One Number You Need to Know
Article Date: Thursday, January 19, 2012
Written By: Erik Mazzone
Learning to love metrics did not come easily to me.
I majored in English and Philosophy in college and have always thought of myself as a “big picture” rather than a “detail” person. Metrics seemed to fall decidedly into the “detail” category. Having a big picture orientation can be supremely unhelpful at many of life’s little junctures, such as assembling IKEA furniture or balancing a checkbook. Or managing a law firm.
As lawyers, we tend to grasp concepts quickly and make connections between facts or ideas readily. Most of us don’t, however, come prepackaged with a hardcore orientation toward metrics or data analysis – which I will define loosely as the ability to tease actionable information out of a barrage of numbers. Luckily, you don’t need a Ph.D in statistics to benefit from using metrics in law practice management. Keeping track of a few key indicators can help you better make important decisions in planning for and running your firm.
When I first started keeping track of metrics, I went a little overboard, as I am prone to do. I started keeping track of all kinds of stuff and looking for relationships between arcane and seemingly unrelated bits of data. What happens to an attorney’s billable revenue in a month where she is issued a new computer? Beats me, but if the question titillated you, you can imagine how easy it is to fall prey to searching for hidden secrets in your firm data.
To keep things simple, I’m going to suggest that you start using only one new metric in 2012. It is a metric I’m guessing most of you don’t currently calculate. It is easily calculated, and 99% of the firms I consult with already possess the underlying data (which is well more than half the battle).
That’s the good news.
The bad news is that once you know this number, you can’t un-know it. And knowing it may cause you to look differently at the way you run your firm and the folks you have on your team.
It is Revenues Per Employee (RPE).
Well, that didn’t sound so bad (or so hard to un-know, for that matter.) So, let me elaborate.
Most firms that I visit with have the underlying data to make this calculation readily available. It’s a simple calculation of gross revenues divided by the total number of employees over a given period of time, say a year. A lot of firms already perform a similar calculation for partners, associates and billing paralegals, but then lump all of the other employees into “overhead” which is a little like deciding whether a baseball team is successful based on the individual batting averages of all of the players. It misses one key ingredient – how is the firm as a whole performing?
There are a lot of different ways to track firm-wide performance, so why is RPE so special?
RPE is an important metric for three reasons.
First, RPE scales to rising or dropping revenue environments.
In a time where not every law firm can be assured of increasing gross revenues year over year, RPE allows you to look at how efficiently you are using your human capital – which is almost always the biggest expense for a law firm. Whether revenues are down 20% or up 20%, RPE remains a static metric that allows you to determine whether growth was actually profitable or whether a decline in revenues was necessarily a bad thing. As a lot of firms realized over the past four years, increasing gross revenues may be sexier, but increasing profitability is a lot more important.
Second, tracking RPE drives innovation and investment in infrastructure and systems.
RPE induces us to think harder about the default solution, we as lawyers, devise for almost every problem, which is to throw bodies at it. Law practice has lagged in the adoption of technology to simplify routine tasks and improve efficiency. A lot of legal technology experts believe that is because lawyers are cheap or anti-innovative. I don’t believe either of those explanations are true. I think lawyers just operate in a system that rewards a firm’s growth in size (as measured by the number of employees) in a whole bunch of significant normative ways. Over-acquisition of human capital just doesn’t necessarily do much to help the bottom line, and in most cases actively hurts it.
Third and finally, RPE allows us to compare apples to apples.
Tracking RPE gives lawyers a relevant basis of comparison between firms of different sizes, in different practice areas and in different locations. For those of you who have been around the NCBA long enough to remember the last Economic Survey that the Association conducted in 1998, you’ll recall that one of the frequent criticisms is that most economic information relevant to a 50 lawyer firm in a big city is not terribly relevant to a 7 lawyer firm in a small town. RPE makes it easier to understand the relative efficiency of your firm compared to others. The Law Practice Management Section is undertaking a new Economic Survey this year and I hope that RPE will be one of the questions asked.
So, here’s where I get to the hard to un-know part.
None of this matters much in a vacuum. Once you’ve calculated your RPE, what are you supposed to do with it?
I’ve talked with a lot of firms about RPE and there is a wide range in performance. The highest RPE I’ve seen is in excess of $200,000, though it is much more common for me to see an RPE of just north of $100,000. Whatever your firm’s RPE turns out to be is not, alone, dispositive in whether changes need to be made.
Ultimately, It all comes down to partner compensation. If the folks who own the firm are happy with what they’re bringing home and how much they’re working, I wouldn’t get wrapped around the axle about RPE. On the other hand, I talked to a lot of firms in 2011 where the partners were working harder than ever and taking home less compensation – and that’s not anybody’s ideal scenario.
Once you decide to improve RPE for your firm, it’s pretty clear that whether your gross revenues go up or down, you are going to have to do more with less to move that needle. There are a lot of ways to do more with less and none of them are easy or simple, but they are doable.
Ultimately, reviewing and improving RPE is a good, if sometimes painful, process for a law firm to go through. Your firm will emerge from the process leaner and more efficient; you may have fewer bodies around the water cooler; and you will probably develop greater reliance on technology. It’s not better or worse than doing business the way it was done before; it’s just adapting to the new terrain.
Best of luck for a happy and prosperous 2012. •
Erik Mazzone is the director of the Center for Practice Management for the North Carolina Bar Association, where he provides advice on technology, marketing, management and finance. He is the Associate Editor of Law Practice Today, a web-based magazine published by the ABA Law Practice Management Section and a member of the Program Committee of the National Association of Bar Executives. He is a graduate of Boston College and Boston College Law School and speaks frequently on law practice management.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.