KPIs: What are they and how do we use them?

October 1st, 2019
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Key Performance Indicators (KPIs) are management measurement tools, values used to determine the state of the business and typically expressed as a number. The word metric is often used in a similar way and refers to any measurable value used to track and measure performance. KPIs in themselves are not valuable and should be considered tools to be used in the process of reaching business goals. Metrics are typically time, often measured by hours, months, quarters and years. Metrics can also be measured in hard number value, for example, how long does it take a legal practitioner to make x amount of money? KPIs typically have forward looking or historical aspects, in other words, are legal practitioners reporting (historical) or forecasting (predictive)?

KPIs are all around us. We feel the business is doing better and we know the business is growing. Intuitive management is, however, almost always doomed to failure. Adopting defined KPIs places management on an analytical, objective level, which is based on accurate, quantifiable information. Reducing complex business information to simple KPI results allows for easy comparison: Actual to potential, peer-to-peer or year-on-year.

There are no magical or universally applicable KPIs. Certain business requirements appear perennial, but do not necessarily apply universally to all businesses, nor continuously. The easiest application of KPIs is to consider current business goals. The KPIs selected must support our efforts to achieve goals as KPIs are not goals in themselves. Over time, goals may change and using the same KPIs indefinitely reflects a misunderstanding of their purpose and complacency in the status quo.

It is anecdotal that the two most commonly used KPIs are:

  • What are my fees for the month?
  • How much money do we have in the bank?

Although valid, these KPIs are limited in scope and only reveal limited information. In order to be successful, we need to know more.

Finding KPIs

KPIs are usually numbers, which represent the answer to defined questions. We can simply and clearly express the answer to questions such as ‘what are my fees for the month?’ using the KPI ‘fees month-to-date’ principle as guidance. KPIs do not have special names. Certain concepts have crystallised over time, but a KPI may be given any name, as long as its contents and meaning are clearly understood. Once a legal practitioner knows what they want to manage they can create tools to measure. Once clarity exists on business goals, supporting KPIs can be defined. The practice support systems in use today contain vast amounts of information applicable to a legal practitioner’s business. The answers to the questions we seek are contained in those systems. Often it is simply a question of knowing where to look, of how to interpret the information in a manner that makes sense in our business environment.

The discussion which follows is intended to provide insight into a few of the most common areas affecting law firms, without in any way being exhaustive. Consider KPIs as a basket of options. Based on current business requirements, select a combination of KPIs that best support achieving those goals. Review those goals and the supporting KPIs periodically.

Marketing

A new firm may place a very high value on marketing related KPIs. This should support the goals of business growth through new client acquisition. Profitability may in fact be negatively affected by strong growth. Some terms used in marketing, include:

  • New client acquisition – the number of new clients recruited in a given amount of time.
  • New matter opened – the number of new matters opened in a given amount of time.
  • Matters closed – number of matters finalised in a given amount of time.
  • Total clients and total matters – a simple count of the total on a date.
  • Client acquisition cost – the cost involved in acquiring this client.

Operations

Operational KPIs deal with how efficiently we work. Given an eight-hour work day, how much of our time was converted into billed hours. These KPIs include:

  • Fees month-to-date – a count of value of work done for the month.
  • Fees year-to-date – cumulative value of work done for the year.
  • Daily billable hours – the number of hours a professional is expected to bill.
  • Actual hours billed, or average per client or day – a measure of performance.
  • Fees to target – the gap between current fees month-to-date and monthly fee target.

Human Resources

  • Professional staff to support staff ratio – who works in our business and in what roles?
  • Professional/support staff churn – how often do we replace staff?

Profitability

Profitability is a high-level goal of interest to businesses owners. The information contained in these KPIs typically cover longer time frames and deal with the success of the entire business. These KPIs include:

  • Income to budget – the difference between budgeted income and actual income.
  • Expenses to budget – the difference between budgeted expense and actual expenses.
  • Debtor days – the time we wait for clients to pay.
  • Fees to cash – the value or rate at which our fees billed are converted to cash in the bank.

Selecting KPIs to track

When selecting KPIs to track, it is essential to first know why the KPI is needed, and secondly who will use the KPI?

  • A junior professional may be given a simple set of KPIs mainly from the operations basket, to encourage dedicated hard work. Fees month-to-date is a very clear measure of productivity, but not profitability. Dealing with matters on a daily basis requires dedication and focus, as well as the ability to convert work done into billable hours. Typically, a legal practitioner is directly responsible for matters under their control. KPIs are short term, should be updated daily and deal with individual performance, for example, ‘Productivity: Fees and files.’
  • Heads of departments may be tasked with KPIs, such as: New matters opened, fees year-to-date and debtor days. Dealing with issues, such as how effectively a given department is functioning and daily operational control of activities and staff line management. Typically, an experienced legal practitioner in charge of other legal practitioners would be tasked with KPIs that fall in the short to medium term, and would be updated weekly and deal with ‘Profitability: People and activities’.
  • Partners and business owners should be tasked with human resources, new client acquisition, client acquisition cost, and profitability KPIs. The success of the entire business rests with them. Senior management is responsible for the entire business. KPIs deal with all aspects of the business, but at a higher, more abstract level and should be updated monthly with ‘Profitability: Strategy and direction.’

A KPI productivity example

Monthly fee target R 20 000
Actual fees month-to-date R 16 014
Number of files billed or invoices sent 23

These KPIs are closely related. They show the fee earner’s expected monthly fee target of R 20 000 and the actual fees written of R 16 014. On the 15th of the month, this would indicate an 80% achievement of target, with time to spare. Reaching target is very likely. But, at the end of the month, the numbers tell a different story of targets not being reached. It also reveals an expected billing rate of R 80 per hour, with an actual billing rate of R 64 per hour. This is based on a 31-day month, and eight-hour work day. In addition, the nett invoice value equals R 696,26 fees per file.

KPIs are often presented in visual format to provide ‘at-a-glance’ management reports. A common visual tool is the business dashboard.

Business dashboards

A business dashboard is a graphical display of management information. If a picture does paint a thousand words, a business dashboard may be the display of a master’s in business administrations worth of management information.

Even if the system in place does not provide a dashboard, these can quite easily be built using spreadsheets, based on standard information. The simple example below shows new matters and fees, monthly. The strength of a business dashboard is its visual appeal, it should be easy to use and easy to interpret. This may necessarily truncate certain details, but these should be available from supporting documents.

An example of a simple business dashboard

The table contains three sets of data for the year-to-date; new matters opened; fees month-to-month; and fee target. The fee target column is used to present the fees to target chart. The example visually illustrates a trend: Those months with low numbers of new files, also show lower fees. Reasons for this trend may not be apparent from the business dashboard but does make it easy to spot. Adding fees year-to-date, year-on-year may reveal annual recurring trends.

Month New matters Fee total Target
March 2 R 20 765 R 20 000
April 4 R 23 490 R 20 000
May 1 R 24 006 R 20 000
June 1 R 16 014 R 20 000
July 3 R 19 056 R 20 000
August 5 R 21 050 R 20 000
September 9 R 22 012 R 20 000
October R 20 000
November R 20 000
December R 20 000
January R 20 000
February R 20 000

 

Carl Holliday BProc LLB (NWU) is a non-practising legal practitioner in Pretoria.

This article was first published in De Rebus in 2019 (October) DR 8.