Three better metrics for law firm success

Law firms still measure key aspects of their business — productivity, pricing, and growth — in "lawyer terms." Here are superior metrics that calculate success in real-world outcomes and experiences.

You’ve probably come across the “Law of the Instrument,” first coined by philosopher Abraham Newman but more commonly attributed to psychologist Abraham Maslow: “It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” It describes a faulty approach to problem-solving whereby your own expertise and experience dictate your analytical responses.

Everyone is prone to this habit to some extent. Lawyers, for instance, reflexively tend to diagnose just the legal dimensions of a given problem and try to apply law-related solutions, even if legal tactics won’t necessarily lead to the best outcome. Because we’re “legal hammers,” so to speak, we’re always looking for something we can pound with our legal expertise.

This is an annoying but forgivable quirk in individual lawyers. Scaled up to the organizational or institutional level, however, it becomes a real problem.

Lawyers and legal remedies frequently aren’t the best or most effective responses to a problem. But an entity whose default tool is the “legal hammer” is going to miss that fact. You can see this, for example, in legal regulators’ assumption that no person and no process is fit to solve legal problems except lawyers — and in the resulting dumpster fire raging in the access-to-justice space.

But the best illustration of the “Law of the (Legal) Instrument” is the law firm. Law firms, of course, are extremely lawyer-intensive entities. They are so densely packed with lawyers, in such close proximity to one another, that they generate a colossal amount of gravitational energy, bending the surrounding light in such a way that those within the firm can’t help but perceive everything through “lawyer lenses.”

I wrote yesterday at Slaw about how the billable hour continues to thrive in law firms in part because lawyers’ time and effort naturally appear more valuable to them than does any other pricing consideration. But wearing lawyer-coloured glasses doesn’t just affect firms’ external vision; it also influences what they see internally. Everything firms perceive is interpreted in “lawyer terms.” And crucially, that includes metrics.

Law firms use lawyers as the basic unit of measure for almost everything important.

• Productivity: Number of hours billed by lawyers

• Pricing: Number of hours billed by a lawyer multiplied by a lawyer’s hourly rate

• Growth: Number of lawyers working in the law firm

It really is astonishing, one-quarter the way through the 21st century, that legal services entities that can generate annual revenue in the billions of dollars still employ such rudimentary measures. No comparable businesses operate from such a simplistic conceptual base. “Sophisticated” law firm financial analyses use variations like “worked rates” and “collected rates,” but they’re all still based on the time and effort of each individual lawyer in the firm, just as in the 1960s.

We need to do better. That’s partly because lawyers won’t be so essential to the revenue and profitability of law firms in future — as I and others have been saying for a while, AI is going to radically reduce the number of billed hours at least at the associate level and force shifts in the underlying law firm business model.

But mostly, it’s because measuring everything important about law firms in terms of their lawyers is self-centred to the point of professional narcissism. Why do lawyers insist on making it all about us? What is blocking us from conceiving and conceptualizing our legal services businesses in terms of the people we serve and the results we achieve?

We need to retire the use of lawyer-based metrics in law firms, as well as in many other aspects of the legal sector. Here are some better ways to measure and assess three key elements of law firm financials: productivity, pricing, and growth.

1. Productivity

As I’m fond of saying, measuring productivity in terms of lawyer hours is a great way to identify your present workaholics and future outpatients, but not much else. Obviously, profitability is a more useful tool, at the individual and/or group level.

But there’s more to a law firm than its profits, and more to productivity than financial results. Look around your firm and ask: Who’s our most valuable lawyer? Who’s our “MVL”? Who contributes the most to the overall success, internal and external, of the firm? To answer those questions, you need to measure different areas of activity:

• Client Service: Successful client outcomes, positive experiences on the way to the outcome, and a better understanding of and deeper relationship with the client following the experience. Track these by asking clients after every retainer.

• Firm Culture: Active participation in non-business firm activities, visible acts of “good citizenship,” and exemplification of the firm’s core values (you do publish those, right?) — encourage, notice, elevate, and reward each instance.

• Professional Development: Both for oneself (actively enhancing one’s expertise beyond basic CLE requirements) and for the firm (mentoring younger colleagues, training junior partners, adding to the firm’s overall knowledge and proficiency).

• Financial Contributions: Revenue targets achieved, efficiencies and innovations developed, elements of the lawyer’s individual business plan achieved (you do create those for every lawyer, right?) — measure and reward them all.

2. Pricing

The basic rule of pricing, as far as I’m concerned, is that while you control your spending, your customers (and the market generally) control your income. So you do whatever you can to reduce your internal costs of doing business (without either cheapening your products or cheating your employees), while setting your external prices according to what buyers need, want, and are willing to pay (via-à-vis their other options).

In that context, setting your prices according to your costs (which is fundamentally what the cost-plus hourly billing model does) is conceptually flawed. Of course you can’t charge less than your costs of doing business — you need to know how much revenue is needed to pay for overhead like rent, electricity, technology, and associates (yes, associates). But that’s the last time you should look at your costs when setting prices. (Reflect for a moment on how liberating a concept that is.)

My view is that clients who hire a lawyer are looking for three and only three things:

1. A Successful Outcome: Your client is at a bad Point A, and they want get to a better but poorly understood Point B. Help them define Point B, and get them there.

2. A Positive Experience: Your client wants the A-to-B trip to be timely, cost-effective, and not excruciating. Do what you can to maximize all three elements.

3. An Improved Relationship: Your clients wants you to understand them and their situation better at the end of the retainer than at the start. Show that you do.

Outcome, experience, and relationship constitute everything that clients care about. What might a pricing regime look like that was based on just those three elements?

3. Growth

Two law firms merge, and the press release announces breathlessly that “the new entity will have XXX lawyers across XX offices.” Yawn. When, in history, has anyone ever said: “Fantastic, we have so many more lawyers now”? Yet I still hear law firm leaders describe mergers, acquisitions, and lateral hires as “growth.” They’re not — or at least, they don’t tell you much about whether the firm is actually, sustainably thriving.

There are three dimensions in which law firms should measure growth in future:

1. Higher Profitability: Measured for the entire firm, but with due attention to its component parts: One or two practices or groups shouldn’t be carrying all the weight. And don’t cheat by relying only on cost reduction: Revenue growth should be the primary driver of profitability, supplemented by sensible cost control.

2. Expanded Market Share: Measured either by an increase in the firm’s percentage of client spend in a market, or by an expansion into new markets adjacent to the firm’s current areas of strength. My friend Ed Wesemann used to say that law firms should aim for “dominance” in their chosen markets. He was right.

3. Greater Reputational Capital: Measured by sophisticated market research (read: not “Best Lawyers”) that shows how highly the firm and/or its professionals are esteemed by clients and competitors alike. This can be a leading indicator of the other measures: The more your firm is respected, the more good work it will get.

You can also consider internal growth metrics, which can include low but healthy levels of turnover, increasing adoption of new technologies and innovations, and more engagement by employees in all aspects of firm life.

The bottom line here is that using lawyers’ time and effort as the measure of anything important in a law firm is an archaic approach to running a professional services entity. It’s out of touch with what clients really want, and it’s out of step with the direction that technology and other macro-level changes are taking the legal sector.

Lawyers are lousy yardsticks. Come up with better measures of your productivity, pricing, and growth, and watch as all three flourish before your eyes.