Getting better (at getting better)?

As the climate of uncertainty continues, law firms may wish to consider whether their investment in management information in recent years has paid a clear dividend.

By Robert Mowbray

I have witnessed the unbelievable explosion in ‘management information’ systems in
law firms over the past 20 years and I keep finding myself asking: ‘has the investment been profitable?’ Two decades ago the legal profession was very different and there was little need for management information as lawyers could charge for the time they spent on matters with little pressure from clients, who believed they could not really negotiate with firms on their rates. By turning up at work a solicitor was almost guaranteed to earn a comfortable living.

Today the landscape is completely different. There are new competitors entering the legal marketplace, while clients have learned to negotiate with their lawyers and to use their bargaining power. Developments in technology have resulted in major changes to the way in which lawyers work. There has been a recognition that to remain competitive a firm must invest in better information systems to provide more up-to-date feedback to lawyers on their performance, allowing them to learn from their actions. The problem has been that with so many requests for different types of information, however, the average lawyer is now drowning in a sea of information and is perhaps unable to see the wood for the trees.

I am also interested in why the huge investment in management information has not necessarily resulted in any sizeable change in performance. Highly-skilled accountants do an excellent job of collecting, sorting and collating relevant data and formatting it into useful management information, which is then distributed to fee-earners. The questions that then need asking and answering are:

Do fee-earners read it?
Do fee-earners understand it?
Do fee-earners take ownership of it?
Has it resulted in a change in behaviour?

If you answer these questions honestly, it becomes clearer what still needs to be done if the distributed information is going to have a profitable impact on the performance of both fee-earners and the wider firm.

Many clients are now regularly asking me to advise on three things:

What information should be prepared for fee-earners to enable them to perform their roles?
When should fee-earners look at this information?
How should fee-earners use this information?

The first question is effectively asking what the key performance indicators (KPIs) are for a fee-earner, as there is a danger of this information being lost in a pile of less significant data. It is always a good idea to make sure that KPIs can be communicated on a single sheet of paper or a single screen.

So what are the traditional KPIs?

There are a number of ways of looking at how you might like to structure KPIs. At its simplest level, a law firm is a very simple business that attempts to turn time spent on client matters into cash. If this is the model followed, the KPIs for fee-earning work that might follow this process are:

Hours recorded (month/ year to date);
Work in progress (WIP) total – (£/days lock up);
Fees (month/ year to date);
Recovery (month/year to date);
Debtors total (£/ days lock up);
Cash received (£).

A trainee might only be able to influence the hours recorded, while a partner should take responsibility for all the information, so it is important to think about how much of this is shown to people at different levels of seniority. As the performance of a team is always more important than the performance of an individual, it is always helpful to let people see performance at a team level in addition to that at a personal level.

When should the information be reviewed? A monthly review of this information should give a fee-earner a feel for how they are performing and help them to understand what they need to focus on to ensure that their performance looks better a month later. Having looked at this headline performance information, a fee-earner then needs to think about how regularly they should look at more detailed information to do their job and meet the expectations of clients and the firm. For example, an employment lawyer might say it is necessary to look at detailed WIP once a month to do their billing while a corporate lawyer working on a large deal might want to monitor WIP on a daily basis to keep the client properly informed of costs.

How should fee-earners use the management information that they review? Fee-earners should see it as feedback on their performance and as a way of improving that performance and that of the firm. Whether a target is beaten or missed is not really the issue. The important thing is that fee-earners think about their performance and whether there are things that they could do to improve their efficiency. If management information is used effectively, it will be seen as an investment of time and not as a waste of time.

Another useful set of KPIs could be to calculate the five drivers of profit per equity partner (PEP), namely:

Gearing (restricted by the complexity of the work undertaken);
Hours recorded (restricted by how hard people are willing to work, which is a function of
pay levels);
Average recorded rate (restricted by the complexity of the work undertaken);
Realisation/ recovery rate (optimum level seems to be around 90 per cent);
Margin (good firms achieve margins greater than 33 per cent if efficient).

If feedback is to be given on these KPIs, it is important to have sensible benchmarks to measure current performance against. The question, of course, is what a sensible benchmark is. My preferred way of benchmarking is to take the upper quartile point from a survey of firms doing comparable work. In the UK we are fortunate that large surveys have been done for many years, and there is a vast amount of information available to those willing to look. It is reasonable to think it is possible to be above average (upper quartile) at everything, but unreasonable to think that you could be the best at everything. For example, if your charge-out rate was £25,000 per hour, you would be the highest priced, but it is unlikely that you would also be the upper quartile for realisation! The danger in many firms is that they try to get even better at the thing they are already good at, rather than concentrating more on other variables, where it would be relatively easy to improve.

If you want to broaden KPIs out to a wider range of things than financial-management headings for partners, you could also structure your KPIs around the following model:

Rain making – the ability to generate more work whether that be from existing or new clients;
Delegating – the ability to push work to the right level, resulting in improved quality, lower cost of production and the ability to hit tighter deadlines;
Supervising – managing work effectively to ensure efficiency and control costs;
Billing – effective and regular billing resulting in high fees and lower levels of work in progress;
Collecting – consistent and proactive credit-control processes, resulting in low levels of debtors;
Developing – self, team, new services and new products;
Leading – finding time to develop a longer-term strategy that is effectively communicated to
team members.

It is hard to argue against this model, which neatly describes what successful partners should be doing. It is interesting to note how many partners can get so wrapped up in the complexities of a current client matter that they actually spend very little, if any, time on the above activities. If partners were given feedback on these KPIs more regularly, they might begin to change their behaviour.

While some of these KPIs are easily measured from the financial results, some of them are harder to measure, and therefore sometimes get overlooked. For example, it appears difficult to measure someone’s ability to delegate, but a financial measure of this for a partner could be fees (or profit) per partner hour.

A more ‘profitable’ future

As there is probably now too much information being distributed to fee-earners, it is easy to see what could be discounted, but it is harder to see what may actually be missing in all of this information and analysis. While there is merit in distributing the information described above, there is a limit to what it can achieve, as all the information is historic and focuses on volumes of work done represented by hours recorded or fees delivered. This is very dangerous, because as clients get more sophisticated at negotiating discounts in rates there is a real danger of earning a huge fee but no profit.

It is right, therefore, to think about introducing another type of management information; one that that is entirely predictive, and purely focused on profit, as this is what any law firm is ultimately trying to generate.

I have worked with a number of major firms on the establishment of these new information systems. It starts with a spreadsheet for every matter, which tries to predict the process that will be followed to undertake the instruction. Time is then allocated to the appropriate fee-earner, and once the spreadsheet is complete it is possible to apply both charge-out rates and cost rates to the time budgeted. This results in two numbers being generated; the fee, which is of interest to the client, and the profit, which is of interest to the firm. There are always discussions around the ‘cost’ of an equity partner, and whether it is right to calculate profit at the gross or net level, but the key thing is that it is now possible to predict the level of profit, rather than just waiting to see if it appears.

A spreadsheet model, as described above, can also build in different pricing arrangements such as blended rates, fixed fees or performance-related fees. By using such a model before a matter starts, it is possible to arrive at a way of doing the work that would meet the expectations of the client in terms of price, but perhaps deliver an even higher profit to the firm. This must surely be a better way of running a firm than waiting for historic information to be produced some time after the matter has been completed.

I would encourage all firms to think about the information they are distributing to fee-earners, and to answer, honestly, the following questions:

Are we distributing too much information?
Is there additional information that we should be distributing?
Do fee-earners read, understand and take ownership of the information provided?
Is the firm benefiting from the investment that has been made in management information systems?

If the answers are not ‘no’, ‘no’, ‘yes’ and ‘yes’, you need to do something new and now.

Robert Mowbray is a partner at Taylor Mowbray LLP, and is a consultant to Macintyre Hudson LLP. He is the current author of the annual financial benchmarking survey undertaken by the Law Management Section of The Law Society.