Key Performance Indicators for Law Firm Growth

Due diligence is a critical step in finding the right match for law firm mergers or group acquisitions. Due diligence goes far beyond financial metrics, but there are a handful of Key Performance Indicators (KPIs) that, in my view, are fundamental to this process. As we look at expansion opportunities, the following financial indices are key to gauging the possibility of a “fit” between firms or groups.

Collection Realization:  Fee Collections/Time Worked at Standard Rates. This KPI, expressed as a percentage, measures the extent that time worked turns into revenue after consideration of rate discounts, billing discounts, and A/R write offs. It is the best objective measure of the ability to convert time worked into cash.

Average Hourly Collection Rate (ACR):  Fee Collections/(Hours Collected + Hours Written Off). ACR is the value provided by an individual working attorney, a practice group, an industry group, or a firm. ACR is used to measure ongoing progress in monetizing annual billing rate increases.

Average Billable Hours Worked (BHW):  BHW/# of Full-time Equivalent Attorneys (FTEs) . This metric can also be measured at the individual working attorney, practice group, industry group, or firm level. Average BHW provides a benchmark to both the utilization of existing personnel resources and the cultural expectations of the law firm.

Leverage: (All lawyers – equity partners)/equity partners, measured in FTEs. Greater leverage results in higher firm profitability as a larger percentage of the work is performed by lawyers with a fixed compensation arrangement.

Firms not measuring these KPIs should consider doing so. Implementing these standards will allow you to measure internal operating progress and benchmark against peer firms, competitors and potential merger candidates.

Bill Horton, Financial Analysis & Counseling

Bill’s top-tier strategic financial analysis and advice add tremendous value to EvolveLaw’s services.

To learn more on how we can help you understand your Firm’s culture visit www.evolve-law.com.

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