by MBA and MBA
In a book thats topping the best seller list, Leadership by Rudolph W. Giuliani, former mayor of
New York City, details his quest to measure critical aspects of the Citys cumbersome
and sometimes antiquated departments. Most
people in Los Angeles may be familiar with Giulianis CompStat program, adopted by
the New York Police Department, which current Los Angeles Chief William J. Bratton
spearheaded when he was the NYPD Chief of Police in the mid 90s and which he has
introduced in Los Angeles.
Giuliani embraced the Broken Windows theory promulgated
by James Q. Wilson and George L. Kelling, which links broken windows to increasing crime. The Mayor inherited a city so rife with crime that
corporations and residents were moving out at an alarming rate, which undermined the tax
structure. Recognizing that its the
small offenses that breed major crimes, Giuliani set about tackling the minor
transgressions first. However, he had to
measure criminal statistics that could gauge the success of his programs and that could
predict criminal activity. Enter CompStat,
one of many programs designed and developed by the various departments in New York City. Each program has hundreds of daily, weekly and
monthly metrics that track and monitor key statistics.
Frequent, oftentimes daily, reports reflect results with ultimate
accountability resting with one individual.
One of 592 statistics measured by the Citys Department of
Corrections was the amount of candy and cigarettes purchased at the prison stores. Prison personnel noticed that when candy and
cigarette purchases doubled, a riot might be in the planning stages, since prisoners were
stocking up anticipating a lockdown. So when
sweets and smokes disappeared from the store shelves, reinforcements arrived and cells
averting the riot.
Whether in government or business, critical statistics can measure
success and predict actions that can provide guidance.
In law firms, partners should track and monitor a number of important
statistics in the areas of finance, personnel, operations and marketing that will reflect
success and highlight areas for improvement.
The beginning of the year is a good time to analyze the last few
years numbers as the benchmark and then set goals for the 2003 statistics. Numbers paint the picture. The financials are the first place to start
if you want to develop a measurement system. In
addition to the basic metrics of revenue, expenses and profits, the profit margin is
important, but oftentimes overlooked and unknown.
The profit margin (revenues minus expenses divided by revenues) is an
average of 33 percent among law firms in the United States (before partner draw) and can
be as high as 65 percent among small law firms. Most
firms should target the 33 percent margin or above.
Yet certain firms dont know their margins and others chase
revenues with no regard to the profit margins. One
firm that calculated its margin at 10 percent discovered that it was operating
inefficiently with no standards and procedures. After
three months of developing standardized procedures, the profit margin soared to 38
percent. But only after the profit margin was
measured did the firm realize that improvements were necessary.
Expense measurement as a percentage of total revenues and as a growth
trend is important. While most firms track
total expenses, certain firms dont analyze line items as a percentage or trending of
expenses. Unless measured on a monthly basis
and then compared to law firm averages, past firm performance and budgeted amount,
expenses can runaway without much notice. The
Internal Revenue Service, Dun & Bradstreet and other sources provide law firm
statistics to which you can compare your firm.
Developing a budget for expenses and then tracking expense variance
is the best way to determine if expenses are suddenly out of line. The firm that noticed office supply expense
spiking in September asked employees not to outfit their childrens desks and
backpacks with firm supplies. Without monthly
monitoring, they wouldnt have been able to recognize and curtail the abuse.
Revenue can be measured by matter, referral source, industry
of client, amount by client, originating attorney, department and many other ways. When one firm discovered a huge jump in revenues
from a specific industry and matter type, they decided to alter their focus in an effort
to capitalize on the trend. Revenues sorted
by referral source can indicate where clients are originating and may point the direction
for new marketing efforts. When one firm
tracked client source, they discovered that speaking at a specific conference each year
yielded at least one client. They redoubled
efforts to ensure that they continued to be invited as speakers.
Analyzing clients by amount of revenue can unveil some good
information. When a mid-sized firms
analysis indicated that 50 percent of their revenues was less that $1,000 per client, they
recognized the high costs they were incurring by working with small clients. Each client needed a file opened, handholding, and
several invoices on the same matter along with collection calls, since the small clients
historically had balked at the fees. Further
analysis revealed the firms theory of small clients growing into large clients was
incorrect. Instead, the small clients left
the firm after an average of three years
probably searching for another law firm that
was less expensive. This type of client was
squeezing the firms profit margin. The
solution was to accept clients with a minimum projected fee of $2,500 and a retainer of 50
percent. If the client objected, then the
firm recognized that there might be collection problems in the future.
Accounts receivable is a critical barometer to monitor. Calculating the average number of collection days
gives you a benchmark for future tracking. To
determine the average number of days it takes you to collect on your invoices, calculate
your total outstanding accounts receivable (less current A/R) and divide by current
months billings (or a 12-month average billings), and then multiply that amount by
A high number of collection
days indicates that the firm is loaning money to its clients who are not
paying in a timely manner. Keeping
collections under 45 days is healthy. The
goal should be to continually drive down this figure.
By tracking this amount, you can monitor your progress in achieving your
Personnel ratios are valuable
statistics to monitor. Since salaries
represent the largest expense in most businesses, its the area where improvements
can be made. Generally, employees dont
complain that they have too little work. However,
its not unusual to hear that they have too much work, especially if the workload has
increased recently. Figuring out how many
employees to hire should not be left to the employees whining. Instead research personnel ratios such as the
number of staff to timekeepers, the number of associates to partners, etc. Theses figures will provide general guidelines,
although the ratios can vary by the type of practice.
Measuring the level of task performed by each employee is
critical for improving profits. The secretary
who was typing all day 15 years ago, today has much less computer work, especially if the
attorney is computer literate. Consequently,
some secretaries are doing more filing and clerical work tasks that could be
performed by a lower salaried employee. Employing
secretaries for these types of tasks drains profits from the firm. Other firms recognize that secretaries are
performing lower level tasks and train them as paralegals.
Running timesheets for all employees to determine the level of tasks they
perform and then making adjustments in who does what can dramatically increase
Much of the measurement task can be time-consuming unless
databases and spreadsheets are used. With a
little programming, most software programs can be linked to databases and spreadsheets,
which will automatically calculate the statistics. With
some additional programming, those statistics can be converted to colorful graphs that
reflect trends and indicate areas for improvement.
Any objective can and should be measured. Even a public relations objective as elusive as
increasing visibility in the business community has its metric. The firm can conduct a visibility survey prior to
beginning a PR campaign to assess how well-nown the firm is in the community. The same visibility survey can be conducted two
years later to measure the results of the campaign.
Mayor Rudy Giulianis record in
reducing crime and improving other areas in New York City is admirable. He identified the goal, determined what needed to
be measured to monitor the achievement and then devised the metric. Any law firm can make enormous strides in much the
same way. A strategic planning session can
help in developing the firms goals for the next few years and in designing the key
measurements that will indicate if the firm is accomplishing its objectives.