Financial and performance data offers insights into the health of a company. With key performance indicators (KPIs), you can get an unbiased look at your firm’s financial performance and overall productivity.
KPIs are quantifiable, which means they provide assessments using numbers or values. You can compare these figures to previous ones or data from competitors or your industry. You can also find insights from financial statements or reports. In addition to comparisons and performance tracking, your business can use KPIs to inform decisions and quantify the results of strategy changes.
If you have a service-oriented business, such as a law firm, you need specific KPIs to gain the necessary insights. From client acquisition to case value to revenue, these data points measure current performance and define areas for improvement. Specialized accounting and finance tools are often necessary to produce this information.
Here’s a deeper look at the KPIs your firm can rely on to measure success.
1. Number of Total Leads
The number of total leads is useful for two reasons. First, it offers an overview of a law firm's marketing performance. Second, it provides a baseline to measure the success of other client acquisition aspects.
The total leads figure counts the number of people who express interest in the firm for their legal needs. It includes every person who took any action that expressed interest in your firm. The data could include people who took a business card from your lawyers, signed up for an email list, called for a rate quote, or signed up for your email newsletter.
Total leads do not paint a complete picture, however. Your marketing team needs to categorize leads based on the level of interest and other factors. Some of the people counted in the total number of leads have no interest in legal services or have cases outside of your law team’s expertise. Additional marketing and outreach KPIs can build on the total lead KPI to provide fine-tuned insights.
2. Number of Qualified Leads
The number of qualified leads counts potential clients with a higher likelihood of becoming paying customers. To measure this KPI, you first need to define qualification criteria. For instance, you could assess each lead's finances and verify that their legal needs match your lawyers' areas of expertise.
You can also look at the ratio between total leads and qualified leads. This figure demonstrates your marketing team's ability to attract high-quality leads. After all, the overall goal of marketing is to attract potential paying clients, not bring generic traffic to your website.
For example, imagine your law firm specializes in intellectual property law. You want to attract individuals or businesses seeking legal counsel related to patents, trademarks, or copyrights. The number of qualified leads measures your ability to reach out to and get interest from people with these specific needs while ignoring those with different motives for making contact.
It’s also important for you to measure the number of qualified leads over a given timeframe. This helps gauge the consistency of your marketing efforts and reveals improvements or shortfalls compared to previous timeframes.
3. Number of Consultations or Sales Meetings
The number of consultations or sales meetings quantifies the next step in the sales process. It counts the number of potential clients who meet with your lawyers face-to-face or virtually. Ultimately, this KPI measures the overall effectiveness of the marketing strategies you use to get potential clients to meet with your lawyers or sales reps.
During a legal consultation, a lawyer will listen to the client's needs and outline the steps they can take to pursue a positive outcome. A sales meeting takes a similar approach but focuses more on inspiring the client to hire the firm.
Ratios comparing the number of consultations to lead generation and qualification statistics offer insights into your overall marketing strategies. These ratios show how well your marketing team pushes qualified leads through the sales funnel.
The measurement of marketing success requires these comparisons. Also, your firm likely offers free initial consultations. You need additional KPIs to measure the success of these consultations.
Again, measuring figures on a weekly or monthly basis allows you to compare timeframes and verify the consistency of your marketing efforts.
4. Number of New Clients
The number of new clients is a fundamental metric showcasing your firm’s ability to convert leads into paying clients. This metric counts the clients who sign an engagement agreement with you over a given period.
This KPI focuses on customers signing their first engagement agreement with your firm. Existing clients may return to your firm for additional counsel. These repeat customers depend on your lawyers' ability to build relationships, achieve outcomes, and otherwise satisfy clients. You need different metrics to quantify client retention efforts. Also, you should separate new and returning client information. Using data from returning clients can cloud the calculations related to new clients and make marketing efforts seem more successful than they are.
All law firms need new clients to replace older ones and ensure consistent growth. Therefore, this indicator is essential for measuring your team’s overall marketing success.
5. Estimated Case Value of New Cases
The estimated case value of new cases allows you to understand the financial impact of recently acquired clients. The case value calculation involves estimating billable hours and settlement amounts. It also includes factors like your firm’s legal expenses, payment structures, and expected workload.
For complex cases, variables such as the resources and expertise of the opposition as well as your firm’s previous outcomes for similar cases may also be important. Your firm can use the estimated case-value KPI weekly or monthly to help allocate resources and organize schedules for your lawyers. It also helps forecast revenue.
Finally, estimated case value helps inform the selection of clients. You can choose cases with the highest revenue potential or focus your marketing efforts on similar clients in the future.
6. Months of Operating Expenses in Cash
Months of operating expenses in cash indicate your firm’s financial safety net. You calculate this figure by dividing total cash reserves by average monthly operating costs.
This KPI assesses your firm's resilience. For instance, it can tell you how long you can remain in business if something unexpected occurs. Perhaps a major client decides they no longer need your legal services. Or, a case ends with no new clients to replace the existing ones.
You can use this statistic to improve your firm’s resilience, repeating calculations monthly or quarterly to evaluate progress.
7. Production Labor Ratio
The production-labor ratio measures efficiency for businesses in many industries, from manufacturing to legal services. The ratio comes from the labor costs associated with providing legal services, divided by revenue. The resulting quotient demonstrates your team’s ability to work efficiently.
It's important to calculate this KPI frequently. Different types of legal work may have different labor requirements. The production-labor ratio helps define these differences. It may also reveal patterns of efficient or inefficient operation.
You can use the production-labor metric to fine-tune case preparations and research practices. It can also help you measure the usefulness of new tools or resources, such as software that automates time-consuming tasks.
8. Total Labor Ratio
The total labor ratio measures productivity. You can calculate it by dividing total labor costs by revenue. The goal of this KPI is to assess your firm’s overall labor efficiency. Unlike the production-labor ratio, this metric includes the salaries of admin and marketing staff. In other words, it includes the firm's entire payroll.
Revenue and labor costs can fluctuate based on caseloads and client acquisitions, so you should use the total labor ratio as a monthly indicator. Regular looks at the total labor ratio can also help you see if changes to administrative or legal practices increase overall productivity.
9. Partner Taxable Income
Partner taxable income provides insights into your firm's overall profitability. The calculation involves adding the W2 wages of your partners (who essentially own the firm) and the overall net income. You can use this KPI annually to measure income and compare profitability to other years.
The partner taxable income KPI has two purposes for most firms. First, it measures your firm’s financial performance. In addition to indicating overall financial health, this figure can also help put marketing, productivity, and efficiency KPIs into context.
Second, partner taxable income provides transparency. It shows owner compensation and overall net income. In addition to record-keeping, reporting, and fairness, these figures may also help you attract other legal talent. Potential partners and skilled lawyers can see the earning potential available at your firm.
10. Operating Profit Percentage
Operating profit percentage is also called operating margin. You can calculate this figure by dividing net income and partner wages (before tax and interest payments) by the firm’s revenue.
This KPI demonstrates your ability to generate profits and offers an overall picture of financial health. The information from this percentage is also useful for creating financial statements.
Operating profit margins are important for internal planning, but you can also include these stats in financial reports. Lenders and investors use the figures to gauge your firm’s profitability and make investing or loan decisions.
Tracking KPIs More Effectively
The 10 KPIs above support data-driven decision-making. However, your law firm does not need to spend hours away from casework to make calculations. Steps like automating data collection and analysis can streamline KPI compilation. Busy firms can also outsource these processes.
Here are three ways to streamline and fully utilize KPIs.
Review Performance Regularly
It can be easy to overlook KPIs, especially for firms that successfully automate collection and calculations.
Regardless of how you obtain insights, your firm can make them a regular part of employee and department performance reviews. With quantified performance metrics, leadership can focus these meetings on specific areas. You can also help staff create goals and assess progress using the same indicators.
These efforts ensure your firm gets full value out of the system to collect the data.
Outsource Your Financial Services
Your firm can outsource accounting and bookkeeping or other financial services. Third-party providers can handle financial records and compile reports. These specialists can also calculate KPIs.
Not only can third-party services track and calculate financial metrics, but they also help your firm choose the best KPIs for your specific needs and plans. Some may even offer financial consulting services. They connect your firm with specialists who can help with financial planning, budgeting, and reporting improvements.
Automate Financial Reporting
Technology makes financial record-keeping and KPI-driven analysis easier. For instance, your firm can automatically track financial performance and generate reports using accounting software. The software can also calculate KPIs for use in analysis and planning.
Real-time cash flow reports and balance sheets contain all the information necessary to track performance and offer full transparency to partners, investors, and other stakeholders.
Your law firm can use specific KPIs to track performance and ensure efficiency and productivity in every aspect of your operation. Software and specialized financial services put these metrics at partners’ fingertips to help decision-making and planning.