Must-track metrics to improve law firm profitability
Are you doing everything you can to improve law firm profitability?
In today’s marketplace, growing a profitable law firm can be challenging. As you work hard to keep up with client demands and maintain healthy profit margins, taking time to track and analyse your firm’s performance and effectiveness can be overlooked.
Tracking profitability in a systematic way can provide you an early warning when important factors are out of range. Metrics – a quantifiable measure used to track performance – can help you identify where you need to invest time and energy into changing so that you can enjoy increased profitability. In short, tracking the right metrics can give you the focus you need to ensure you’re dedicating time to what matters most.
Metrics to track law firm profitability
In simple terms, profitability can be understood as total revenue minus total expenses.
To focus more sharply on profitability, you can also drill-down on revenue and expenses by practice area, partner, client or full-time equivalent timekeeper (FTE). For example, a certain practice area or client may be more profitable than another. Knowing where your firm is most profitable (and where you are losing out!) can help you prioritize efforts and create a unique position in the market, boosting your competitiveness.
For your law firm, the main form of revenue generation is client billing. Whether you bill by the hour, flat/ fixed, contingency models or by any other alternative fee arrangement (AFA), it all comes down to the good old “time factor”. Therefore, your timekeepers’ productivity numbers are crucial to understand how your revenue contributes to your profitability. Timekeeping lets you understand the time spent on each task by each employee and if or not it contributes to your revenues. It also helps you determine how profitable certain cases are and which ones consistently affect your profits negatively.
Calculating total expenses can vary depending on your firm, but will likely include both direct cost (like salaries, payroll taxes, etc.) and indirect costs (like occupancy expenses, support staff salaries, equipment costs, etc.).
Using metrics to improve law firm profitability
Improving profitability requires a combination of sound expense management and a solid plan to increase revenues by working harder and smarter. To do this, firms need to use the insights provided by tracking metrics to improve how they work, mainly by better leveraging staff and increasing realization rates. To learn more about how to reconfigure your organization to make the most of the time you have, download the free guide “Metrics for the successful law firm”.