en·tre·pre·neur ˌäntrəprəˈnər/ noun
- a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.
If you’re a solo or small firm lawyer (and there’s a 70% chance you are), let’s face it—you’re not only a lawyer, you’re also an entrepreneur; responsible for the day-to-day management, marketing, and financial health of a business. You’ve assumed the ‘greater than normal’ financial risk of simply going to law school (to the tune, on average, of a $125,000 debt load) and graduating into a market where your employment is anything but guaranteed.
Yet despite this fact, when it comes to measuring the performance and success of lawyers and law firms, most law firm KPIs remain firmly entrenched in outdated notions that focus on the billable hour and the fee earner (legal standards), rather than the customer (entrepreneurial standards.) It’s time for a change—or, at the very least, it’s time to incorporate measures of success not exclusive to the practice of law—measures of success that drive some of today’s most prolific companies.
As a result, forward-thinking law firms will have the opportunity to take risks, innovate, and build success by using their findings to differentiate themselves from their competitors.
Drink From the Funnel
Just like any other business, you need to acquire clients to secure revenue; and, like any other business, you need to understand exactly which channels are driving client acquisition to know where your firm is succeeding and where you can scale back your efforts. Picture client acquisition like a funnel: at the very top of the funnel, you’ll have the number of customer inquiries. Following that, you’ll want to focus on how many of those inquiries are converting to paid or retained clients, what the average annual revenue per client is, and your client retention rate.
For example, if you have 800 website visitors in a month, 200 customer inquiries via an online form on your website, and 20 of those inquiries convert to paid clients, you can benchmark your firm’s website-to-lead conversion rate at 25%, and lead-to-client conversion rate at 10%. If your firm’s growth or revenue targets call for more than 20 new clients per month, you can explore initiatives that increase website traffic, such as SEO or social media, look at improving your website-to-lead conversion through form optimization or A/B testing, or you can look at improving your lead-to-client conversion rate through actions your firm takes after a form request is received. Knowing each step in your acquisition funnel, as well as determining factors and conversion rate for each, will allow you to continually optimize your efforts and elevate client acquisition to the next level.
Ditch Profit Per Partner
“PPP is not a good metric: it drives selfish, irrational, destructive behaviour,” said Jordan Furlong in this post. “It rests on a basic assumption: that the ultimate and best purpose of a law firm is to generate and maximize profits for its partners.”
Multiple firms that traditionally reported high profit-per-partner have crashed and burned, lending credence to the suggestion that PPP should not be the be-all-end-all metric for measuring law firm success. The other downside to PPP is that it’s purely reactive—if you’re noticing a downturn in PPP, you’re looking back at what’s already occurred, rather than forward.
Consider, instead, the more proactive contribution margin—calculated by revenue per unit sold (in most firms’ cases, the ‘unit’ will be the billable hour) less the variable cost per unit. After calculating your contribution margin, you can then subtract fixed costs for overhead (such as office space or IT) to arrive at your profits and profit margins. Contribution margin is versatile in that it can also be applied to different units—for example, contribution margin by practice area, contribution margin by matter, or contribution margin by clients. Your best clients-the ideal clients for your firm-will be the ones with the highest contribution margin.
So how do you determine contribution margin per client? Say, for example, you’ve spent $100,000 on marketing and business development, and acquired 20 new clients over this time. This will place your Client Acquisition Cost-or, the amount spent, on average, to acquire a new client-at $5,000 ($100,000/20). These 20 new clients then generate collected revenue of $154,000 (or $7700 in annual revenue per client). Your client contribution margin for the 20 clients acquired is $2700—the collected revenue per client minus the cost to acquire that client. Tie client contribution margin to your acquisition efforts to see which clients are bringing your firm the greatest success—clients over your firm’s client contribution margin average are generally more desirable, while clients below the average will generally not be profitable. Having this visibility at the client, matter, and practice area level will give you a much better idea of what’s contributing the most to your firm’s bottom line.
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Track ROI Roiligiously
Return on Investment should be meticulously tracked for your customer acquisition channels. Whether you’re investing in a new website, print advertising, a Super Bowl ad, or business development initiatives, you should be able to quantify what you’ve spent and what financial returns your efforts have yielded. No need to reinvent the wheel on this one; just find what you’re seeing the highest return on and double down on it. After you’ve identified what’s bringing in your ideal clients based on client contribution margin, focus specifically on the channels bringing you those clients. Once you’ve built a robust ideal customer profile, you can even narrow your firm’s focus to create a niche practice serving only those clients, and watch your profits explode.
A Calculator for Lawyers?
On average, Clio customers save eight hours a week. Before you ponder what could be achieved in that extra time, we’ve done the number crunching. Our Return On Investment Calculator measures the revenue your firm can earn when those hours are put to better use.
We published this blog post in October 2014. Last updated: .
Categorized in: Business