KPIs That Can Really Help Law Firms
Welcome to this month’s issue of inVOICE. These “5-minute reads,” brought to you by InvoicePrep, are short, informational executive briefs designed for law firm executives and managing partners. They provide practical tips and provoke new ideas to make your management of your Firm more effective. (For our prior newsletters please visit us here).
Last month, we explored some new ideas about law firm profitability. We encouraged law firms to avoid the temptation of chasing “shiny objects,” in the form of the newest and trendiest ideas, and suggested instead a focus on the “plums and oranges” – the low-hanging fruit that can make an immediate difference in firm profitability.
The low-hanging fruit we referred to comes mainly in the form of improved processes around how to invoice and how to be paid for the work being done by a law firm. Those ideas, combined with a great conference of the Federation of Defense and Corporate Counsel (FDCC) in Montreux, Switzerland in July, tee up some ideas for this month.
Key Performance Indicators – And the opportunity for law firms
Just after returning from Switzerland, I read an article exploring a series of key performance indicators (KPIs) for law firms. There are certainly no shortage of such articles. Generally, I think measurement is a good thing, and that’s certainly true in the law firm environment as well. Certainly, it seems that firm clients are measuring everything now and firms should be on board with similar processes to stay competitive.
But what really struck me about the article I read was that almost every single KPI related in some way to production. Firms were encouraged to track hours worked, hours billed, hours billed by matter type, participation in profitable matters, billing growth, new cases opened, new clients secured – the production list went on and on.
I submit that there are other KPIs that might deliver faster and more profitable return for law firms. After years of successfully growing and expanding business ventures, I know that doing “more” isn’t necessarily the fastest way to a stronger bottom line. In fact, in any business with inefficiencies, doing “more” business might in fact be the worst thing to be doing. Sometimes doing things “better” can be more powerful.
KPIs That Relate to a Firm’s Bloodline – Billing
It’s been our experience that when it comes to billing generally, most firms have two rudimentary KPIs in place: the total billings invoiced and realization rate. Yet, while the former is a pretty clearly defined number, firms sometimes vary in their definition of the latter. Sometimes “realization rate” is comprised solely of client adjustments to invoices; in other situations it includes invoices written off for many reasons, including a client inability to pay or a courtesy write-off.
In our world of improved invoicing there are several KPIs we recommend law firms add to their processes to improve their billing processes and to be paid more and faster. These KPIs fall into two general categories: Quality and Efficiency. Both matter.
Invoicing Quality KPIs
In the quality realm, we recommend these two high-level KPIs and several sub-KPIs.
- Pre-Bill Edits — First, we recommend that firms quantify the number of corrections or edits required during the pre-bill process. This should include both the number of edits (frequency) and dollar value of the edits (severity). These numbers help to identify how accurate the original time-keeping capture is and the quality of those descriptions. To make the bill truly guideline compliant both parties (both the capturing timekeeper and the pre-bill reviewer) must fully understand what is compliant and is not. In our experience it is rare that both parties can fully articulate the actual billing rules themselves. These rules may be captured in a binder in the library or simple remembered as a “rule of thumb,” but they are frequently hard to access and apply.
At a high level, a firm can then say on a monthly basis, “Our pre-bill process required 1,000 corrections, at a dollar reduction of $22,000.” At a timekeeper level, the same KPIs might identify that “Timekeeper Bob was responsible for 510 of the 1,000 corrections, at a dollar reduction of $15,000.”
This data example suggests that some extra work with Timekeeper Bob would have a dramatic and positive impact on the pre-bill process. Timekeeper Bob’s inaccurate or poor time capture creates a lot of inefficiencies and exposure for the firm. Put another way, a significant portion of the firm’s resources are required to fix Timekeeper Bob’s invoices before they can be sent out to clients.
- Client Adjustments — Just as with pre-bill corrections and edits, we recommend that firms keep detailed KPIs about the invoice adjustments taken by clients. While some firms understand the overall number (pre-appeal realization rates), many do not, and most don’t go deeper. Again, knowing both the number of edits and the dollar value of those edits is important.
Knowing how those adjustment rates compare at the timekeeper level can be illuminating. It could well be that Timekeeper Bob’s invoices are all cleaned up by the time the client sees them, but that Timekeeper Jane’s invoices (which looked fine during pre-bill) are getting cut right and left. The firm can then respond accordingly.
With both pre-bill and client-side edits, it is important to develop KPI categories that enable firms to analyze and drive corrective behavior. For example, classifying the reason for the edit or correction into easily understood categories creates potential actionable data. These categories might be “inadequate description,” or “unreasonable time” or “lack of authorization for the activity.”
Many firms do this on a one-off basis, using an individual invoices and an individual timekeeper – often on an invoice that a client has just adjusted. However, the more powerful way for firms to create an understanding of what can be improved is to do this in the aggregate, across many invoices and longer periods of time. More data means a better picture of what can be done to improve the firm’s billing behavior and subsequent bottom line. This increased clarity in the reason for the edit or adjustment means that the firm’s corrective action can be more precise, and therefore more effective.
Invoicing Efficiency KPIs
In the efficiency realm we recommend that firms focus on each phase of the invoice. The invoicing lifecycle has many stages and understanding where the slow-downs are is imperative to improving the process. Sophisticated firms (or even unsophisticated firms with the right technology), can analyze how long an invoice sits in each phase.
We recommend that firms capture the time an invoice sits in the following phases:
- Time from time-capture cut-off to finalization of pre-bill editing
- Time from pre-bill editing to invoice sent to client
- Time from being sent to client to client adjustment (or payment)
- Time from client adjustment to law firm appeal
- Time from law firm appeal to check in the door
These KPIs, when used correctly, tell the firm where things “are stuck,” and what to do to get them “unstuck.” For most firms, the quality standard should be as close to zero as possible. “We have zero client adjustments,” or “we have zero invoices we needed to appeal.” The delta between the performance standard set by the firm and the actual KPI numbers reflect where the firm should be focusing its attention.
Tell me what you think!
InvoicePrep enhances law firm profitability by improving e-billing quality and accuracy. When invoices are prepared properly, payment is more prompt and the number of denied charges decreases. InvoicePrep’s system is streamlined, efficient and uses a combination of cutting-edge technology and professionals with extensive legal invoice compliance and e-billing software knowledge. To learn more about InvoicePrep, please visit www.invoiceprep.com