The Ultimate Guide to Small Law Firm KPIs

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Don’t ever forget this: Your law firm is a business. Every law firm owner or managing partner must be able to measure the pulse of their business. How effectively and efficiently monitor what efforts are working, and what efforts aren’t? Can legal case management software really provide useful profitability forecasts and law firm reports? Using key performance indicators (KPIs) is one useful way to track your firm’s progress toward your its goals. Law firm KPIs help you understand that success is not how much time you spend practicing law, but whether the time you spend practicing law works.

Why Is It Important to Track Law Firm KPIs?

KPI is more than a buzzy Silicon Valley acronym. Collectively, law firm KPIs are measurable values that indicate how effectively your law firm is achieving its specific targets. That can include website traffic from potential clients to annual collected revenue, and everything in between. Tracking these metrics is essential for a few reasons:

Visualize Your Performance Trends

What happened last month is important, but are you looking at what happened last month compared to the previous month, the same month last year, and the year before that?

Improved Accountability

If your staff knows you are paying attention to productivity and finances, they are more likely to stay focused on tasks.

More Predictability

If you really understand how your law firm (your business) is performing, you will be much better equipped to make decisions about marketing opportunities, hiring needs, and outside of practice opportunities, like whether you should act as co-counsel for an out-of-state trial. With a projected annual revenue, you can predict where you will be at the end of the year.

Other synonyms for KPIs would be metrics and business intelligence. No matter what you call law firm KPI, the measurement of your firm’s performance will influence or empower you to make informed data-driven decisions to drive greater client acquisition, client satisfaction, success, and profitability.

Small Law Firm Objectives & Goals

As mentioned above, KPIs measure how effectively your small law firm is achieving its objectives and goals. Therefore, the logical step is to figure out what your firm’s objectives and goals are. Is it client intake, client satisfaction, billable hours, or money recovered? The firm goals and objectives you set for your law firm will depend on your practice area, firm size, location, and other personal factors. How you define success will also affect your objectives, and the KPIs you emphasize may even impact firm culture.

Here are a few ideas to establish your firm’s objectives or goals:

• Retain ______ (number or percentage) of new clients – monthly, quarterly, or annually.
• Increase revenue billed each month/quarter/year by $x.xx or %.
• Increase actual revenue collected (realization) each month/quarter/year by %.
• Identify the most profitable practice areas each month/quarter/year.
• Identify the most effective referral sources for new clients.

While you are drafting your objectives and goals, make sure you’re setting yourself up for success. It will likely be helpful for you to use the SMART system. SMART stands for Specific, Measurable, Achievable, Relevant, and Timely.

• Specific: Your objectives or goals should be clearly defined. Every member of the firm should know what you want to achieve. This is the what, why, and how of your objectives.
• Measurable: Your objective must be quantifiable. Without a measurable objective or goal, you won’t know the progress or when you have achieved it.
• Achievable: Objectives and goals should be challenging and stretch you to achieve them, but don’t not unrealistically beyond your reach. When you set an “achievable” goal, consider whether you have the financial and human resources to achieve them.
• Relevant: Is your objective or goal consistent with your practice? Does the objective or goal help the entire firm?
• Timely: Every objective or goal must have a target date. This will help you prioritize the tasks you need to complete to accomplish your objective or goal.

Once your objectives or goals are established, don’t be afraid to make changes or adjust them as you go. The objectives or goals you establish will help you create an action plan to achieve them, but they are not written in stone. Give yourself flexibility and stay focused on what you set out to achieve.

Data Is King

Data is the foundation of all your law firm KPIs. Without data, you can’t measure anything.

Also, you don’t want just any data, you must have accurate, complete, and timely data. If you’ve heard of the phrase “garbage in, garbage out” that is what will happen with your KPIs without good data.

The first step in getting KPIs is to get the data. Data gathering is the most difficult and arduous task of getting KPIs. Depending on the type of software, system, or process your firm uses, you will discover that your data is all over the place. Your data may be handwritten, recorded on spreadsheets, or in other document formats. This is where most firm owners and partners get frustrated and question whether it’s worth the trouble. However, don’t let the grunt work discourage you. The data you gather will pay off in the end.

Examine where your data lives. It may be helpful for you to follow the lifecycle of a case, from beginning to end, to determine the number of different systems you may be used in your office. For example, if you don’t have a case management system, how do you keep track of your files? Do you use some type of internal reference numbering system for your files? For timekeeping, do you use software or a manual system? Does the data integration with other applications? For billing, are you able to extract data from the software you use, or do you have to ask your bookkeeper or accountant to pull the data for you?

Once you have figured out where your data lives, the next step is to determine what data to collect.

What Law Firm Data to Track

New Matters

Without new client acquisition, new clients, and new matters, you won’t have a business. So, one basic KPI all law firms should have is how many new clients/cases/matters you are creating every week.

Matter Details

Whenever a new client retains your firm, there are several key details you should collect for KPI purposes.

• How did the client find you? You may think you know, but ask the client how they found you. Did they see your law firm website, an ad, or a client referral? They may know one of your previous or existing clients. You can get even more granular by asking why they chose your firm over another. This data will help you understand the effectiveness of your marketing channels.

• Matter type. If you handle multiple practice areas, record the type of matter prospective clients seek help with. This is helpful for gauging whether certain legal services are more profitable than others.
• Billing Details. Identify the responsible attorney on the case. Also, identify the fee type – is it hourly, flat/fixed, or contingency. This will help when compiling profitability information.

By collecting this information with matter management software, you will be able to focus your KPIs and metrics on the source of your new business. With some granular data, you can assess whether divorce cases are more profitable than real estate matters. You may find you can make more money by charging a flat/fixed fee for certain matters, and charging hourly for others.

Legal Time & Activity Tracking

As you work on client matters, you will need to track how much time you spend on each case. This is the most important data you can record to get a complete and accurate picture of your law firm’s profitability. Regardless of whether you bill hourly, fixed/flat, or on a contingency fee basis, you need to know how much time you spend to determine your law firm’s profitability.

If you charge a client on an hourly basis, it’s self-explanatory that you would track all your time. Tracking time is how you invoice your client. However, if you are like most firms, you don’t charge for all of your time because you haven’t kept track of all of your time. Also, you may not charge the client for the time your paralegal or assistant spends on the matter. Having accurate data on how much time you spend on a case will lead you to an accurate profitability rate.

If you charge a client on a fixed or flat fee basis, tracking the amount of time you spend on the matter is critical to your profitability. Many law firms make the mistake of not tracking time. If you do not track time, how do you know whether you or your staff are spending too much time on a matter? At what point are you no longer profitable?

If you charge a client on a contingency basis, tracking time is still necessary. Similar to flat or fixed fees, you want to analyze how much time was spent on a matter and whether the contingency fee was enough for you to be profitable. Also, if you ever must file for fees, an accurate and complete timesheet will provide the court with the evidence to decide in your favor.

When tracking your time and activities, the best practice is to track your time and activities contemporaneously. Contemporaneous time and activity tracking means that you are recording the time, activity, and matter as you are completing the task. Unfortunately, instead of using automatic lawyer time tracking software, many attorneys do not follow this best practice and instead “reconstruct” their time at the end of the week through guesswork. Inevitably, you will fail to charge for time spent or overcharge for tasks that you completed.

As stated above, billable hours are the most important data to capture. Without this data, you will not have an accurate calculation of profits. Time and activity data reveal where you can make the greatest improvement in your firm’s operation. Time is money, and this is the data you need to measure productivity and maintain quality of life and positive firm culture.

Determining Staff Costs

Determining profitability requires you to calculate how much staff time costs. It can simply be the hourly calculation of a staff member’s salary. You can also get detailed and incorporate costs of benefits, vacation, and other fixed costs into a staff member’s hourly cost.

For example, if an associate attorney’s salary is $100,000, the hourly cost would be $48.08 per hour based on a 40-hour work week for 52 weeks (salary / 2,080 hours). This simple calculation does not figure in benefits, vacation, sick days, and other fixed operating expenses. Adding 10% for other costs is a good start, but your accountant can get a more accurate figure depending on your jurisdiction and tax rates. A staff member’s cost helps you determine your profit per hour charged to a client, and the nonbillable costs involved for your staff.

Revenue Billed by Matter

Unless you are purely operating on contingency fees, you should be tracking how much you are billing your clients. Revenue billed by matter offers you a view into how much billable work you are doing and which matters are most active. You will use this data to determine your profit potential and realization.

Revenue Collected by Matter (Realization)

Revenue brought in by matter is a percentage number that is calculated from the revenue you collected on the matter divided by the revenue billed. It doesn’t matter how much you bill the client if you don’t collect. This data will also tell you if you should be invoicing clients more often, offer payment plans, or accept different payment options. Realization data will allow you to consider different payment strategies so you can get paid by your clients as much as possible – and as quickly as possible.

Compile Your Data

When you have figured out where and how your data is collected, the next step is to compile it for analysis.

Not an analyst? No worries. You can very easily compile your data in a spreadsheet, such as a comma separate value (csv) file type or Excel (xls) file type. This format will allow you to compile the data together in a spreadsheet which is easiest to work with. Most systems and software will allow you to export data in .csv or .xls format.

As you work to collect and compile the data, you will find yourself searching for solutions that are integrated so that you don’t have to manually collect or compile data. The ROI (return on investment) of technology comes from the elimination of redundant data entry. Therefore, if you are using legal practice management software, make sure it has the capability to track time and activities for each matter. Without this capability, you will be entering data multiple times and must use third-party software to collect it.

With Smokeball, you simply don’t have to worry about gathering data and compiling it. Smokeball is the first and only legal practice management software that automatically tracks your time and activities. By working from Smokeball, everything you do is tracked and automatically associated with the matter. This eliminates the need to manually record data – so billable hours are a breeze. This means more time to devote to your clients and cases.

Business Metrics: Law Firm KPIs to Track

Now that you have the data, let’s look at how to analyze the data and what they mean.

Client-Related KPIs

Unless you are doing very repetitive flat fee work, you have probably seen firsthand that not every client provides the same revenue. Some clients are just more lucrative than others. Look for trends in your client acquisition and existing clients – and measure your firm’s KPIs related to:

• Your average revenue per client
• How many lawyers represent each client
• The average length of time your firm represents your clients
• The average client retention rates
• The number of client acquisitions you bring in monthly, quarterly, annually, etc.
• Client satisfaction surveys and client feedback.

New Matter KPIs

Every law firm needs clients to thrive and you should be tracking how many new matters you created during a week and month to stay on top of your firm’s performance. To track this KPI, you need to keep track of how many new files you created. This is simply a sum of all the new matters you created during the time period.

New Matters by  Week, Month, and Year

As you continue to compile new matter data, you will be able to use bar charts to display any trends of your weeks, months, and years. This data will help you determine any seasonal trends, marketing effort influences, and how your firm is progressing over time.

In this view, you can see how many new matters the firm created in the last 7 days, the count of the current month, and the number of matters created last month. This will give you a quick view of how the firm is performing compared to last month.

As you continue to compile new matter data, you will be able to use bar charts to display any trends of your weeks, months, and years. This data will help you determine any seasonal trends, marketing effort influences, and how your firm is progressing over time.

New Matters by Practice Areas

As you continue to track this KPI, you will want to dig deeper and track the type of matters that are being created. This is especially important if you have a general practice and need to decide how to allocate marketing dollars. This is law firm business intelligence and will help you make data-driven decisions instead of using your instincts or gut feeling.

If you want to learn more about KPIs and how Smokeball can help you achieve your goals, visit smokeball.com or call us at 855-668-3206.

Law Firm Marketing KPIs

Compile the data from your matter details and client-related KPIs to get analyze your leads. You may be throwing away money if you are not spending your marketing dollars on the right channels. For example, if you recorded how the client found your firm, you can the data in a pie chart to show the percentage distribution of the marketing channels. By tracking this data, you will be able to shift marketing dollars and determine which referral source is most effective for your area, and the legal industry.

Staff Productivity KPIs

Measuring your team’s productivity is essential to ensure you are as successful as you can be. Individual performance KPIs frequently relate to:

• Billable hours (vs non-billable hours)
• Case progression
• Cost and fee tracking.

Practice management software can measure many of these metrics automatically.

Law Firm Financial KPIs

Your law firm’s financial health must be on your radar. Can you answer critical questions about the financial status of your legal practice, such as:

• What is your monthly billed revenue?
• What is your net overhead?
• What are your cash reserves?
• What is your net profit?
• What is your total firm debt, and is it increasing or decreasing?

Once you establish your goals, KPI reports should be prepared and analyzed on a monthly basis. If you’re not meeting your goals, you may need to change your strategy.

Fee Insights KPIs

Revenue Billed

Your billed revenue (the amount of revenue you bill in a time period) will provide insight to determine how “busy” you are. This data will also tell you how many hours of your day or the staff’s day is devoted to billable vs. non-billable work. You may be spending more time on non-billable administrative tasks than on client matters. Collect and analyze this data in weeks, months, and years.

By tracking the revenue that is billed by your staff, you are able to see how much work your paralegals and other legal professionals at your firm are doing.

Revenue Collected

For law firms, revenue received (money collected by you when clients pay their bills) is more important to measure your firm’s success than revenue billed. It doesn’t matter how much you bill if you can’t collect. In the chart below, you are able to see the profitability of each matter at a glance and the percentage of realization. The chart also tracks the number of hours, staff cost, revenue billed, and the realization rate calculated from the fees collected. You have a quick graphical view of how profitable your matters are. This type of dashboard allows you to take a quick pulse of your firm, instead of laboring over spreadsheets to view the data and measure success.

With data to compile the above KPI, you will be able to determine which staff members are most profitable. This comes in handy when reviewing employee performance.

There are several other KPIs that will help you monitor the health of the firm and Smokeball offers you the ability to see software usage, profitability by fee earner, and practice area-specific KPIs.

Next Steps in Your Law Firm KPI Strategy

Now that you understand what KPIs are, you can roll out your plan to firm success. Your next steps are simple:

• Determine your KPIs: they should align closely with your firm’s SMART goals.
• Include both leading and lagging indicators: You should look behind you, look at your present situation, and look ahead.
• Measure KPIs consistently: Legal practice management software can help with consistent reporting.
• Make data-driven decisions: When you track KPIs, you are not just making decisions, you are making informed decisions.

Like all change at your firm, buy-in comes when it is emphasized by leadership. KPIs only work if you know how to track them. Initially, there may be necessary training on generating reports. It will be worth it.

Legal Practice Management Software: Leverage the Power of Automated Law Firm Reporting

As a firm owner or managing partner, you must understand key metrics and be able to understand how your law firm is performing. Preparing KPI reports does not have to be tedious or time-consuming. As you saw in this article, defining your law firm’s objectives, and gathering and analyzing data isn’t always simple. But the best legal practice management software, like Smokeball, can help you achieve the results you want and get the business intelligence to do it.

Smokeball’s Law Firm Insights reports integrate directly with your automatic time-tracking data, putting the power of your metrics directly in your hands. Break down your Firm Insights by:

• Individual matter profitability
• Court and settlement date
• Matter type profitability
• Profitability by fee earner/staff
• Billing status
• Matter stage
• And more.

Whether you do criminal defense work, handle family law or personal injury cases, or any type of legal representation, we provide all types of law firms with intuitive matter management software. Smokeball is the first and only legal practice management software that automatically tracks all of your billable hours, time, and activities.

If you want to learn more about KPIs and how Smokeball can help you achieve your goals, visit smokeball.com or call us at 855-668-3206.