The Law Firm Efficiency Rating

The spread of COVID-19 has led to worldwide social distancing rules, while stopping the sports world in its tracks. Fortunately for basketball fans, the release of the highly-anticipated Michael Jordan documentary The Last Dance on April 20 provides them with some form of entertainment. This 10-part series chronicles the untold story of the’90s Chicago Bulls dynasty through the lens of the final championship season in 1997-98.

So why is this piece of information relevant to the lawyers and legal tech professionals reading this blog post? Well, while sports may be shut down for the time being, Michael Jordan is as relevant as ever. To put it simply, he’s the best, no question.

Even his “worst” seasons were still great. And as subjective as the term “greatest” or “best” may be, there is an objective metric called the “Player Efficiency Rating,” which is a rating of an individual player’s per-minute productivity. The PER is calculated using tortuous formulas sums up all a player’s positive accomplishments, subtracts the negative accomplishments, and returns a per-minute rating of a player’s performance. On this scale, Michael Jordan remains the NBA’s all-time career leader in the Player Efficiency Rating, a statistic that has been calculated since 1951.

So, again…relevance? Well, as lawyers, we tend to measure our greatness with the number of billable hours, the price of a corporate acquisition, or the percentage of a contingency fee. However, in an era of digital technologies and rapid change, our efficiency metrics need to change. And maybe lawyers, in this respect, have some lessons to learn from the basketball world. This is why I am proposing the Law Firm Efficiency Rating.

Measuring Efficiency within Law Firms

The traditional definition of “efficiency” in law firms is hard to pin down. However, the 2018 Report on the State of the Legal Market by Georgetown Law School and Thomson Reuters defines “law firm productivity” as “the number of billable hours worked by lawyers divided by the total number of lawyers.” While I understand that productivity in Big Law has been defined largely by billable hours, we are now in an era where clients purchase value, guidance, and, results—not time.

The legal profession is being disrupted by artificial intelligence, data, project management, and automation, to name a few. That is the main reason why law firms should implement other Key Performance Indicators (KPIs) for the measurement of performance and efficiency apart from billable hours worked. Whatever metrics a law firm uses to measure its efficiency and define the Law Firm Efficiency Rating, the overall system should be easy to understand, record, track, and display. For example, a law firm could measure accuracy in reviewing documents, or performance to budget and compliance with project management plans.

There are different KPIs that law firms can use instead of the traditional billable hour, which I’ve listed below:

  1. Costs: This should probably one of the most basic metrics to measure efficiency. As a law firm, you should measure the size of your external spending against industry averages, and if the internal spend is fixed or variable. A law firm can also assess whether they are spending on the best value for money provider. Law firms should implement a cost control program is to identify those areas where potential savings exist. However, avoid the temptation to cut costs, which could lead to revenue loss. For instance, Tango Law is a law firm that works remotely, saving overhead costs. Other virtual firms, like FisherBroyles and Culhane Meadows, do not only eschew offices but also offer innovative compensation models that provide their partners with the ability to offer more flexible fee arrangements without reducing profitability or quality of work. Cost-cutting is an appropriate strategy only if you are cutting the right costs. You must consider all costs, ranging from the fixed cost of your office space to the variable costs from a digital marketing strategy. Take the time to think strategically about cost reduction. (You can read more about what helps the best virtual law firms in the world succeed here.)
  2. Time entry velocity: This metric measures the amount of time it takes for billable time worked to become a time entry. This metric is used constantly in Project Management, a discipline that is driven by achieving results in a timely fashion. Most lawyers work in teams and submit their pleadings, contracts, or legal memoranda for review from a colleague or a partner. If your team is executing their tasks in a timely manner, time entry velocity should be low (meaning that the gap between time worked and time billed is small). On the other hand, if a law firm has a high time entry velocity, it is important to assess the factors that could be playing a role. For example, your firm’s time entry technology may be too difficult or onerous for your lawyers to use on the day to day basis, or your time entry policies may be too lax.
  3. Accurate pricing and budgeting: In essence, this measures the ability of your firm to accurately forecast pricing on a per matter basis. But what about the assumption that law firms sell hours? I believe that, these days, this concept is not aligned with the way that companies truly think. Clients want to be charged based on the value of the task that the law firm has performed for them, not the law firm’s hourly rate. Clients want certainty about the price of legal work. Furthermore, they want clarity and transparency. An efficient law firm can provide fixed prices, depending on the client’s needs. Instead of forcing the client to adapt to a traditional pricing model, an efficient law firm can provide new alternatives—but only if they can properly forecast how much a deal will cost.

    On the other hand, the market continues to find alternatives to push down legal fees. Therefore, the risk of the costs of a legal matter running over budget has shifted from client to lawyer. Now, lawyers should be mindful of not exceeding the budget that the client has agreed to. With a higher level of scrutiny on costs and compliance, clients can’t afford the luxury to allocate unlimited resources to a law firm. With accurate pricing, the client’s expectations are better managed. Therefore, lawyers have to be very strict on budget, to prevent clients from pushing back on bills for work completed outside of the initial budget. If the client has certainty, clarity, and transparency, the overdue bills and bills awaiting payment will probably be reduced, as clients won’t be as hesitant to pay.

  4. Amount of administrative work done by the lawyer: Email management, case management, or internal meetings are a few of the tasks that lawyers must do but cannot bill for. In fact, Clio’s 2019 Legal Trends Report showed that lawyers only spend 2.5 hours a day on billable work. However, there are a wide variety of technologies available on the market these days that can automate or streamline many of these activities. Law firms should first seek to understand how much time their own lawyers are spending on such administrative tasks beyond evaluating solutions to help them focus more on the core elements of legal practice.
  5. Return on investment: In a previous contribution, we talked about how lawyers can measure the return on investment. The return on investment could go as far as measuring marketing efforts and comparing it with the total number of leads generated and how leads convert into clients. Another approach could be to measure how much it costs to acquire a client. These are metrics that relate directly to the success of the firm and are easily measured. For law firms, return on investment can be established through close monitoring of expenses at the most granular level. It is only at that level that efficiency is really visible.
  6. Talent retention: An inexperienced team is likely to require a lot of supervision from more experienced lawyers. That means that every law firm should want a team that sticks together and grows experienced together. Lawyers are extremely smart individuals who need intellectual challenges in the workplace. If an attorney gets overwhelmed with administrative work or other non-substantive issues, he or she is likely to feel unenergetic. Legal practice often involves tedious administrative work, such as entry or email management. These tasks can be automated with technology like ZERØ, allowing lawyers to focus mostly on challenging, high-value legal work. Furthermore, if a law firm has high retention rates, the costs of onboarding diminish substantially.
  7. Automation ratio: Automation and artificial intelligence often invoke perceptions of being replaced by a robot. However, basic artificial intelligence tools can substantially increase efficiency. The McKinsey Global Institute estimates that 23% of a lawyer’s job can be automated, leaving more time to focus on substantive work or other less tedious activities. Monthly billing expense entries and email management can be automized. Law firms should use metrics to measure their performance and should periodically analyze the data to automize certain tasks. This ratio measures the correlation between the incorporation of new legal technologies against the use of manual tools. There is no exact formula or perfect ratio. However, a law firm should aspire to have a positive ratio, rather than nothing.

Why Measuring Efficiency Is More Important Than Ever

The 2019 State of U.S. Small Law Firms report found that most small law firms face a wide variety of challenges to be truly efficient. Especially, 72 percent of the respondents agreed that they spend too much time on administrative tasks, considering it a “moderate challenge”. Furthermore, the 2020 Report on the State of the Legal Market reported a decline in productivity in law firms, while clients are now requesting improved efficiency, predictability, and cost-effectiveness in the delivery of legal services.

Automating tedious, time-consuming tasks with technology will benefit your practice and your efficiency rating. At the same time, clients will appreciate the effort made to lower legal costs.

Unlike the NBA, law firms can use a variety of metrics to measure efficiency. However, it is important to clearly define the metrics to be used. Furthermore, ensure that every team member understands the metrics used to measure efficiency. Measuring efficiency means measuring productivity and performance. When firms understand that efficiency drives profitability, they can adopt the right KPI’s.

An individual lawyer’s efficiency rating will depend on the comprehensive metrics incorporated by a law firm. Your firm can create a balanced scorecard, of sorts, to determine an overall score based on the parameters laid out above. However, regardless of scoring methodology, it will remain vital for firms to use technology to support their metrics and improve efficiency, which will ultimately drive profitability.

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Mauricio Duarte

Mauricio Duarte is an International Associate at A2J Tech Store with a J.D. from Universidad Francisco Marroquin (Guatemala) and an LL.M in U.S. Law from University of St. Thomas (Minnesota).Mauricio also serves as a University Professor, teaching “Networking & Technology” and “Lawyering Skills I & II.” Mauricio served as a Fellow for the Kleros Decentralized Justice Fellowship (Law & Society) and is the Host of the Legal Hackers Podcast (in Spanish).