george psiharis - entrepreneurship in law: kpi, metrics and the modern law practice
DESCRIPTION
What are Key Performance Indicators and how can metrics like these help your practice’s performance? Explore the business side of law and how to use tools to track and improve your profits.TRANSCRIPT
Clio Cloud Conference 2014SEPTEMBER 22 – 23, 2014 · CHICAGO, ILLINOIS
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Entrepreneurship in Law: KPIs, Metrics, and the Modern Law
Practice
by George Psiharis
@GeorgePsiharis
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a bit about me
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Vice President of Business Development & Partnerships
In my role, I work with:
• legal professionals;
• law societies and bar associations;
• law schools;
• clio certified consultants;
• and Clio’s partners to grow our business and create long-term value for our customers.
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this means that…
• I’m an in-house entrepreneur;
• I’m constantly conducting new business experiments;
• I identify, measure, and report on Key Performance Indicators (KPIs) on each and every experiment.
• my decisions are driven data;
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our agenda
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i. Traditional law firm metrics;
ii. Thinking like an entrepreneur;
iii. Measuring your practice like a startup;
iv. Building a successful business model.
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i. traditional law firm metrics
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Source: http://fortune.com/2014/08/06/15-most-profitable-business-sectors/
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this year, law firms ranked #2 - profit margin of 17.8%
(down from #1 and 18.3% in 2013)
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i. Available hours;
ii. Utilization rate;
iii. Average hourly rate;
iv. Realization rate;
v. Collection rate.
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i. Available Hours
The total number of hours that are available to be billed.
Think of this as your maximum inventory, e.g. 40 hours/week
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ii. Utilization Rate
chargeable hoursavailable hours
Of your available hours, how many are actually chargeable, netting out all non-client
facing activities?
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ii. Average hourly rate
billable value of utilized hours# of utilized hours
What is the average sale price of a utilized hour of your time?
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ii. Realization rate
value of billed hoursvalue of utilized hours
Considering the value of your utilized hours, how much of what you record is ending up on
invoices delivered to your clients?
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ii. Collection rate
total collected revenuevalue of billed hours
The all important metric: how much of what you bill actually converts to positive cash flow
for your practice?
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Let’s work through an example…
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i. Mike Ross worked 60 hours last week.
ii. He spent 10 of those hours in non-billable meetings.
iii. His average hourly rate is $250.
iv. He billed a total of $10,000 last week.
v. His finance team collected a total of $7,000.
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i. Available hours = 60, max billable = $250 x 60 = 15,000
ii. Utilization rate = 50/60 or 83%
iii. Average hourly rate = $250
iv. Realization rate = $10,000 / ($250 x 50) or 80%
v. Collection rate = $7,000 / $10,000 = 70%
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If we take collected revenue and
subtract fixed and variable costs we
can determine profits and profit
margins (where we started).
Another very popular traditional
metrics is PPP - Profits per Partner.
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does all this sound familiar so
far?
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ii. think like an entrepreneur.
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1. Traditional law firm KPIs
revolve around billable hours
and the fee earner, not the
customer.
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2. The single most important KPI in
any business is ROI, not PPP.
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3. These metrics are frozen in
time and have not adapted to a
disrupted market.
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Definition of an
entrepreneur:
“a person who organizes and
operates a business or
businesses, taking on
greater than normal financial
risks in order to do so.”
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Average debt of the class of 2013:
$125,000
Source: http://grad-schools.usnews.rankingsandreviews.com/best-graduate-schools/top-law-schools/grad-debt-rankings
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what are some examples
of entrepreneurship in
law?
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solo practices and small
firms
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According to the American Bar Association 50% of
private practitioners are solos, while 70% work in
firms of 10 lawyers or fewer.
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alternative fee arrangements
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examples of alternative fees
- Capped fees;
- Blended rates;
- Value-based fees;
- Fixed / flat fees;
- Portfolio-based fees;
- Performance-based / contingency fees
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alternative practice models
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alternative practice models
- Virtual and distributed law firms;
- Corporate secondments / in-house positions
- Legal freelancers;
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self-help & online legal forms
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we’re screwed…
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There are a number of
opportunities to take risks,
experiment, and build success in
this space - but before you do,
you have to know what to
measure an look for.
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iii. measuring your practice like
a startup
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1. look at customer
acquisition as a funnel,
across the business
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# of customer inquiries
# of converted / new customers
average annual revenue per customer
customer retention rate
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2. consider contribution
margin instead of profit
per partner (PPP)
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contribution margin:
Revenue per unit sold less the variable cost per unit.
you can then subtract fixed costs to calculate profits and profit
margins.
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contribution margin per practice area
contribution margin per matter
contribution margin per customer
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contribution margin per customer
Average Cost of Acquiring a Customer
Average revenue per customer
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$100,000 on marketing and business development
This resulted in 20 new customers
Average CAC = $100,000/20 or $5000
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These 20 new customers generated $154,000 in collected revenue this
year
Or $7700 in annual revenue per new customer.
Your contribution margin per customer is $7700 - $5000 = $2700
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Customers over this average are likely the most desirable.
Customers under this average are typically not profitable.
You can apply this to individual matters and roll it up into practice
area totals.
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3. set yourself up to track
Return on Investment
(ROI) for everything you
try.
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4. Based on ROI, identify
your ideal customer
profile.
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iv. building a successful
business model
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we’re screwed…
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Unbundling
+
Competition
+
IT
= Commoditization
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what these premium brands
offer is superior customer
service, or what we at Clio
might call customer
experience.
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your law firm is a service company that just happens to
sell legal advice‟
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build and differentiate your
customer experience based on your
ideal customer profile.
your firm here
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putting KPIs and ideal
customer profiles into
action.
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Branigan Robertson:
How I Started My Own Law Firm Right After Law
School.
http://landing.goclio.com/How-I-Started-My-Own-Law-Firm-Right-After-Law-School-Web.html
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Thank you.
Questions?
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Appendix A- Useful Resources
• http://fortune.com/2014/08/06/15-most-profitable-business-sectors/
• http://www.managingpartner.com/sites/default/files/ARK1708%20-%20Financial%20Planning
%20and%20Management%20for%20Law%20Firms_Sample_Chapter.pdf
• http://www.law21.ca/2013/08/law-firm-profitability-metrics-just-subtract-lawyers/
• http://www.americanbar.org/publications/law_practice_magazine/2013/september-october/yo
ur-financial-dashboard.html
• http://www.altmanweil.com/dir_docs/resource/41ff6ad2-da67-406e-9999-ca2aaae63539_docu
ment.pdf
• http://www.managingpartnerforum.org/tasks/sites/mpf/assets/image/MPF%20-%202012%20S
urvey%20of%20LF%20Economics%20-%20Exec%20Summary%20-%209-20-12.pdf
• http://insidelegal.typepad.com/files/ILTAInsideLegalTechnologyPurchasingSurvey2012.pdf
• http://www.appliedstrategies.ca/documents/kpi_primer.php
• http://landing.goclio.com/How-I-Started-My-Own-Law-Firm-Right-After-Law-School-Web.html
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Appendix B - Business Model Generation
http://www.businessmodelgeneration.com/canvas/bmc
https://www.youtube.com/watch?v=QoAOzMTLP5s