Practice Groups Part 3: Practice Group Leader as Financial Steward
As firms continue to grow in size and complexity, it often is no longer possible for them to drive, manage and measure the revenue growth of the firm only through the central leadership. The concept of practice groups operating as business units is that they now have primary responsibility for overseeing major aspects of their firms’ financial health. Practice groups are usually the vehicles through which firms develop their annual revenue projections and expense budgets and help manage the risks inherent in a professional practice. While fluctuations can occur, sound financial management has become a key responsibility of practice groups and the partners who lead them.
This is a major responsibility for practice group leaders and is another reason that most larger groups have co-leaders or a deputy. There often is a division of responsibilities and the financial stewardship resides with one of them. Large practice groups often have business operations directors who help monitor and report on financial performance continually. Fortunately, there are numerous technology tools that effectively track the various performance metrics (see below) and easily can provide real time data on individual timekeeper numbers, and aggregate group numbers. This prevents “surprises” from occurring and allows practice group leaders to address and make course corrections in real time. Many of these tools are also accessible to partners so they can track their own productivity metrics against goals.
Areas of Financial Performance Oversight
In our previous post, Practice Groups Part 2: Practice Group Leader as Strategist, we discuss the various types of information that are necessary to collect and analyze as part of the assessment phase of practice group plan development. A financial performance analysis is a key element of that.
There are several areas of financial performance and related risks that practice group leaders often are responsible for:
Risk management: Client intake and work acceptance standards; identification of clients and matters that pose greatest risk; sound quality control practices such as “second” lawyering; new matter intake, conflicts, time-keeping, billing, rates, alternative fee arrangements, collections and write-offs.
Productivity: Ongoing monitoring of number of timekeepers, utilization, workloads, billing rates, leverage, bottle-necks, project scoping, resource allocation and efficient project management; monitoring and underperformance.
Annual revenue budget: Projected net revenue based on hours and collections, other streams (premium/bonus fees, contingency billing, etc.) minus discounts, write-offs.
Annual expense budget: In addition to PG’s overhead allotment and personnel and staffing ratios, PGs must track travel, marketing, client development, sponsorships, business development and entertainment expenses; might also include lateral hiring expenses and CLE.
Pricing: Hourly rates, alternative fee arrangements including flat fees, capped fees, premium billing, hold-backs with success fee, and contingency.
Success metrics: In addition to monitoring the statistics, many PGLs now establish metrics that can easily be measured on a quarterly basis that reflect growth in revenue and increased productivity and profitability. Some are less directly a financial metric but still reflect improvement in areas that often lead to new business. Examples include:
- Increased revenue into practice from new clients
- Increased revenue per lawyer
- Increased realization for PG
- Increased utilization per lawyer
- Increased profitability of matters
- Increased revenue into PG from other PGs
- Increased referrals and revenue to other PGs
- # of client meetings
- # prospect meetings
- # referrals
- # proposals and pitches
Practice Group Key Performance Indicators (KPIs)
Law firms and practice groups should regularly monitor their financial performance throughout the year. In order to do so, the practice group leader should meet with the firm’s CFO to develop a list of key performance indicators that they believe are critical to the PG’s success that they wish to track and measure.
Stephen Mabey and Mike Mabey have published a number of articles on KPI’s for law firms. One of the best is found at Your Financial Dashboard. Below is a summary of the types of metrics they discuss and that practice groups leaders are using to evaluate and improve financial performance:
|Client and Cross-selling KPIs|
|Top Clients||# and % clients that represent 80% of PG revenue|
|Growth in Top Clients||Percentage of fees billed to top 100 (or 50) clients vs. 12 mos. prior|
|Client Growth Rate||# active clients from year to year|
|$ value of new clients year to year|
|Inactive clients||Ratio of clients firm has not handled matter for in past two years to total # of clients|
|Lost clients||# of clients you know exited the firm in past year|
|Average Fee Per Client||Collected revenue for year divided by # clients|
|Number of Matters per Client|
|Average Fee per Matter|
|Profitability of Matters|
|Client Retention||# clients billed in last 12 mos. to same clients in prior 3 years|
|Import-Export/Cross-selling||# matters sent to/received from other PGs|
|$ value of matters sent to/received from other PGs|
|Percentage of Partner Hours||Ratio of partner hours billed to total hours billed by all timekeepers|
|Billable Hours by FTE Timekeeper||Gross # billable hours worked by paralegals, associates/counsel and partners divided by FTEs in each category|
|Effective Rate (vs. Standard or Rack Rate)||Fees actually billed and collected divided by the hours billed|
|Revenue and Financial KPIs|
|Fee Growth||Total revenues collected after discounts and write-offs compared to prior year|
|Realization||Percentage of standard billing rates collected after rate discounts, write-downs (reductions taken before sending bill) and write-offs (reductions taken after sending bill)|
|Utilization||# hours billed by FTE relative to goal|
|Leverage||Average ratio of associates/non-partner lawyers to partners (equity and non-equity)|
|Matter Profitability||For each matter, fees collected minus direct and indirect expenses allocated to that matter|
|Timesheet Write-offs/Write-Downs||Reductions taken before sending bill|
|Fee/Price Discounts||Pre-agreed discounts off standard hourly rates; can also be based on volume|
|Unbilled WIP (Work in Progress)|
|Accounts Receivable/Weeks Carried before Collected|
An important area for practice group leaders to monitor and manage is the area of revenue leakage. In his article, Calculating Profitability, Jim Cotterman, depicts the components of billing and collecting that impact profitability. Beginning with
- Actual Time Worked minus Timesheet discounts →
- Standard Value of Time Recorded minus Price discounts →
- Value of Unbilled Time at Actual Rates minus Efficiency write-downs →
- Accounts receivable minus Value write-offs →
- = Collected Fees
One can see how quickly and easily the profitability of matters declines at each step of the recording, billing and collection cycle. This also is a reason why timely and accurate recording of time and tasks is so critical. The longer firms take to bill time, the more clients tend to question or push back, the longer the collection cycle and the less likely they are to pay the full bill, to say nothing of their dissatisfaction.
The fourth and final post on Practice Groups will focus on the role of Practice Group Leader as Coach and Talent Manager.