Keeping Partners Informed with Key Performance Indicators

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Keeping Partners Informed

with Key Performance

Indicators

Presented by

Jay Erdman, CPA

FM01

Saturday, 10/26/2013

8:00 AM - 9:15 AM

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Regions 1 & 3 ALA Presentation:

Keeping Partners Informed with Key

Performance Indicators

Jay Erdman

Rippe & Kingston

Serving Law Firms Since 1979

October 2013

KPI

Thank you for inviting me to present!

2

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3

Size of Firm

• < 10

• 11-25

• 26-50

• 51-99

•

100

•

250

•

500 Note: Size does not really matter.

THINK BIG!!!

The ever-changing

Legal Marketplace demands it...

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5

KPI FOCUS

All Additional Revenues or Cost Savings Go Directly to the Bottom Line…

and Directly Increase Partner Profits.

Income

+ 100 *

+

Salaries

_

Operating Expenses

=

Partner Profits

+ 100 *

6

(5)

Operating Expenses

_

Salaries

+

Partner Profits

=

+ 100 *

- 100 *

Income

+ 100 *

- 100 *

Reduction in Income or Increasing Expenses works just the opposite…

7

$17,000,000

$6,000,000

$5,000,000

$6,000,000

For Example:

Revenue

Direct Cost

Indirect Cost

Partner Profits

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Revenue

$18,700,000

Direct Cost

$6,000,000

Indirect Cost

$5,000,000

$7,700,000

Partner Profits

A 10% Revenue Increase Equates to

a 28% Increase of Partner Profits

28%

9

Law Firm Profitability Formula

10

KPI FOCUS

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Keeping Partners Informed with Key Performance Indicators

(KPI)…

• Do Partners want to be informed?

• Is there such a thing as TMI for Partners?

• Choose your battles…

11

Should you use ‘herd mentality’ and do what other Firms are

doing?

(Keeping up with the Smiths’, Jones’, and Does’)

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KPI Scope...

• Measure against past performance for improvement

measurement

• Use them to develop strategy (goals) and then measure

against that strategy (goals)

• Provide (some) objective measurement against other

entities in your same industry

13

Goals

This analysis is going to suggest that you:

• Compare the Firm against itself (history) and strategy

(goals/budgets)

• Supplement your Firms’ strategy with industry

knowledge

14

Goals

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• Various Resources

• Price Waterhouse Cooper

• Citibank

• Etc.

• Comparison Factors

• Size of Firm

• Specialization

• Area of Law

• Clients (Industry, Size)

• Geography

15

• Key Performance Indicators – Basic

• Key Performance Indicators – Intermediate

• Key Performance Indicators – Advanced

But...

KPIs are not always a one line percentage statistics, but can also

include supplemental reports that require analysis.

Often simplified into a statistic, KPIs can require reporting

that needs to be analyzed.

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KPI come in two flavors:

#1

Statistic - expressed as numbers or a percentage that can

be compared against a like statistic.

#2

Reporting - requires the user to analyze the elements of

the report to reach a conclusion.

17

Today’s Agenda

18

Today’s Agenda

#3

Firm statistics don’t improve unless Individual

statistics improve. This presentation will also address

methodologies for monitoring individual statistics to

enhance Firm statistics.

Therefore... Everyone (grinders, minders, finders) has

KPIs to pay attention to.

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Basic

Intermediate

Advanced

Practice Development Practice Development

Resource Management Resource Management

Asset Management Asset Management Asset Management

Production Statistics Production Statistics Production Statistics

Financial Statements Financial Statements Financial Statements

Profitability Analysis 19

B

I

A

1

2

3

4

5

6

Basic Intermediate Advanced

Practice Development

a. Opened Files by Area of Law - Matter

- Client

a. Client Revenue by Year b. Matter Revenue by Year c. Cross-selling Report d. Client/Matter Minding Resource Management a. Monthly Calendar b. My Time Resource Management

a. My Team (budgets comparison) b. Cross-working Report

Asset Management

a. Unbilled Time / Aging b. Unbilled Cost / Aging c. A/R with Aging

a. Credit Limit Reporting b. Asset – Turn and Days c. New Clients/Matters

a. Operational Statistics Analysis

• With FTE Equivalents

Production Statistics

a. Key Statistics

a. Utilization / Capacity Analysis b. Rate Assessment

c. Write Off Analysis / Gaps

• With FTE Equivalents b. Write Off Analysis / Write Up/Down

Reasons

Financial Statements

a. This year vs. last FS

a. Budgets b. Profit Plan

B

A

1

2

3

4

5 I

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21

Overview

We have over 30 KPI statistics &

reports...way too many.

Choose the ones that are relevant to

your Firm and its culture.

“Grow” as time progresses.

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a. Unbilled Time / Aging b. Unbilled Cost / Aging c. A/R with Aging

B

A

1

2

3

4

5

6 I

Concept

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a) Unbilled Time

23

Aging Periods that are relevant

to your practice

Dollars & Percents Variance Net Unbilled after Retainers or Unapplied Cash Rippe & Kingston

b) Unbilled Cost

Basic

Intermediate

Advanced

to your practice

Dollars & Percents Variance Net Unbilled after Retainers or Unapplied Cash Rippe & Kingston

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c) Accounts Receivable with Aging

25

Basic

Intermediate

Advanced

to your practice

Dollars & Percents Variance

It might be helpful to separately age the last bucket to see how old the old A/R really is.

Rippe & Kingston

26

Production Statistics a. Key Statistics

B

A

1

2

3

4

5

6 I

Concept

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Discussion:

Cash

vs.

Accrual Reporting

27

Pros & Cons...

a) Key Statistics

Basic

Intermediate

Advanced

When individual statistics improve, Firm statistics improve.

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Key Statistics Terminology:

YTD Billable Time Hours - the current billable hours (worked and entered) by the working

Attorney year to date.

YTD Billable Time $ @ BIM Value - the dollar value of the billable time (worked, entered, and

posted) year to date. The current billable hours are extended at the override rate if one exists

or an Attorney’s standard rate if an override does not exist.

Average Billable Rate - current billable dollars divided by current billable hours. It is the

average billable rate per hour for all time (worked and entered) year to date. This is also

referred to as Blended Rate.

YTD Total Time $ Billed - the time dollars billed to Clients on invoices year to date.

YTD Total Cost $ Billed - the cost dollars billed to Clients on invoices year to date.

Basic

Intermediate

Advanced

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Key Statistics Terminology:

YTD Total Time and Cost $ Billed - the time dollars and the cost dollars billed to Clients on

invoices year to date.

Effective Billed Rate - the effective hourly rate for the time billed on the invoices to Clients. It is

arrived at by taking the billed amount divided by the relieved hours for the current invoices

sent to Clients. As an example, if a billing memo had 5 hours for a total of $1000 and is billed

for $800, this calculation would be an effective rate of $160 per hour.

YTD Write Up/Down Time $ @ BIM Value - the difference between the billed and relieved

amounts for the invoices sent to Clients year to date.

YTD Write Up/Down Time $ @ Std Value - the difference between the billed and relieved

amounts calculated at the Attorney's standard rate for the invoices sent to Clients year to date.

Basic

Intermediate

Advanced

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Key Statistics Terminology:

Time Realization % @ BIM Value - the billed amount divided by the relieved amount for the

invoices sent to Clients.

YTD Write Up/Down Cost $ - difference between the billed costs and relieved costs for the

invoices sent to Clients year to date.

YTD Total Time and Cost $ Cash Receipts - the time dollars and the cost dollars received from

Clients on invoices year to date.

YTD Acct Rec Adj - Time $ - the amount of Accounts Receivable that was written off for time by

the Firm year to date on invoices previously rendered to Clients.

YTD Acct Rec Adj - Cost $ - the amount of Accounts Receivable that was written off for cost by

the Firm year to date on invoices previously rendered to Clients.

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Average Billable Rate / Blended Rate:

• Some engagements are won based on the blended rate. On others,

the blended rate is calculated after the fact and used to assess the

practice's ability to leverage staff. For example, if your firm billed a

client $75,000 in total fees for 600 billable hours, the blended rate

would be $125 an hour (total fees billed divided by the hours billed).

Sophisticated clients monitor this rate and often question why it is

increasing. All things being equal, maintaining a low blended rate

while delivering superior legal advice can generate competitive

advantages. (Source: BizActions)

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Billing Realization Rate:

• Often the recorded billable hours and the actual amount charged to

the client differ. Bills are written down for many reasons. Many law

firms neglect to manage this rate as it is typically calculated well

after the work has been completed. Whatever the realization

percentage rate is, chances are good that it can be improved by five

percent or more by determining the causes of the write-offs and

eliminating at least some of them. (Source: BizActions)

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Basic

Intermediate

Advanced

a) Key Statistics

34

Basic

Intermediate

Advanced

Last 12 months

Last 12 years

Trend Analysis is important.

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35

a. This year vs. last FS

1

2

3

4

5

6

Concept

a) This Year vs. Last

Basic

Intermediate

Advanced

Percent of Total Income Variance ($ and %) 25% 8% 11% 1% 5% 7% 7% .4% .3% .3% 3% 20% 7% 8% 1% 5% 4% 6% 1% .4% .3% 4% 31% 10% 12% .3% 7% 8% 9% 1% .4% .0% 4% 24% 8% 9% .04% 5% 6% 6% 1% .3% .3% 4% 100% 100% 100% 100%

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a. Opened Files by Area of Law - Matter - Client

B

A

1

2

3

4

5

6 I

Concept

a) Opened Files by Area of Law (by Year)

38

Basic

Intermediate

Advanced

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a) Opened Files by Area of Law (by Month)

39

...using the Matter Open Date.

a) Opened Files by Area of Law (by Year)

Basic

Intermediate

Advanced

...using the Matter Open Date.

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41

Resource Management a. Monthly Calendar b. My Time

B

A

1

2

3

4

5

6 I

Concept

a) Monthly Calendar

42

Basic

Intermediate

Advanced

Time has to be worked to be billed and collected. Timekeepers should

‘know’ their expectations and be

reminded of them.

(23)

b) My Time

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Individual Statistics

Annual billable goals are an accumulation of daily billable goals.

Day by Day Accountability Budget Actual Trend ‘Picture’ Budget Actual $

a. Credit Limit Reporting b. Asset – Turn and Days c. New Clients/Matters

B

A

1

2

3

4

5

6 I

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a) Credit Limit Reporting

45

Basic

Intermediate

Advanced

Credit Limits

Client Unbilled_Time Unbilled_Cost _ReceivableAccounts Totals Credit Limit % of Credit _Limit

ABC & Co. 1,000 1,000 500 2500 7,000 36%

B&B Travels 2,500 1,000 0 3500 7,000 50%

Carson, Inc. 6,000 0 700 6,700 7,000 96%

Dyer Bros. 1,000 500 0 1,500 10,000 15%

Ellison & Ellison 500 250 200 950 5,000 19%

Note: Monitor Clients at or above (e.g., 80%) of their limit).

Note: Requiring Originating Attorneys to think about a new Client’s ability to

pay by implementing credit limits is a “Best Practice” initiative.

A B C D

(A+B+C)

E F

(D/E)

b) Asset - Turn

Inventory Turn Calculation

Billing Attorney Annual Billable Time Unbilled Time _Inventory Inventory _Turn

Ashland, Joe $269,000 $82,000 3.3 Baldwin, Bob $337,600 $65,000 5.2 Brown, Ashley $289,400 $51,000 5.7 Barley, Jonathan $377,500 $32,200 11.7 Carlton, Marissa $400,000 $ 63,000 6.3 Totals $1,673,500 $293,200 5.7 46

Basic

Intermediate

Advanced

Note: Monitor by Billing Attorney, Area of Law, and Client

A B C

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b) Asset - Days

Average Days in Inventory

Billing Attorney Unbilled

Time $ Average Daily Billable Time $ Average Days in Inventory Ashland, Joe $82,000 $1,067 77 Baldwin, Bob $65,000 $1,339 49 Brown, Ashley $51,000 $1,148 44 Barley, Jonathan $32,200 $1,498 22 Carlton, Marissa $ 63,000 $1,587 40 Totals $293,200 $6,641 44 47

A B C

(A/B) B = Annual Billable Dollars / Working Days of Year (i.e., 252)

b) Asset - Turn

Accounts Receivable Turn

Billing Attorney Annual Fees Billed Average A/R _TurnA/R

Ashland, Joe $259,950 $92,000 2.8 Baldwin, Bob $338,000 $69,000 4.9 Brown, Ashley $275,400 $52,500 5.3 Barley, Jonathan $357,420 $35,200 10.2 Carlton, Marissa $396,900 $ 70,000 5.7 Totals $1,627,670 $318,700 5.1

Basic

Intermediate

Advanced

A B C

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Days in Accounts Receivable

Billing Attorney A/R Average Day

Fees Billed Average Days in AR Ashland, Joe $92,000 $1,032 89.2 Baldwin, Bob $69,000 $1,341 51.4 Brown, Ashley $52,500 $1,093 48.0 Barley, Jonathan $35,200 $1,418 24.8 Carlton, Marissa $ 70,000 $1,575 44.4 Totals $318,700 $6,459 49.3 49

Basic

Intermediate

Advanced

A B C

(A/B)

b) Asset - Days

B = Fees Billed/Working Days of Year (i.e., 252)

c) New Clients/Matters

50

Basic

Intermediate

Advanced

Firm Investment / Asset Management

Train New Clients

...Of the new Clients opened in the last 365 days, are they paying timely?

(27)

51

a. Utilization / Capacity Analysis b. Rate Assessment

c. Write Off Analysis / Gaps

1

2

3

4

5

6 Utilization / Capacity Analysis:

• From almost the first day practicing law, attorneys focus on

utilization. Expressed as a percentage of total available hours to be

billed throughout the year, this metric is the first step in determining

performance. Most firms function on the basis that there are

anywhere from 1,800 to 2,300 billable hours a year. If a lawyer bills

1,700 hours, the utilization rate would range from 94.4 percent to

73.9 percent. (Source: BizAction)

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a) Utilization / Capacity Analysis

53

Basic

Intermediate

Advanced

Capacity Analysis by Working Attorney

Working Attorney Billable Hours_(YTD) Budget Hours % of Budget

Ashland, Joe 1,422 1,800 79% Baldwin, Bob 1,742 1,800 97% Brown, Ashley 2,300 1,800 128% Barley, Jonathan 2,100 1,800 117% Carlton, Marissa 1,942 1,800 108% Totals 9,506 9,000 106% A B C (A/B) Capacity

a) Utilization / Capacity Analysis

54

Basic

Intermediate

Advanced

Capacity Analysis by Practice Group

Practice Group Billable Hours_(YTD) Budget Hours Capacity %

Tax 12,600 15,000 84% Corporate 13,000 15,000 87% Litigation 22,000 30,000 73% Trust 5,100 6,000 85% Totals 52,700 66,000 80% A B C (A/B) Capacity

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b) Rate Assessment

55

Days elapsed between time entry date and rate start date

c) Write Off Analysis / Gaps

Basic

Intermediate

Advanced

1. Write offs due to Client rates less than Firm Standard rates

2. Write offs in the billing process for time

3. Write offs in the billing process for cost

4. Write offs due to A/R adjustments

1 2 4 3

(30)

57

Financial Statements a. Budgets b. Profit Plan

B

A

1

2

3

4

5

6 I

a) Budgets

58

Basic

Intermediate

Advanced

Budget versus Actual

Variance ($ and %) 19% 7% 8% 1 % 5% 4% 6% 1% .4% .2% 4 %

(31)

b) Profit Plan

59

Actual Budget

1,000,0001,000,000 1,000,00014,579,95012,289,426 709,476

a. Client Revenue by Year b. Matter Revenue by Year c. Cross-selling Report d. Client/Matter Minding

B

A

1

2

3

4

5

6 I

(32)

a) Client Revenue by Year

61 This year’s revenue by the Client open date

Basic

Intermediate

Advanced

a) Client Revenue by Year

62

Basic

Intermediate

Advanced

55%

(33)

b) Matter Revenue by Year

63 This year’s revenue by the Matter open date

b) Matter Revenue by Year

Basic

Intermediate

Advanced

78%

(34)

65

c) Cross-selling Report

Fee Receipts

Practice Group

Tax Corporate Litigation Trust Totals

$ % $ % $ % $ % $ % Tax $53,845.23 23.7 % $45,125.98 16.6% $70,425.15 21.1% $22,985.65 21.9% $192,382.01 20.5% Corporate $85,125.68 37.5% $101,020.67 37.3%$185,325.50 55.6% $38,489.45 36.6% $409,961.30 43.8% Litigation $29,458.51 13.0% $79,698.25 29.4% $17,258.32 5.2% $18,145.78 17.3% $144,560.86 15.4% Trust $58,654.28 25.8% $45,215.32 16.8% $60,259.67 18.1% $25,536.83 24.2% $189,666.10 20.3% Totals $227,083.70100.0%$271,060.22100.0%$333,268.64100.0%$105,157.71 100.0% $936,570.27 100.0% Working Attorney Originating Attorney

Basic

Intermediate

Advanced

d) Client/Matter Minding

66

Basic

Intermediate

Advanced

Last time posted date equals the last contact date.

Clients that have not been contacted in the last 365 days (evidenced by the lack of time entry)...

(35)

67

Resource Management a. My Team b. Cross-working Report

1

2

3

4

5

6 a) My Team

Basic

Intermediate

Advanced

When individual statistics improve, Firm statistics improve.

(36)

a) My Team

69

Basic

Intermediate

Advanced

70

Basic

Intermediate

Advanced

b) Cross-working Report

Working Attorney Billing Attorney

Billable Time

Tax Corporate Litigation Trust

$ % $ % $ % $ % Tax $53,845.23 23.7 % $45,125.98 16.6% $70,425.15 21.1% $22,985.65 21.9% Corporate $85,125.68 37.5% $121,020.67 44.6% $135,325.50 40.6% $38,489.45 36.6% Litigation $49,458.51 21.8% $59,698.25 22.0% $67,258.32 20.2% $18,145.78 17.3% Trust $38,654.28 17.0% $45,215.32 16.8% $60,259.67 18.1% $25,536.83 24.2% Totals $227,083.70 100.0% $271,060.22 100.0% $333,268.64 100.0% $105,157.71 100.0%

(37)

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b) Cross-working Report

Working Attorney Billing Attorney

Write Ups/Downs

Tax Corporate Litigation Trust

$ Billing Realization % $ Billing Realization % $ Billing Realization % $ Billing Realization % Tax $5,800.00 98.2 % $5,525.98 89.6% $1,425.15 89.1% $985.65 90.9% Corporate $5,130.68 89.5% $1,000.67 92.6% $3,325.50 102.0% $3,469.45 96.6% Litigation $4,4508.51 101.4% $5,700.25 101.0% $6,255.68 91.2% $1,145.88 101.3% Trust $3,700.28 95.0% $4,215.32 93.8% $4,200.00 89.1% $2,300.20 99.2% Totals / Avg $2,500.70 96.0% $2,500.22 94.3% $3,250.64 92.9% $1,100.00 97.0%

B

A

1

2

3

4

5

6 I

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73

Basic

Intermediate

Advanced

At an Advanced level, FTEs can become important...

Wikipedia defines FTE Equivalents as:

• a unit that indicates the workload of an employed person in a way that makes

workloads comparable across various contexts. FTE is often used to measure a

worker's involvement in a project, or to track cost reductions in an organization. An

FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of

0.5 signals that the worker is only half-time. (Wikipedia.org)

Provide comparability between periods as census

statistics grow or shrink.

74

Basic

Intermediate

Advanced

b) Operational Statistics Analysis

• With FTE Equivalents

Operational Statistics

Per Partner Per Attorney Per Timekeeper

Unbilled Time Unbilled Cost Account Receivable

(39)

75

• With FTE Equivalents b. Write Off Analysis / Write Up/Down

Reasons

1

2

3

4

5

6 Basic

Intermediate

Advanced

a) Operational Statistics Analysis

• FTE Equivalents

Operational Statistics

Gross Fees A. Per Partner B. Per Attorney C. Per Timekeeper

1. Billable Time Hours 2. Billable Time Dollars 3. Leverage 4. Average Billable Rate 5. Billings 6. Average Billed Rate 7. Write Up/Downs 8. Cash Receipts 9. A/R Adjustments

(40)

77

Basic

Intermediate

Advanced

a) Operational Statistics Analysis

• FTE Equivalents

1. Billable Time Hours – the current billable hours (worked and entered) by the

working Attorney.

2. Billable Time Dollars – the dollar value of the billable time (worked, entered,

and posted) year to date.

3. Leverage – Non-Partner billable dollars divided by total billable dollars.

4. Average Billable Rate – current billable dollars divided by current billable hours.

It is the average billable rate per hour for all time (worked and entered) year to

date. This is also referred to as Blended Rate.

5. Billings – the time dollars billed on invoices sent to Clients.

78