The Three Step Programme to Monitoring Performance in Law Firms

Ian Hopkins 19-04-2023

Ian Hopkins explores best practice when it comes to law firm financial performance monitoring. This article first appeared in Legal Abacus Magazine

Monitoring financial performance at all levels of your firm is crucial to maintaining a vibrant profitable business.

If the leaders and managers in your firm understand and act upon the financial management information they receive, the better the chances of improved financial performance over time.

So, how do you implement or improve an existing performance monitoring scheme in your law firm, so that it becomes a key tool for decision making allowing you to deliver your strategic goals and objectives along the way.

There are three important steps:

No 1 – Generating the right financial management information

The starting point for most law firms is to generate a good set of management accounts with the emphasis being on the team performance as opposed to the individual lawyer performance.

The management accounts should mirror the firm’s management structure with each department and depending on the department’s size, sub department being shown as its own profit centre or strategic business unit.

Focus on the fees and gross profitability of each department because these are the things that a Head of Department can influence and manage whereas many items in the full profit and loss account they cannot.

Within each department however there is a need to monitor individual lawyer performance. Typical measures I would expect to see include fees per lawyer, matter related and total time per lawyer, utilization rates, aged WIP and debtors, new matters opened and archived.

It is important to keep the design of the financial management information easy to follow and user friendly. Avoid information overload as lawyers are busy people and will not read it. Many lawyers do not like numbers so where possible, use visual charts such as bar graphs which can be a powerful tool in getting a message across.

The frequency a firm should be monitoring business performance varies and depends on a number of factors. Smaller firms may review monthly whereas larger firms with greater resources available, more frequently. The important thing is to continually review the key financial measures in your business and make decisions quicker as a result.

No 2 – Distribute the information

A growing number of law firms now use dashboards for their lawyers and managers allowing instant access to real time financial information avoiding the need to circulate monthly management packs either in hard copy or electronically.

For most law firms however the financial management information is generated in the traditional way by the accounts department.

Your accounts department should aim to consistently produce the monthly management accounts as soon as possible after month end so that it becomes part of the way things are done in your firm. Financial management information that is out of date is worthless and will not allow your managers to drive performance improvement.

Law firms have differing approaches to sharing financial information with managers and lawyers. Some firms are wary of distributing information for cultural reasons, whereas other firms are more open with what is shared.

In my experience Heads of Department and lawyers are motivated and respond well to being shown how their team or office is performing as against other teams and offices in the firm. Managed correctly it can generate a healthy level of peer competition within the firm which in turn will improve financial performance.

No 3 – Act on the Information

Failing to act on the financial information provided is the most common fault with performance monitoring in law firms.

It is not unusual, in my experience, for financial management information to be distributed without any guidance being provided as to what it means or what the Head of Department or lawyers should do with the information.

To avoid falling into this trap the Managing Partner and Head of Accounts should spend time with each Head of Department explaining the financial management information provided and establishing a framework throughout the firm for performance monitoring to thrive.

It should be explained and understood that Heads of Department are accountable for the performance of their team and are also empowered to drive up performance.

If you can create an environment within your firm where a group of leaders emerge at Head of Department level each driving improved profitability of their department, the overall financial performance of the firm will improve as a result.

The performance monitoring framework you establish within your firm should include monthly 1:1s between the Managing Partner and each Head of Department to review performance and a monthly meeting with the Heads of Department as a group to review the firm’s performance and forecast future performance.

Importantly monthly 1:1s between the Head of Department and each lawyer in their department should be set up to firstly ensure the lawyer understands the information provided and secondly to review performance – does the lawyer have too much/too little work; do they have sufficient administrative support; are there any training needs; can more WIP be billed; what action is being taken regarding debtors; Is there a backlog of archiving files?

Each review meeting within the performance monitoring framework should have a short-written record of the decisions made, action to be taken, by whom and by when to ensure progress is made and that the meetings are not talking shops.

Those firms that are able to successfully implement the three steps identified in this article, and establish a fully functioning performance monitoring regime within their business, providing the necessary information to their lawyers and managers, will see improved performance as a result and give themselves a better chance of navigating the headwinds faced by the UK economy over the next two years.