george psiharis - entrepreneurship in law: kpi, metrics and the modern law practice

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