling these levers, you improve your bottom line today, but you also learn to adjust your billing and forecasting going forward. Our clients monitor these numbers carefully and regularly, which helps them avoid surprises and bad decisions.
Remember: A lever can be calibrated exactly where you want it. You can also pull each one in combination with the others. If you need to increase your billing expectation, you can do it in increments and then see if that’s enough.
A lot of lawyers fear increasing their standard rate, because they worry it will cause them to lose clients. But if you try a slight adjustment in your forecast, you can see what happens if you increase your standard rate 10% and lose 1-2 clients: you’ll most likely still be well ahead. Another option is to boost your average bill rate by increasing training or creating more efficient processes – a great way to earn more without raising rates.
Levers allow you to adjust your firm’s direction without throwing everything off balance. If you feel you need to make a change in your firm, pull a different lever and see if you like the outcome. If you don’t like your outcome, change your input.
Sit down with these numbers, and you can see the outsized impact even a small change in a lever can have – potentially hundreds of thousands of dollars, depending on how many full-time equivalents you have.
Interested in reading more about levers? Check out my newly released book, Judicial Dollars and Cents.
If you’d also like to learn more about how we advise our clients on improving their profitability, check out our virtual CFO services for law firms.
