How To Run Your Law Firm More Like a Business

One of the primary objectives of law firm management is to maximize profit for owners. If you're not using and championing CRM and practice management tools at your firm, it will be much harder for you to meet that objective.

Data Management Impacts Profitability

Data becomes more valuable as firms grow larger and more complex in an ever-consolidating market. And to make that data actionable, it has to be regularly gathered, reported and reviewed. The managing partner, management committee, and CFO need to understand the elements that impact profitability so they can identify and improve weaknesses, and capitalize on opportunities.

For instance, do you have a complete understanding of the breadth and depth of each client relationship at your firm? Do you know the number of matters for a given client, which practice areas support that client, and the number of professionals who spend time on matters connected to that client? Do you know the potential cross-sell opportunity for that client and the reason they chose to hire your firm in the first place?

A customer relationship management system can help you see the factors that influence opportunities, wins, and losses so you can understand your firm's sales cycle and develop more business. A practice management system can help you track and report on key performance indicators (KPIs) related to productivity, finances and client service.

This invaluable data can translate into higher revenues and greater profitability for your law firm ' but only if you actually use it.

No matter what type of software you have in place for managing your practice, this three-step process can help you run your law firm more like a business:

1. Use the tools. Create a culture of adoption, decide on KPIs, and start tracking them.
2. Report and review. Select or build the right reporting tools to make it easy to monitor what you are measuring.
3. Turn data into action. Establish a process for making decisions based on the data and implementing those changes.

Use the Tools

You cannot manage what you do not measure. Having CRM and practice management systems in place is not enough. In order for these tools to be effective at your firm, attorneys need to input and update information on a regular basis.

Creating a Culture Of Accountability

CRMs are most effective when there is a transparent firm-wide sales process, enabling all professionals to see everything that is in the pipeline at all times.

At some firms, this may require changing the culture.

Some attorneys may be concerned about how this increased sales transparency could affect their originations. Management will have to address this concern and other barriers to adoption.

According to the study by The Ackert Advisory, the two primary reasons for CRM underutilization are cultural and behavioral issues rather than problems with the software itself. A lack of accountability and a general lack of technological proficiency are the two issues that most often stand in the way of adoption, said survey respondents.

To break down these barriers, firm management needs to lead the way. Accountability comes from the top. If you are not willing to personally champion the use of the system, good luck getting your partners to use it. If you don't set expectations for minimum technological proficiency and provide training to help attorneys meet those expectations, your firm may soon be falling behind.

Deciding What To Measure

Setting the tone and shifting the culture, if necessary, is the first big hurdle. Next, you need to decide what to measure and start tracking it.

This is the point at which you will identify the key performance indicators for your law firm. We define KPIs as metrics within a business that affect profitability. While there are an infinite number of things you could measure, when we advise law firms on identifying performance metrics and analyzing profitability, we recommend selecting a reasonable number of specific measures you might realistically expect to impact.

In your practice management system, you will track billable hours, billings, collections and certain cost and expense categories. Other basic metrics include WIP, accounts receivable, and write-offs. Collect and measure this data at the lowest possible levels ' per lawyer, practice group level or office location ' so that you can compare to internal and external data, such as industry benchmarks.

One key metric to look at is leverage, which can be an important predictor of a law firm's profitability. The ratio of non-partner attorneys (associates) to partners, or “leverage,” dropped dramatically after the major law firm staffing cuts of the last decade. Having a higher number of salaried associates on staff can result in higher returns for partners.

For a more complete list of law firm KPIs, download a free checklist at kaufmanrossin.com/resources.

In your CRM, you should be tracking the following data per attorney, per client so that you can see across the firm and identify patterns and exceptions to those patterns:

• How long it took to close;
• How many touch points to close and what they are;
• Potential cross-sell opportunity; and
• Reasons the firm lost business (i.e., fit, relationship, price, unknown).

In addition, each attorney should be tracking his or her sales pipeline. You can think of pipeline reporting for opportunities as having four main stages:

1. Initial business discussion.
2. Discovery meeting/Scoping.
3. Pricing/Proposal.
4. Negotiation and review.

After moving through some or all of the stages above, each opportunity will eventually move into one of the final stages: “Closed won” or “Closed lost.” Tracking these metrics in your CRM system will help you to better understand revenue drivers and improve the sales process.

Report and Review

Once you have identified what to measure, the next step is reporting and reviewing the data. As our experience advising law firms has shown us, doing this on a consistent and timely basis is not an easy task for management at most firms.

The difficulty may be in gathering the information, or it could be that there is so much information available that it's hard to focus on the right indicators. Sometimes other matters take priority, which means management takes too long to act on the data at hand.

Having a process in place surrounding how and when you gather and report information can make the process easier and give you more time to analyze the information and make the data actionable. Looking at the metrics from different perspectives can give you a more well-rounded view of your firm and can help you to understand the major profit drivers.

For example:

• If you have more than one office, look at the performance of each location individually.
• If you generate revenue from more than one or two practice groups, review metrics at the practice group level in addition to the firm level.
• If some of your work is done on contingency, monitor performance (hours, fees, collections, costs and expenses) and compare to non-contingency work.
• If your firm includes several merged entities, compare performance for each partner group.

There are many different ways to share data with the management team. We'll take a look at a few of the most common:

• Financial statements;
• Management reports;
• FLASH reports;
• Real-time dashboards;
• Exception reports; and
• e-Mail alerts.

Financial Statements

Beginning the year with the right data is critical; your CPA firm can help you get off to a good start.

Setting up your accounting systems properly can create a significant amount of useful reporting. Your general ledger chart of accounts should be detailed enough to provide meaningful information and provide the breakdowns you need.

For example, set up different accounts for revenue and expenses by practice area or by location if these should be tracked separately. Be careful not to muddy the data by grouping too many uncommon items into one general ledger account. This makes the information you are looking at difficult to interpret.

Customize regular monthly reports that provide a snapshot of firm activity during a specific time period, and allow comparison to the prior period, budgets and forecasts. If in-house accounting personnel aren't comfortable with the reporting options available in your accounting package (or if they tell you that what you want isn't available), ask your CPA firm for assistance or check with the software company.

Management Reports

Are you getting the right information from your practice management system and using it properly? Does the data that the management team receives in monthly reports allow them to see strengths and weaknesses across the firm? You may wish to see the data by originating attorney, responsible attorney, office location, practice area, client group, or client matter.

CRM metrics should also be included in management reports. Proposals won, lost and pending can be tracked for the fiscal year to date and can be compared to the same time period in the prior year. Reporting on opportunities can give you a sense of what's in the sales pipeline across the firm and for each attorney. For a quick snapshot, you can look at top 10 won opportunities and top 10 pending opportunities for a given time period. You may want to see CRM data for the fiscal year or calendar year or for a rolling 12-month period.

The distribution list for these reports is an important consideration. If you want to foster a competitive spirit among professionals, then show them all how they're doing compared to each other. If you've recently completed a merger or acquisition, however, you may wish to restrict detailed data to the management team until the cultures become more aligned. This decision will be depend on the culture and direction of the firm.

FLASH Reports

The FLASH report provides a frequent high-level picture of the firm's performance. The report should reflect current data in comparison to prior period data, so you can see trends and variances.

Many businesses divide FLASH reports into three sections:

1. Liquidity. Cash position, WIP and A/R aging summaries, days in WIP and A/R, line-of-credit balances and working capital ratio.
2. Productivity. Key performance metrics of the business, including new clients, hours worked, leverage and average daily fees generated, billed and collected.
3. Profitability. Billings, collections and write-downs.

There may be other sections or indicators that are more important to your firm, such as the dollar value of pending opportunities or percentage of proposals won and lost year to date.

Regardless of which metrics you decide to include, keep the report to one page or two at the most. Your accounting staff can set up an Excel template, and should take no more than an hour or two assemble this data on a weekly, semi-monthly or monthly basis. Your CPA firm can be a valuable resource in helping you to design FLASH reports that include the most important big-picture metrics for your firm.

Dashboards

Financial statements, monthly management reports, and even weekly FLASH reports may not provide all the tools needed for effective firm management. Dashboards show real-time information, an excellent tool to help management keep track of the pulse of the firm. Anything that is in your database could be at your fingertips.

We recommend that you create dynamic dashboards based on the data in your database. You might create a dashboard, for example, that allows you to look at hours, billings or collections for a time period you set, and sort or group data by originating attorney, responsible attorney, client group, practice group, office location or even industry. Additionally, you could look at originations for a specific period by partner or by office if you track the commencement date for each new client matter. You could also check productivity stats by attorney, for other timekeepers, by practice area or by office.

You may need to consult the provider of your practice management system to set up these dashboards or look into training for your IT department to be able to create them. Your CRM system may already have built-in dashboards that can be customized for your firm.

Exception Reports and e-Mail Alerts

If you establish guidelines or requirements for any part of your firm's operations (and we recommend you do so), you must monitor compliance and hold people accountable.

If you set a standard for monthly billing, do you know which attorneys are not billing in a timely manner? If you require daily timesheets, who isn't complying? Which WIP or A/R balances might be troubled based on delinquency that exceeds your standard number of days? If you expect partners to be using the CRM regularly, who has not logged in this month?

Consider creating exception reports that are provided to management to monitor the standards you set. Sending e-mail alerts to appropriate personnel can provide similar types of information on a more frequent basis. Like dashboards, these can be based on any information you enter into your system.

Turn Data Into Action

Data is worth nothing if you don't look at it. It's worth almost nothing if you see trends or variances but take no action.

Monitoring the KPIs of your business and acting on that data when issues or opportunities arise can improve profits to partners or shareholders and can help you run your firm more effectively.

For example:

• If you know which practices and matters are not profitable, you will have a better idea of what kinds of cases or matters make sense for the firm to take on.
• If you can identify patterns in how the firm loses potential business, you can correct those issues and improve your close rate.
• If you understand the cost drivers of a practice, you can use that information to make competitively priced pitches for new work.
• If you know how much operating cash the firm needs to keep on hand each month, you will be better prepared to take on clients with alternative billing arrangements ( e.g. , contingency fees, equity in startup clients) without over-extending your liquidity.
• If you track work volume and demand trends in core practice areas, you can address staffing gaps or overstaffing.

Taking action on the information is often the most challenging part of the process. This may involve establishing partnership criteria for productivity and economic performance ' and holding everyone accountable for meeting those criteria.

Create a disciplined process of action: management meetings to discuss data findings, decision processes to establish priorities and next steps, and communication about the plan to the rest of the firm. Make sure everyone understands that this process is designed to improve firm profitability. And then hold people accountable for the behaviors you know will affect the key performance metrics that drive profitability at the service line, client and individual levels.

Steven A. Davis, CPA, is an entrepreneurial services principal at Kaufman Rossin, one of the top 50 CPA and advisory firms in the U.S. A member of this newsletter's Board of Editors, he can be reached at [email protected]. Tyler Quinn, CPA, CISA, is an assurance and advisory services manager at Kaufman Rossin. He can be reached at [email protected].