Andrew McDermott

Is your law firm doing well?

How do you really know that your firm is doing well? When it comes to firm wide metrics, many aren’t sure they have the answer. Their gut feeling tells them all is well so they go with that.

Maybe they’re right?

Or maybe their assessment of their firm is completely wrong. Is there a way to objectively find the right answer?

Absolutely.

Want objective proof? You need firm wide metrics

You gain clarity with the right metrics.

These metrics give you hard data on your firm’s performance. There’s no guesswork involved, no indecision on what needs to be done. Just crystal clear, actionable evidence to follow. With the right metrics you know (a.) when you’re off course (b.) what needs to be corrected and (c.) when you’re back on track.

Why does that matter?

These metrics enable you to avoid “decision by committee.” There’s no need for partners and shareholders to debate the merits of what can work. These metrics show you what will work.

Which metrics are we talking about here?

1. Cost per client conversion / acquisition
2. Cost of servicing a client
3. Realization
4. Profitability
5. Individual performance
6. Satisfaction (clients and employees)

1. Cost per client conversion / acquisition

How much does it cost to acquire a client? Which platform sends you the most clients? Which platform sends you the best clients? The cost per conversion / acquisition metric is a fantastic way to get data-driven answers to these questions.

Cost per conversion

Most attorneys know what I mean by conversion.

But, for the sake of clarity, I’m going to define it here. A conversion occurs when a prospect completes the desired goal. Calling you on the phone, sending you an email, filling out a contact form on your website, etc. It’s a goal or outcome that leads to revenue.

Easy.

Here’s the formula to calculate your cost per conversion.

Cost of traffic / by the number of conversions = Cost per conversion

If you have goals set up in Google or Adobe analytics, you’ll have what you need to track your cost per conversion and cost per acquisition.

Here’s why this matters

You’ll be able to get detailed data on:

• The marketing channels that work best for your firm (e.g. Google AdWords, Facebook Ads, display advertising, guest posts, etc.).
• Which website, landing pages, offers or ads produce the greatest amount of conversions you want
• A keen minute-by-minute awareness of your marketing effectiveness

It’s a helpful way to measure your marketing effectiveness – without delving too deeply into data science and complex formulas.

Cost per acquisition

Here’s the formula to calculate your cost per client acquisition

Marketing expenses / number of clients = Cost per acquisition (per client)

Here’s the thing with this formula. You’ll need to be consistent with your timeframe. If you spent $2,000 on marketing in a month and you acquired 20 clients in that same month, your cost per acquisition would be $100 per client.

Here’s why this matters

If you have a set breakeven point this metric shows you whether you’re on track (or not). Let’s say your breakeven point for a specific practice area (e.g. bankruptcy matters) was $530 per client. If you spent any more than $530 to acquire a bankruptcy client you’d lose money. Anything less than $530 and you’re making money.

Here’s an important caveat.

Your breakeven cost per acquisition may vary by practice area. This is important. It enables you to allocate your marketing dollars to practice areas with the greatest financial upside.

Your breakeven point is your initial target.

2. Cost of servicing a client

This takes our previous point further. Calculating the cost of servicing a client requires that we factor in all of our fixed costs. We need to determine what it takes to attract and win a new revenue producing client.

Fixed costs include rent, utilities, payroll, taxes and fixed marketing expenses. Here’s a formula you can use to calculate the cost of servicing a client

Hours spent on client / Total hours spent * Total Fixed Operating Costs = Cost of servicing a client

This requires disciplined time tracking – at the client level and firm wide. The more accurate your data the more telling this metric is.

Here’s why this matters

• You’ll get a clear idea of the quality and quantity of the work you’re doing for each client
• You can identify which clients are profitable in the short and long-term
• Assess which practice areas are worthwhile from a financial standpoint

With a little bit of digging, you can quickly identify the markers, red flags and identifiers of an unprofitable client. With a well-designed marketing funnel and the right data, you’ll have the knowledge you need to attract more of the promoter clients your firm needs.

3. Realization

As far as performance indicators go, realization is fairly straightforward. It’s the answer to a simple question. Of the time that’s billed, how much comes back to your firm as revenue?

Realization includes the following firm wide metrics:  

• Amount of work done vs. amount billed
• Revenue billed per month
• Revenue collected per month
• Monthly expenses
• The accounts receivable lifecycle (the amount of time between you doing the work and receiving payment)
• Any discounts and/or write downs (before billing)
• Write offs after billing.

This data is key.

Realization gives you the ability to forecast. It’s a simple and straightforward way to assess your firm’s financial performance.  

• Use these metrics to identify problem clients
• Clients who pay well and pay on time
• Which practice areas are profitable or unprofitable
• Whether your collections policies need improvements to capture more revenue
• Whether your time tracking methods are accurate

The data from realization is essential because it confirms your firm’s financial performance. With the right details, you’ll be able to increase revenue, decrease expenses and decrease losses.

4. Profitability

Clients aren’t created equal. One client can be more profitable than another. Some practice areas are more profitable than others. When it comes to measuring profit you’ll want to take a layered approach.

Determine profitability by:

• Client
• Firm
• Partner
• Practice area
• Timekeeper

This gives you the granular data you need to find and address financial problems. The basic formula for calculating profit looks incredibly simple.

Revenue – cost = Profit  

In reality this isn’t that simple. It really depends on the billing model you use in your firm. Do you use a cost-plus, fixed price or value-based model? How do you determine costs? These questions aren’t as easy to answer, as you already know.

It’s something you’ll need to define for your firm.

5. Individual performance

Which attorneys are your top/bottom performers? Which employees are financially profitable? If you’re looking for an answer to that question you’ll need to assess your attorney’s individual performance.

Here’s what I mean.

Let’s say attorneys in your firm have a maximum of 60 hours available in a week to bill clients. You decide to use this as your benchmark. If your attorney bills at $200 per hour that means the maximum they can earn for that week is $12,000 per week or $48,000 per month.

Here’s the math:

60 hours (total) x $200 per hour = $12,000 potential per week.

If this attorney only brings $7,500 hundred per week in that’s a 63% collection rate. You’re able to instantly gauge whether he’s performing as expected.

You can calculate this for the entire firm, groups in the firm (e.g. first year associates), and individuals.

Here’s why this matters

Measuring individual performance enables you to:

• Maintain cash flow and profitability in your firm
• Identify A players, A player potentials, B and C players
• Set and maintain financial goals/benchmarks for your firm

Attorneys and those who produce billable work are judged primarily by the amount of billables they produce for the firm. Does this mean this is the only metric that matters?

Not at all.

But it’s the metric with the most immediate value.

6. Satisfaction (clients and employees)

Client satisfaction can be distilled down to one simple question.

“On a scale of 0 – 10, how likely are you to recommend us?“

This is taken from the NetPromoter score.

 

 

• Promoters are loyalists. They’ll spend more money with your firm and they’ll refer other clients, driving growth.
• Passives are unenthusiastic but satisfied with your work. They’re opportunists who are vulnerable to competitor poaching.
• Detractors are unhappy clients who will use reviews and word-of-mouth as a weapon to damage your brand and restrict growth.

This is crucial because it tells you where to spend your time and attention.

• Spending 80 percent of your available time on promoters keeps them happy and passionate about your firm. Continue to look for ways you can add value to these clients.
• Offer lukewarm passives three to five percent of your available time, inviting them to become a detractor or promoter.
• Give detractors 15 to 20 percent of your available time as long as they meet one condition. They qualify as unhappy, misinformed or underserved in some way. Ignore ragers, irresponsibles, trolls, users and abusers.

Use automated review and reputation management software to attract reviews and client attention.

Employee satisfaction is a bit more involved.

This comes down to a simple strategy you can use to gauge employee feedback.

360 degree feedback.

A 360 degree feedback assessment removes the fear, resentment and unnecessary conflict that comes with the feedback process. It can be difficult to manage but you’ll need a few details to make these reviews effective.

1. Outline review policies (e.g. be honest, be kind or be quiet)
2. Vet reviews ensuring they comply with policy
3. Provide examples. Show staff how to give good feedback  

Give everyone the opportunity to review everyone else in the firm. This is painful but it’s good for the firm in the long term. It gives firm leaders a chance to address their blind spots before it becomes a major problem. This protects the firm in several ways.

• This feedback provides radical candor boosting employee trust in peers and firm leadership
• It gives law firms a chance to deal with their dirty laundry before it ends up in a review or on Glassdoor
• This feedback keeps leadership humble and open to change
• Provides the firm with consistent opportunities for growth
• Reduces the odds of a mass exodus of associates and partners from the firm
• Improves employee performance and client satisfaction by proxy

 

 

Research shows that 360 degree feedback increases staff performance significantly year over year. It’s not perfect, but it’s an excellent way to foster trust in a firm.

Maybe you’re interested in a different set of metrics?

These metrics are the basics.

They’re a firm wide overview of your practice. The number of performance indicators you can measure is near limitless but in this case, less is more. A comprehensive amount of data is not as helpful as many of us have been led to believe.

You know your firm best.

Start with the basics, the data that tells you how you’re doing and where you need to improve. Then add in the data that gives you a customized view of your firm’s performance.

You know your firm is performing well when…

These metrics provide you with the data and evidence you need.

Most firms track a few of these performance indicators. But how many firms make it a habit to monitor these key performance indicators?

Not many.

True, these metrics don’t always deliver the best news. Sometimes our gut feeling is wrong. Sometimes we’re not doing as well as we thought. These firm wide metrics are an important part of our growth. If you’re looking to grow your firm you need this data.

Why?

Because even if it’s bad news, it’s good news to know.

Knowledge provides direction.

It’s a simple and straightforward way to gain clarity about your firm’s performance. There’s no guesswork involved, no indecision on what needs to be done. Measure the right metrics and you’ll know what to fix and when, ensuring that you’re never off track again.

 

What’s the most upsetting part of billing? A fee dispute. Clients aren’t always happy with their bill. In their mind, there’s an abundance of law firms that can do the same things you do. It makes sense then that clients have become dissatisfied with the traditional “per hour model.” They want options. They want you to provide them with alternative fee arrangements (AFAs).

Are alternative fee arrangements the enemy?

Not at all.

A recent legal trends survey found roughly 56 percent of firms used AFAs. What’s interesting about this is the fact that 96 percent of these firms were satisfied with the quality of work provided under AFAs. A previous survey found that 81 percent felt that AFAs were a permanent trend.

So firms are increasing their use of AFAs?

Not so much. Only 37 percent of firms plan to increase their use of AFAs in the coming year.

Uh… what?

That’s right. Law firms discovered that many of their clients want/prefer AFAs. They also discovered these AFAs produced outstanding results for their firm.

So what’s the problem?

You need to know what you’re doing. These AFAs are risky if you’re careless or inefficient. This doesn’t mean they pose a significant amount of danger to your firm. It means you’ll need to pay attention to what you’re doing if you’d like to achieve good results.

Common sense, right?

Fee arrangements need the Goldilocks principle

Remember the story?

“This porridge is too hot,” Goldilocks exclaimed.

So she tasted the porridge from the second bowl.

“This porridge is too cold.“

So she tasted the last bowl of porridge.

“Ahhh, this porridge is just right!” she said happily.

And she ate it all up.

AFAs need the Goldilocks principle to survive.

Here’s a hypothetical scenario shared by Bill Josten, Legal Analyst at Thompson Reuters.

A law firm and client agree to work for a flat $1 million. The client is happy. They feel this price is fair. The law firm is happy, because the margins are reasonable. The work is rewarding.

Along comes Mr. all-star attorney.

Mr. all-star attorney is ambitious and eager to provide value to the firm. He comes up with a new way to complete the same amount of work, with superior results for a meager $50,000. The quality is top shelf.

The client is pleased.

Until they see the shadow bill. Suddenly they’re furious. How could their firm bill them $1 million dollars for work that only cost $50,000 to produce?

See the problem?

If the law firm spent $950,000 producing the work and billed $1 million, the client wouldn’t have batted an eye. The law firm didn’t cheat their client. They found an innovative way to get the work done.

This is the hidden risk with AFAs.

If you’re too good at your job you sow seeds of distrust and dissatisfaction with your clients. Instead of being commended (as you should be) for your ingenious approach you may actually lose the client.

It’s incredibly unfair.

What if things swing in the other direction?

What if you quote your clients the very same price ($1 million) but the work ends up costing the firm $2 million? If you’re suddenly hemorrhaging money, your clients will expect, no demand that you honor the price you’ve quoted them.

Even if it kills the firm.

You’ll be forced to either (a.) eat the cost of failure and do what you can to survive or (b.) find a legal loophole or stratagem you can use to escape the unprofitable arrangement you’re trapped in.

It’s painful either way.

This is the obvious risk with AFAs.

If your alternative fee arrangements are going to be successful, you’ll need to have a clear idea of how you’ll handle the twists and turns that come with each arrangement.

How many “arrangements” are there?

Choosing the fee structure that’s just right

AFAs, for the most part, are focused on one thing.

Control.

These AFAs satisfy a client’s need for certainty. It gives them clear guidelines they can use to make predictions, estimates and guesses. This is important because clients need to know what to expect.

Let’s take a look.

1. Fee caps: Hourly billings are capped at an agreed upon maximum for a given case, project or service. As you might have guessed, this is hourly billings with a slight modification. This arrangement is definitely more beneficial to clients than it is to your firm. You’ll want to watch out for the obvious risks (see above) I mentioned previously.
2. Fixed fee menus: This option provides set pricing on a variety of services provided by the firm. Additional flat fee charges could be added to the initial base price. An investment transaction could be billed at $25,000. Added to that, an additional $8,000 fee for assuming a loan. $10,530 for financing and so on.
3. Fixed fees for single engagements means firms set a hard price on a several well-defined services. This isn’t ideal for new services or practice areas and it’s not a great fit for inexperienced attorneys. Firms using this AFA need volume to make this arrangement worth their while. This is perfect for services that produce the lion’s share of a firm’s revenue.
4. Full contingencies: With these no fee unless we win arrangements, survival depends entirely on success. These AFAs are common with plaintiff and defense attorneys. This AFA works best if your firm has a competitive advantage or noted ability in a specific practice area. Avoid this AFA if you’re unsure of the outcome or results you’ll achieve.
5. Holdbacks: A contingency arrangement where a predetermined amount is guaranteed as payment to the firm (say 20 percent). The rest is contingent on the firm’s success in achieving the desired outcome. Receiving fees at 80 percent of your usual rate, with the remaining 20 percent contingent on success. This is often combined with bonus or success fees, further incentivizing firms to deliver results.
6. Partial contingencies/Success fees: Similar to a holdback, the firm receives a portion of their fees during the engagement. They receive an additional lump sum at the end of the engagement if they’re successful. Partial contingencies typically define success criteria ahead of time. These criteria are sometimes left to the client’s discretion or spelled out in significant detail.
7. Portfolio fixed fees provide clients with a single, fixed price for a large number of services.  For example, an organization’s intellectual property engagements over the course of a year. With this arrangement, losses are inevitable so you’ll need a significant amount of volume to come out ahead.
8. Retainers: The legal industry’s old faithful. A fee your clients agree to pay every month, for a set period of time, for a specific set of services. These are well known but they’re growing in popularity thanks to the surge in demand for AFAs.
9. Risk collars: An hourly billing arrangement that rewards efficiency. With this hourly billing arrangement, attorneys receive a bonus if their work is completed under budget. Clients receive a discount if the work goes over budget. The actual discounts and bonuses vary from firm to firm but it helps to align the client’s/firm’s interests.
10.   Subscriptions: Similar to retainers, subscription plans give clients access to a specific set of services and engagements for a predetermined price. While retainers have a set timeframe and clear purpose, subscriptions are more universal in their application, continuing indefinitely. Subscriptions require a significant degree of experience as you’ll need to be aware of what it costs to provide a particular service.

These AFAs aren’t created equal.

You’ll need to choose the right arrangement for your firm. They require experience and careful preparation. But, as we’ve seen, these alternative fee arrangements produce a significant amount of value for law firms and their clients.

It’s part of a strong value proposition.

These AFAs make most firms nervous. There’s a concern that you’ll lose money or alienate your clients. But it doesn’t have to be this way. Follow a simple maxim and it won’t be this way.

Plan for the worst, expect the best.

Follow this principle and you’ll have what you need to make these AFAs work for you.

Only _____ firms use alternative fee arrangements

AFA isn’t a dirty word anymore.

Research shows 22 of the 650 law firms serving the Fortune 1,000 rely on AFAs. AFA usage is an at all-time high but it hasn’t gone fully mainstream yet.

Now’s your chance.

It’s your chance to get ahead of your competitors. To establish innovative strategies with your AFAs.  To do what other firms can’t or won’t do for their clients.

It’s risky – for the unprepared.

Big law, small to medium sized firms, they’re using AFAs. These strategies aren’t unique to a particular region or practice area.

AFAs could be your savior

The tool that boosts client confidence.

That shows clients you’re willing to take a risk on them. To align your interests with theirs. To alleviate the most upsetting part of the billing process.

The fee dispute.

The traditional model often brings uncertainty and fear. Clients aren’t all that comfortable with the hourly model. In their mind, there’s an abundance of firms that do what you do.

Only there isn’t.

No firm does it quite like you. Your firm is special, unique. Your approach, your experience, your take on the law. It produces value in a way that’s unique to you.

AFAs get clients to listen.

To take a chance with your firm. The research shows AFAs are here to stay. The firms using them continue to grow. Who will win? The firms that master AFAs. It could be you. It should be you.

It will be.

If you start now. Your clients want options. They want you to provide them with alternative fee arrangements. Give them what they want then watch as the most upsetting parts of billing begin to fade away.