Knowledge truly is power when it comes to KPIs, particularly when they impact firm profit. It is important to match individual timekeeper goals with the firm’s cash requirements. It’s hard to measure and reward profitability if there’s no accountability once the hours are recorded. Plus, billings are meaningless until collected. Therefore, you should focus on hours or effort that can be recorded, billed, and ultimately collected.
To illustrate where a disconnect might occur between a timekeeper and your firm’s financial goals, we have an attorney—Paul—who is recording hours and billing well above 100% for 2016. Paul believes that he should be receiving a bonus at year’s end based on his 107% utilization1 rate calculation.
The traditional utilization rate is calculated as the hours recorded over available hours—in Paul’s case, 2000. In this example from my small law KPI book, some of Paul’s billings were written off as shown below. Therefore, the total billings converted to cash were 93.36% of the 2000-hour target which is more than 13% less than the 107% recorded.
Paul’s gap between billed and collected cost the firm over $40,000 in lost cash (which is calculated as the amount recorded and billed of $640,500 versus the $598,000 collected). Thus, the bonus discussion may not go as Paul thought. Instead, if Paul and the firm agree that his performance—and therefore his compensation—will be evaluated based on collections rather than utilization, there will be no unpleasant surprises.
One critical caveat: I am not suggesting that timekeepers should stop recording hours, because that information is invaluable for budgeting and pricing, including determining billing rates and alternative fees like flat fees. For example, if Paul needed these hours to complete the tasks, he should record them and discuss with his supervisor why he is over budget so that adjustments can be made to either the staffing of the matter or the budget and pricing of it.
There is room for more KPIs within legal, and that’s possible without having to adopt expensive technologies. Many of the newer KPIs discussed in this series do not require software beyond a law practice management software program, accounting, and Excel.
If you would like to learn about how to track collections versus utilization or the other KPIs in this series, here is a free spreadsheet to get you started.