Performance measures: an in-house perspective

The flexibility of the balanced-scorecard approach to performance management has made it a hugely popular theory, implemented across many industry sectors, be as it may with varying success. How far should it now be applied to the legal profession? Gwyn Price, a consultant to American Express and visiting professor at Nottingham Law School, compares performance-measurement strategies at law firms and in-house departments to see how much has been learnt and what needs to be done to make lawyers truly part of “learning organisations”.

A recurring theme at conferences for in-house lawyers is the importance of adding value to a client’s business. Lawyers may feel that they make a major contribution to business activities and that they are strategically well positioned within the organisation for which they work. Somehow, however, they lack the tools to be able to convince senior company managers of their value. This article will address the evolution of performance measures and their relevance to the legal world. It will highlight some practical differences between law firms and in-house departments, which require a differentiated approach to performance measurement.

Effective measurement, through quantitative measures, was regarded as a management imperative in the latter part of the 20th century. Goals were only deemed effective if they were quantifiable. One of Jan Carlsson’s mantras was: “If you can’t measure it, you can’t manage it.” Performance assessment has historically focused on financial measures. The technological advances over the last 20 years in the areas of data collection and sorting have meant that key financial measures could be tracked with relative ease, and managers had ready access to comprehensive financial reports. Law firms have taken full advantage of these opportunities and universally track data enabling them to assess how they are doing in terms of turnover, utilisation rates of professionals, hourly billing rates, the percentage of time worked that is billed and collected, the effectiveness of collection activities, and around profit margins.

Over time, it was recognised that an exclusive focus on financial measures was inappropriate. It meant that other areas of performance were neglected and organisations ran the risk of not measuring key elements of strategy. Also, by definition, the financial performance measures reflect the past, not the future, so, while an important part of a performance-assessment mix, they do not provide a tool to take the business forward.

A 1992 seminal article by Kaplan and Norton, ‘The balanced scorecard – measures that drive performance’ (Harvard Business School Press), introduced three additional perspectives. Financial measures needed to be supplemented by systems tracking performance in relation to customers, internal processes, innovation and learning. The customer element would capture how an organisation was viewed by its clients, and measuring internal activities would identify processes at which the organisation needed to excel. Finally, methods would be constructed to track innovation and the value-added improvements that flow from it. This approach combines the snapshot financial picture with operational measures that are drivers of future performance. It also provides a vital management tool linking an organisation’s vision and strategy with a broad range of performance measures. Capturing these various measures in a single scorecard was likened to the pilot viewing the range of dials in an airline cockpit.

The balanced-scorecard approach developed by Kaplan and Norton has broad application across industry sectors. Inevitably, the measures tracked need to reflect the particular circumstances and strategic objectives of individual organisations. The model is flexible enough to be able to provide an effective tool for law firms. The measures included in the customer category would need to address the question: are we meeting our clients’ needs? It would typically include fields tracking client-retention rate, revenues from the top x number of clients, client complaints and surveys over time. The internal process category would be framed around the effectiveness of the firm. It could address billing and collection efficiency rates, whether work was being done at the right level, the transactional process and staff-turnover levels. Innovation and learning measures would seek to ensure that there is sufficient effort devoted to developing an organisation fit to face the challenges of the future. A critical element here is how effective the firm is in becoming a “learning organisation”. Peter Senge in The Fifth Discipline described effective learning in organisations as: “The continuous testing of experience and the transformation of that experience into knowledge – accessible to the whole organisation and relevant to its purpose.” The innovation and learning element would also track how new products and/or practice areas are developed and how effective the firm’s training and development programmes are.

Adoption of the balanced-scorecard approach is plainly not appropriate to all firms. It demands extensive data feeds and sustained management attention to make it work properly. It would not work in an organisation where the culture or the attitude of the key decision makers was not open to continuous process improvement. It raises additional management challenges: if the firm has decided to assess itself on a broad range of measures selected on the basis of close alignment with an agreed strategy, it would surely not be appropriate to base partner-compensation decisions solely on financial contribution.

Even if a firm has decided not to follow a performance-measure-based system, there are likely to be increasing pressures, particularly from the more demanding corporate clients, to ensure that a series of agreed standards – whether or not formally called a service-level agreement – is put in place governing billing, reporting and other process issues, as well as formal requirements for client-relationship management. The DuPont model – covering DuPont’s relationship with its selected outside counsel – is an indication of things to come.

How relevant is the balanced scorecard to the in-house legal department leader? I maintain that its approach and objectives are quite as relevant as they are in a law firm.

It provides a means to address the annual conundrum of how best to describe to the senior business executive what exactly the legal department has achieved in the course of the year. There is always something to say, often lots to say, but an unstructured approach, which relies on war stories of having helped product launches, facilitated acquisitions, settled a law suit on favourable terms and headed off a potentially challenging law, may not be enough. Or, put another way, there may be better ways to present it.

More business organisations are assessing their business-unit performance by a scorecard-based approach. There is a strong cultural benefit in the legal department being seen to be subject to the same rules. The challenge – as always - is to ensure the items measured are tailored to align with the legal department’s strategy. That, in turn, will have been driven by and be consistent with an overarching corporate strategy. If the company is particularly focused on growth initiatives or risk containment, this will be reflected in the legal department’s scorecard. It is self evident that the scorecard will not be a constant. It will vary with the demands of the business and the pressures facing the legal department.

Some of the Kaplan and Norton categories may seem less relevant to the in-house department. Financial issues are important. Keeping to budget on internal and external expenses is clearly an area of performance that we expect to be judged on at year end. That said, it does not require the level of granular attention demanded for key drivers of profitability at a law firm. Similarly, customer issues are important, and we should all be tracking levels of customer satisfaction over time, by surveys or via less formal channels. It is, however, a reality of an in-house lawyer’s life that – for better or worse – his client is captive. In-house lawyers are spared the very real pressures faced by law firms around client retention and new client acquisition.

Outside counsel management is an area that in-house lawyers have typically handled in a less than structured manner. Introducing even fairly basic metrics can provide a focus that will quickly generate improved performance. Make sure that engagement letters are in place for all outside counsel relationships. Reap the benefits of concentration – if that is appropriate to your practice – by setting a target that x per cent of billing is in no more than y law firms. Make your team commit to have budgets in place for all matters given to law firms that are likely to end up in a bill of more than, say, £15,000. Set a target of having at least z per cent of total billings through alternative charging methods, and not dependent on hourly rates. Get the most out of your ongoing relationship with law firms by committing to regular meetings to review substantive and relationship issues. The measures themselves are important and achieving them will improve quality and reduce cost. In addition, the simple fact of putting targets in place will change behaviour. Lawyers are typically focused and task-oriented, and, as long as the objectives are not unrealistic, you will be helping drive the organisation to another level.

As far as the categories chosen for measurement are concerned, there is no one size that fits all. Some organisations break down their targets by the various constituencies they represent – typically shareholders, customers and employees. Measures can be framed along these lines if it helps internal alignment. Ensure, however, that the internal process and innovation dimensions are not ignored. Otherwise, you may potentially not focus on opportunities such as driving work down to the lowest appropriate level, or changing working practices to harness the wealth of legal precedent and training material potentially available to the in-house world through law-firm extranets.

Putting in place a scorecard system and agreeing the measures with your senior managers is an important step, but it is only the beginning. Its ultimate effectiveness will be determined by how well it has been sold into the organisation responsible for delivering on the measures. Communication of the measures and the reasons underlying them is critical. Debate and discussion should be encouraged, and lead to closure. Members of your team will adopt the key targets as part of their individual goals and, at the end of the year, their performance will be reflected in their rewards. If some measures are more important than others, make sure this is reflected in relative weighting within the goals.

Signing up for specific targets is the foundation for individual accountability. Regular progress reviews throughout the year with business leaders and legal staff will ensure that the scorecard is a live document. Indeed, the elements or their relative importance may well change in the course of the year in line with corporate or departmental priorities.

One additional area of performance measurement that too many in-house departments ignore is benchmarking. For law firms, competitive intelligence is critical, and a key driver of strategy. Information is taken from public sources, from what is observed in the market place, and from anecdotes. Competitive pressures generally mean that it is very difficult or impossible to learn in detail about management or process issues within competing law firms.

I have always found in-house colleagues willing and eager to share their own perspectives and experiences – not in sensitive areas of product or market information – but around the operation of the legal function, where the challenges facing in-house leaders are very similar across industry boundaries. Sharing practices and experiences – happy and otherwise – will help develop your own view of what amounts to good performance, give you a chance to identify shortcomings and new approaches in your own organisation, and potentially give you useful ammunition in discussions with business leaders. Some attempts have been made to establish formal benchmarking reviews, but the most immediate return will come from establishing and maintaining an informal dialogue with your peers in other organisations.

In summary, I would regard it as a badge of professionalism for in-house practitioners to have developed a series of measures – tailored to their practice – to monitor performance and strengthen the credibility of their function. The measures should be both qualitative and quantitative, well communicated and regularly monitored. And don’t forget to talk to your colleagues in other organisations.

Gwyn Price is a consultant to American Express. He is also a visiting professor at Nottingham Law School. He can be contacted at prices.albourne@virgin.net.