As with other businesses, law firms rely on performance indicators to apprise the health of their business. However, given the distinct differences in its nature from other sectors, using the conventional business measurement protocols to track its performance, is akin to fitting a round peg in a square hole.
The business of law, as with most other professional services, has a strong emphasis on human capital. In the context of performance measurement, a perennial proxy of human capital is time – or more specifically, the utility of (the lawyer’s) time.
A snapshot on business performance measurements in a law firm
Utilisation is a commonly used way to track how the working hours of a lawyer are spent. Typically, we would equate the time spent on billable work against the total working hours. When we dissect a work-day in the life of a lawyer, it comprises time spent on client matters; as well as other responsibilities such as business development management, administration, and training.
The time spent on client matters, would constitute the ‘productive’ billable hours that contribute directly to the firm’s revenue. The importance of the non-billable aspects cannot be undermined, since they are the necessary evils upon which the foundation of the firm’s success is built on. Another element of human capital is the worth of the lawyer’s time – what is termed as Billing Rate.
The Billing Rate will commensurate with experience and seniority, although the market recognises other aspects such as domain knowledge, and of course – one’s track record. Whilst we are often guided by the market forces when setting billing rates, one should not be oblivious to internal running costs during the exercise. In this aspect, the sensible approach is to have a clear appreciation of what your billing rate is compared to your fully-allocated cost. This would give you an added layer of confidence in times of fee adjustments, such as determining the level of discounts.
Getting the balance right
Knowing how your financial health performance indicators stand is key – make sure you are striking the RIGHT balance based on your role in the firm so that more of your time is spent on billable rather than non-billable tasks.
There is of course a much larger array of measurement protocols, such as Realisation and Recoverability and Lock-up. For a more comprehensive understanding on the performance measurement framework of a law firm, as well as how Otters Online can help your firm maximise its billable hours by alleviating your burden on the other administrative areas, please contact our Virtual CFO at email@example.com.