Keeping Partners Informed with Key Performance Indicators

Transcription

1 Keeping Partners Informed with Key Performance Indicators Presented by Jay Erdman, CPA FM01 Saturday, 10/26/2013 8:00 AM - 9:15 AM

2 Regions 1 & 3 ALA Presentation: Keeping Partners Informed with Key Performance Indicators KPI October 2013 Jay Erdman Rippe & Kingston Serving Law Firms Since 1979 Thank You Thank you for inviting me to present! 2 1

3 Census Size of Firm < Note: Size does not really matter. 3 THINK BIG!!! The ever-changing Legal Marketplace demands it

4 KPI FOCUS 5 Law Firm Profitability Formula Income * + Salaries _ Operating Expenses = Partner Profits * All Additional Revenues or Cost Savings Go Directly to the Bottom Line and Directly Increase Partner Profits. 6 3

5 Law Firm Profitability Formula Income * * + Salaries _ Operating Expenses = Partner Profits * * Reduction in Income or Increasing Expenses works just the opposite 7 Law Firm Profitability Formula For Example: Revenue Direct Cost Indirect Cost Partner Profits $17,000,000 $6,000,000 $5,000,000 $6,000,

6 Law Firm Profitability Formula A 10% Revenue Increase Equates to a 28% Increase of Partner Profits Revenue $18,700,000 Direct Cost $6,000,000 Indirect Cost $5,000,000 Partner Profits $7,700,000 28% 9 KPI FOCUS Revenue Enhancements 10 5

7 Goals Keeping Partners Informed with Key Performance Indicators (KPI) Do Partners want to be informed? Is there such a thing as TMI for Partners? Choose your battles 11 Goals Should you use herd mentality and do what other Firms are doing? (Keeping up with the Smiths, Jones, and Does ) 12 6

8 Goals KPI Scope... Measure against past performance for improvement measurement Use them to develop strategy (goals) and then measure against that strategy (goals) Provide (some) objective measurement against other entities in your same industry 13 Goals This analysis is going to suggest that you: Compare the Firm against itself (history) and strategy (goals/budgets) Supplement your Firms strategy with industry knowledge Remember, there is no single magic silver bullet. 14 7

9 Goals Various Resources Price Waterhouse Cooper Citibank Etc. Comparison Factors Size of Firm Specialization Area of Law Clients (Industry, Size) Geography 15 Today s Agenda Key Performance Indicators Basic Key Performance Indicators Intermediate Key Performance Indicators Advanced But... KPIs are not always a one line percentage statistics, but can also include supplemental reports that require analysis. Often simplified into a statistic, KPIs can require reporting that needs to be analyzed. 16 8

10 Today s Agenda KPI come in two flavors: #1 Statistic - expressed as numbers or a percentage that can be compared against a like statistic. #2 Reporting - requires the user to analyze the elements of the report to reach a conclusion. 17 Today s Agenda #3 Firm statistics don t improve unless Individual statistics improve. This presentation will also address methodologies for monitoring individual statistics to enhance Firm statistics. Therefore... Everyone (grinders, minders, finders) has KPIs to pay attention to. 18 9

11 Overview B I A 1 Practice Development Practice Development 2 Resource Management Resource Management 3 Asset Management Asset Management Asset Management 4 Production Statistics Production Statistics Production Statistics 5 Financial Statements Financial Statements Financial Statements 6 Profitability Analysis 19 B I A 1 Practice Development a. Opened Files by Area of Law - Matter - Client Practice Development a. Client Revenue by Year b. Matter Revenue by Year c. Cross-selling Report d. Client/Matter Minding 2 Resource Management a. Monthly Calendar b. My Time Resource Management a. My Team (budgets comparison) b. Cross-working Report 3 Asset Management a. Unbilled Time / Aging b. Unbilled Cost / Aging c. A/R with Aging Asset Management a. Credit Limit Reporting b. Asset Turn and Days c. New Clients/Matters Asset Management a. Operational Statistics Analysis With FTE Equivalents 4 Production Statistics a. Key Statistics Production Statistics a. Utilization / Capacity Analysis b. Rate Assessment c. Write Off Analysis / Gaps Production Statistics a. Operational Statistics Analysis With FTE Equivalents b. Write Off Analysis / Write Up/Down Reasons 5 Financial Statements a. This year vs. last FS Financial Statements a. Budgets b. Profit Plan Financial Statements a. Operational Statistics Analysis With FTE Equivalents 6 Profitability Analysis a. Profitability 20 10

12 Overview We have over 30 KPI statistics & reports...way too many. Choose the ones that are relevant to your Firm and its culture. Grow as time progresses. 21 B I A Asset Management a. Unbilled Time / Aging b. Unbilled Cost / Aging c. A/R with Aging Concept 22 11

13 a) Unbilled Time Dollars & Percents Variance Rippe & Kingston Aging Periods that are relevant to your practice Net Unbilled after Retainers or Unapplied Cash 23 b) Unbilled Cost Dollars & Percents Variance Rippe & Kingston Aging Periods that are relevant to your practice Net Unbilled after Retainers or Unapplied Cash 24 12

14 c) Accounts Receivable with Aging Dollars & Percents Variance Rippe & Kingston Aging Periods that are relevant to your practice It might be helpful to separately age the last bucket to see how old the old A/R really is. 25 B I A Production Statistics a. Key Statistics 5 6 Concept 26 13

15 Discussion: Cash vs. Accrual Reporting Pros & Cons a) Key Statistics Rippe & Kingston When individual statistics improve, Firm statistics improve

16 Key Statistics Terminology: YTD Billable Time Hours - the current billable hours (worked and entered) by the working Attorney year to date. YTD Billable Time BIM Value - the dollar value of the billable time (worked, entered, and posted) year to date. The current billable hours are extended at the override rate if one exists or an Attorney s standard rate if an override does not exist. Average Billable Rate - current billable dollars divided by current billable hours. It is the average billable rate per hour for all time (worked and entered) year to date. This is also referred to as Blended Rate. YTD Total Time $ Billed - the time dollars billed to Clients on invoices year to date. YTD Total Cost $ Billed - the cost dollars billed to Clients on invoices year to date. 29 Key Statistics Terminology: YTD Total Time and Cost $ Billed - the time dollars and the cost dollars billed to Clients on invoices year to date. Effective Billed Rate - the effective hourly rate for the time billed on the invoices to Clients. It is arrived at by taking the billed amount divided by the relieved hours for the current invoices sent to Clients. As an example, if a billing memo had 5 hours for a total of $1000 and is billed for $800, this calculation would be an effective rate of $160 per hour. YTD Write Up/Down Time BIM Value - the difference between the billed and relieved amounts for the invoices sent to Clients year to date. YTD Write Up/Down Time Std Value - the difference between the billed and relieved amounts calculated at the Attorney's standard rate for the invoices sent to Clients year to date

17 Key Statistics Terminology: Time Realization BIM Value - the billed amount divided by the relieved amount for the invoices sent to Clients. YTD Write Up/Down Cost $ - difference between the billed costs and relieved costs for the invoices sent to Clients year to date. YTD Total Time and Cost $ Cash Receipts - the time dollars and the cost dollars received from Clients on invoices year to date. YTD Acct Rec Adj - Time $ - the amount of Accounts Receivable that was written off for time by the Firm year to date on invoices previously rendered to Clients. YTD Acct Rec Adj - Cost $ - the amount of Accounts Receivable that was written off for cost by the Firm year to date on invoices previously rendered to Clients. 31 Average Billable Rate / Blended Rate: Some engagements are won based on the blended rate. On others, the blended rate is calculated after the fact and used to assess the practice's ability to leverage staff. For example, if your firm billed a client $75,000 in total fees for 600 billable hours, the blended rate would be $125 an hour (total fees billed divided by the hours billed). Sophisticated clients monitor this rate and often question why it is increasing. All things being equal, maintaining a low blended rate while delivering superior legal advice can generate competitive advantages. (Source: BizActions) 32 16

18 Billing Realization Rate: Often the recorded billable hours and the actual amount charged to the client differ. Bills are written down for many reasons. Many law firms neglect to manage this rate as it is typically calculated well after the work has been completed. Whatever the realization percentage rate is, chances are good that it can be improved by five percent or more by determining the causes of the write-offs and eliminating at least some of them. (Source: BizActions) 33 a) Key Statistics Key Statistics Rippe & Kingston Last 12 months Last 12 years Trend Analysis is important

19 B I A Financial Statements a. This year vs. last FS 6 Concept 35 a) This Year vs. Last Percent of Total Income Variance ($ and %) 100% 100% 100% 100% 25% 20% 31% 24% 8% 7% 10% 8% 11% 8% 12% 9% 1% 1%.3%.04% 5% 5% 7% 5% 7% 4% 8% 6% 7% 6% 9% 6%.4% 1% 1% 1%.3%.4%.4%.3%.3%.3%.0%.3% 3% 4% 4% 4% 36 18

20 B I A 1 Practice Development a. Opened Files by Area of Law - Matter - Client Concept 37 a) Opened Files by Area of Law (by Year) Rippe & Kingston...using the Matter Open Date

21 a) Opened Files by Area of Law (by Month) Rippe & Kingston...using the Matter Open Date. 39 a) Opened Files by Area of Law (by Year) Rippe & Kingston...using the Matter Open Date

22 B I A 1 2 Resource Management a. Monthly Calendar b. My Time Concept 41 a) Monthly Calendar Rippe & Kingston Timekeepers should know their expectations and be reminded of them. Time has to be worked to be billed and collected

23 b) My Time Rippe & Kingston Individual Statistics Day by Day Accountability Budget Actual Trend Picture Budget Actual $ Annual billable goals are an accumulation of daily billable goals. 43 B I A Asset Management a. Credit Limit Reporting b. Asset Turn and Days c. New Clients/Matters

24 a) Credit Limit Reporting Credit Limits Client Unbilled Time Unbilled Cost Accounts Receivable Totals Credit Limit % of Credit Limit ABC & Co. 1,000 1, ,000 36% B&B Travels 2,500 1, ,000 50% Carson, Inc. 6, ,700 7,000 96% Dyer Bros. 1, ,500 10,000 15% Ellison & Ellison ,000 19% A B C D (A+B+C) Note: Monitor Clients at or above (e.g., 80%) of their limit). Note: Requiring Originating Attorneys to think about a new Client s ability to pay by implementing credit limits is a Best Practice initiative. E F (D/E) 45 b) Asset - Turn Inventory Turn Calculation Billing Attorney Annual Billable Time Unbilled Time Inventory Inventory Turn Ashland, Joe $269,000 $82, Baldwin, Bob $337,600 $65, Brown, Ashley $289,400 $51, Barley, Jonathan $377,500 $32, Carlton, Marissa $400,000 $ 63, Totals $1,673,500 $293, A B C (A/B) Note: Monitor by Billing Attorney, Area of Law, and Client 46 23

25 b) Asset - Days Average Days in Inventory Billing Attorney Unbilled Time $ Average Daily Billable Time $ Average Days in Inventory Ashland, Joe $82,000 $1, Baldwin, Bob $65,000 $1, Brown, Ashley $51,000 $1, Barley, Jonathan $32,200 $1, Carlton, Marissa $ 63,000 $1, Totals $293,200 $6, A B C (A/B) B = Annual Billable Dollars / Working Days of Year (i.e., 252) Note: Monitor by Billing Attorney, Area of Law, and Client 47 b) Asset - Turn Accounts Receivable Turn Billing Attorney Annual Fees Billed Average A/R A/R Turn Ashland, Joe $259,950 $92, Baldwin, Bob $338,000 $69, Brown, Ashley $275,400 $52, Barley, Jonathan $357,420 $35, Carlton, Marissa $396,900 $ 70, Totals $1,627,670 $318, A B C (A/B) Note: Monitor by Billing Attorney, Area of Law, and Client 48 24

26 b) Asset - Days Days in Accounts Receivable Billing Attorney A/R Average Day Fees Billed Average Days in AR Ashland, Joe $92,000 $1, Baldwin, Bob $69,000 $1, Brown, Ashley $52,500 $1, Barley, Jonathan $35,200 $1, Carlton, Marissa $ 70,000 $1, Totals $318,700 $6, A B C (A/B) B = Fees Billed/Working Days of Year (i.e., 252) Note: Monitor by Billing Attorney, Area of Law, and Client 49 c) New Clients/Matters Firm Investment / Asset Management...Of the new Clients opened in the last 365 days, are they paying timely? Rippe & Kingston Train New Clients 50 25

27 B I A Production Statistics a. Utilization / Capacity Analysis b. Rate Assessment c. Write Off Analysis / Gaps Utilization / Capacity Analysis: From almost the first day practicing law, attorneys focus on utilization. Expressed as a percentage of total available hours to be billed throughout the year, this metric is the first step in determining performance. Most firms function on the basis that there are anywhere from 1,800 to 2,300 billable hours a year. If a lawyer bills 1,700 hours, the utilization rate would range from 94.4 percent to 73.9 percent. (Source: BizAction) 52 26

28 a) Utilization / Capacity Analysis Capacity Analysis by Working Attorney Working Attorney Billable Hours (YTD) Budget Hours % of Budget Ashland, Joe 1,422 1,800 79% Baldwin, Bob 1,742 1,800 97% Brown, Ashley 2,300 1, % Barley, Jonathan 2,100 1, % Carlton, Marissa 1,942 1, % Totals 9,506 9, % A B C (A/B) Capacity 53 a) Utilization / Capacity Analysis Capacity Analysis by Practice Group Practice Group Billable Hours (YTD) Budget Hours Capacity % Tax 12,600 15,000 84% Corporate 13,000 15,000 87% Litigation 22,000 30,000 73% Trust 5,100 6,000 85% Totals 52,700 66,000 80% A B C (A/B) Capacity 54 27

29 b) Rate Assessment Rippe & Kingston Days elapsed between time entry date and rate start date 55 c) Write Off Analysis / Gaps 1. Write offs due to Client rates less than Firm Standard rates 2. Write offs in the billing process for time 3. Write offs in the billing process for cost 4. Write offs due to A/R adjustments Rippe & Kingston 56 28

30 B I A Financial Statements a. Budgets b. Profit Plan 6 57 a) Budgets Budget versus Actual Variance ($ and %) 19% 7% 8% 1 % 5% 4% 6% 1%.4%.2% 4 % 58 29

31 b) Profit Plan Actual Budget 1,000,000 1,000,000 1,000,000 14,579,950 12,289, , B I A 1 Practice Development a. Client Revenue by Year b. Matter Revenue by Year c. Cross-selling Report d. Client/Matter Minding

32 a) Client Revenue by Year Rippe & Kingston This year s revenue by the Client open date 61 a) Client Revenue by Year 55% 63% 62 31

33 b) Matter Revenue by Year Rippe & Kingston This year s revenue by the Matter open date 63 b) Matter Revenue by Year 78% 68% 64 32

34 c) Cross-selling Report Fee Receipts Practice Group Tax Corporate Litigation Trust Totals $ % $ % $ % $ % $ % Tax $53, % $45, % $70, % $22, % $192, % Originating Attorney Corporate $85, % $101, % $185, % $38, % $409, % Litigation $29, % $79, % $17, % $18, % $144, % Trust $58, % $45, % $60, % $25, % $189, % Totals $227, % $271, % $333, % $105, % $936, % Working Attorney 65 d) Client/Matter Minding Clients that have not been contacted in the last 365 days (evidenced by the lack of time entry)... Rippe & Kingston Last time posted date equals the last contact date

35 B I A 1 2 Resource Management a. My Team b. Cross-working Report a) My Team Rippe & Kingston When individual statistics improve, Firm statistics improve

36 a) My Team Rippe & Kingston 69 b) Cross-working Report Billable Time Practice Group Tax Corporate Litigation Trust $ % $ % $ % $ % Tax $53, % $45, % $70, % $22, % Billing Attorney Corporate $85, % $121, % $135, % $38, % Litigation $49, % $59, % $67, % $18, % Trust $38, % $45, % $60, % $25, % Totals $227, % $271, % $333, % $105, % Working Attorney 70 35

37 b) Cross-working Report Write Ups/Downs Practice Group $ Tax Corporate Litigation Trust Billing Realization % $ Billing Realization % $ Billing Realization % $ Billing Realization % Tax $5, % $5, % $1, % $ % Billing Attorney Corporate $5, % $1, % $3, % $3, % Litigation $4, % $5, % $6, % $1, % Trust $3, % $4, % $4, % $2, % Totals / Avg $2, % $2, % $3, % $1, % Working Attorney 71 B I A Asset Management a. Operational Statistics Analysis With FTE Equivalents

38 At an Advanced level, FTEs can become important... Wikipedia defines FTE Equivalents as: a unit that indicates the workload of an employed person in a way that makes workloads comparable across various contexts. FTE is often used to measure a worker's involvement in a project, or to track cost reductions in an organization. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker is only half-time. (Wikipedia.org) Provide comparability between periods as census statistics grow or shrink. 73 b) Operational Statistics Analysis With FTE Equivalents Operational Statistics Per Partner Per Attorney Per Timekeeper Unbilled Time Unbilled Cost Account Receivable 74 37

39 B I A Production Statistics a. Operational Statistics Analysis With FTE Equivalents b. Write Off Analysis / Write Up/Down Reasons a) Operational Statistics Analysis FTE Equivalents Operational Statistics Gross Fees A. Per Partner B. Per Attorney C. Per Timekeeper 1. Billable Time Hours 2. Billable Time Dollars 3. Leverage 4. Average Billable Rate 5. Billings 6. Average Billed Rate 7. Write Up/Downs 8. Cash Receipts 9. A/R Adjustments 76 38

40 a) Operational Statistics Analysis FTE Equivalents 1. Billable Time Hours the current billable hours (worked and entered) by the working Attorney. 2. Billable Time Dollars the dollar value of the billable time (worked, entered, and posted) year to date. 3. Leverage Non-Partner billable dollars divided by total billable dollars. 4. Average Billable Rate current billable dollars divided by current billable hours. It is the average billable rate per hour for all time (worked and entered) year to date. This is also referred to as Blended Rate. 5. Billings the time dollars billed on invoices sent to Clients. 77 a) Operational Statistics Analysis FTE Equivalents 5. Average Billed Rate dollars billed divided by the hours relieved amounts for invoices sent to Clients. 6. Write Up/Downs the difference between the billed and relieved amounts for the invoices sent to Clients. 7. Cash Receipts the time dollars and the cost dollars received from Clients on invoices. 8. A/R Adjustments the amount of Accounts Receivable that was written off for time and cost by the Firm year to date on invoices previously rendered to Clients

41 b) Write Off Analysis / Write Up/Down Reasons Rippe & Kingston Write Up/Down Reason Codes 79 B I A Financial Statements a. Operational Statistics Analysis With FTE Equivalents

42 a) Operational Statistics Analysis With FTE Equivalents Fee Revenue Salaries (Atty/Timekeepers) Support Staff Gross Profit Occupancy Support Staff (Secretary and others) IT Etc. Total Operating Expenses Net Operating Income Operational Statistics Per Partner Per Attorney Per Timekeeper 81 Gross Margin: Expressed as a percentage, your firm's margin (profits after expenses divided by fees collected) is an important measure of how billable your firm is and an indication of how well it is managing expenses. A margin of 35 percent to 40 percent is normally associated with a high performing law firm that can collect fees while maintaining a low cost structure. (Source: BizActions) 82 41

43 B I A Profitability Analysis a. Profitability Concept 83 a) Profitability What is it? An Accounting allocation process, which measures the gross and net contribution to the Firm s profits of a given revenue stream. An Accounting analysis, which calculates a series of direct and indirect rates per timekeeper per hour allocated to a defined revenue stream to measure gross and net contribution to Firm profits

44 a) Profitability A Systematic Approach for Measuring the Profitability of the Firm Identify Revenue Identify Direct Costs Identify Indirect/Overhead Costs Apply Direct and Indirect Cost to Revenue 85 a) Profitability Why use it? All Clients Contribute to Profitability All Attorneys Contribute to Profitability Create Better Informed Decision Makers Cost Structure & Guidelines Rate Structure & Guidelines Profitability Models 86 43

45 a) Profitability Who should use it? Law Firm Management Executive Committee Practice Group Leaders Billing Attorneys 87 a) Profitability Where should it be used? Measurement of Profitability of Revenue: Products Clients Attorneys (what we produce) (who buys it) (who sells it) (who manages it) (who creates it) 88 44

46 a) Profitability INCOME STATEMENT FEE INCOME PERSONNEL EXPENSES (Direct Cost) OVERHEAD (Indirect Cost) NET PROFIT 89 a) Profitability Firm Per Invoice Per Time Entry Fee Income Direct Cost Revenue Direct Cost Revenue Direct Cost Indirect Cost Indirect Cost Indirect Cost Net Profit Net Profit Net Profit 90 45

47 a) Profitability Revenue Costing Formula Client Invoices Time Entries Working Timekeepers Direct Cost Indirect/Overhead Cost Revenue Direct Cost = Gross Profit Gross Profit Indirect/OH Cost = Net Profit 91 a) Profitability Identify Direct Costs/Timekeeper 92 46

48 a) Profitability Identify/Isolate Direct Expenses Salary Bonus Taxes Medical Benefits Parking 93 a) Profitability Indirect Costs Allocation of all Other Firm Expenses 94 47

49 a) Profitability Rippe & Kingston 95 REPORTING RESULTS Firm Office Department Areas of Law Client Client/Matter Originating Attorney Billing Attorney Responsible Attorney Working Attorney 96 48

50 Summary Page We have over 30 KPI statistics & reports...way too many. Choose the ones that are relevant to your Firm and its culture. Grow as time progresses. THANK YOU! 97 THINK BIG!!! 98 49