Does Your Firm Measure Up?

Aderant Think Tank

Does Your Firm Measure Up?

It’s natural to compare your firm to others, particularly when they are direct competitors. But what metrics are you using to determine if your firm compares favorably? There’s a tendency in law to evaluate success or failure anecdotally, rather than examining the cold, hard facts and figures. In the business world the term “benchmarking” describes the process of dispassionately measuring a company’s performance against industry standards, and it’s now being used in the legal field to great effect.

Firms can utilize internal benchmarking to better understand both their practice and attorney averages, and how those relate to the firm’s goals. In fact, the fields of both Business Intelligence (BI) and Competitive Intelligence have grown in recent years to help firms gather this data and use it for strategic planning. The strength of BI is that it provides a way to understand your own firm in great detail, using tools that gather internal firm data and translate it into clear, meaningful information. Competitive Intelligence gathers, analyzes and manages information about the external business environment, since this information also greatly affects a firm’s plans, decisions and operations.

To bring this issue into the everyday world of running a law practice, several recent surveys reflect the current status of many firms. The 2015 Report on the State of the Legal Market from Georgetown Law School found an average standard billing rate of $473, and a collected billing rate of $390. The average profits-per-partner for all firms was about $500,000, with mid-size firms averaging about $350,000. The 2014 Law Firms in Transition survey noted that firms reported a 4% increase in overall billing rates in 2014, while discounting nearly 30% of all hourly rates. Also, Aderant’s 2014 Legal Technology Industry Survey found that 98% of firms intend to invest in some tech project in 2014.

A recent story in Inc. Magazine titled How to Evaluate Law Firm Financials gave some excellent back-of-the-envelope benchmarks for firms to consider using. Using 17 years of data to analyze their new member firm’s financials, The American Academy of Estate Planning Attorneys (AAEPA) uncovered some interesting patterns.

For example, for AAEPA firms the gross revenue per employee on payroll should be about $150,000, and if this measure falls below $130,000 it’s a major red flag. The gross revenue per attorney should be at least $500,000. They found that firms that fall below this benchmark tend to do so because their attorneys are doing too much non-attorney work that should be delegated. Also, a firm’s total salaries should equal about 65% of the firm’s revenues.

On the negative side, the AAEPA noted various problems that plague struggling firms. These included firm fees that are too high, too low, or just inconsistent; high employee turnover which resulted in constantly training and ramping up new employees; poor marketing strategies; and ignoring potential additional work from existing clients.

The tools now exist for firms to examine and understand their internal data, while also collecting valuable information about the external market. They can then effectively evaluate their performance relative to market standards, set realistic performance goals and, most importantly, take control of their financial future!

How is your firm using benchmark data? Share in the comments below, on LinkedIn or send us a tweet @Aderant and let us know what you think!

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