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Financial Measures that Matter

Properly dimensioning individual financial and strategic contributions to the success of any professional services firm requires assessment of more than simple personal fee production.

Absolutely, measuring personal billings matters: we mustn’t lose sight of accountability for direct, current contribution to revenues and financial health of the firm.

Just as assessment of the strategic health of the professional service firm must take account of factors beyond financial performance in the current period, so individual contribution to fee earning needs to take account of more than mere personal fees rendered this month, last month, and this year.

For some firms and practice groups, two or three simple metrics are sufficient. But in many areas, a wider range of contributions are worth measuring.

All of these are worth considering and will take you a long way to gaining a comprehensive picture of contributions to your firms’ fees.

Current year personal fees:

  • actual personal fees—which is the thing which is most likely to be accurately measured right now
  • fees billed subsequently uncollectible and/or written off - which reflects poor relationship management, inadequate project control, misunderstandings and communication failures, client disappointment, deficient billing practices
  • personal fees trend line:
  • are you going in the right direction?
  • is this an impressive performance coming off a low base?
  • current charge rates
  • standard, achieved
  • number of chargeable hours to produce fees and current realisation rate 
  • are you going up the value curve, or not?
  • number of annual working hours to produce fees—that is, the true effective realisation rate
  • what is it taking in business development, client relationship management, practice administration, and people management to produce these fees ?

Current year work group fees:

  • actual work group fees—total fees for all team members
  • work group fees trend line
  • work group realisation rate—that value curve thing again!
  • current realisation rate
  • true effective realisation rate.

Approximation for real gross profit (before partner returns, but after taking into account all other production costs including financing) for fees, measured for:

  •  individual professional
  •  workgroup
  •  practice group
  •  firm
  •  trend lines for each of these.

So often, we find that professional service firms love what’s simple. However, a single simple metric is a “rear vision mirror” take on what’s going on with an individual fee earner or workgroup, reflecting the business development effectiveness of the past.

Looking at actual fee production in isolation:

  • hides or disguises important realities
  • encourages short-term focus on the single behaviour being measured (fee production now)
  • fails to track the behaviours and strategies which correlate with future financial and strategic success.

At its worst, relying on the traditional single fee production measure:

  • breeds cynicism—"the firm says it wants me to go and spend time getting business, and to spread it round the firm, and to leverage our relationships for the firm as a whole, but the only thing it measures and the highest medal of honour goes to the highest personal fee earner"
  • encourages focus only on making one’s own fee target
  • rewards client-hugging
  • may be a disincentive to fee sharing and leveraging relationships for wide benefit
  • encourages short-termism
  • discourages medium and long-term investment
  • may not value business development efforts and success of non-partner lawyers as they aspire to progression.

Obtaining an assessment of financial contribution to the firm is difficult, especially as size increases.

It’s healthy to emphasise “now”—we have this year’s bills to pay and need to be attractive and financially healthy to realise future potential. But measure widely rather than narrowly to track what really matters to the finances of the firm.

Linda Julian

Linda Julian is Managing Partner of Julian Midwinter & Associates and author of “The passionate professional – creating value, success, prosperity,” which is packed with practical business development advice for lawyers.

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Filed Under: Business Management

About the Author: Linda Julian is Managing Partner of Julian Midwinter & Associates and author of “The passionate professional – creating value, success, prosperity,” which is packed with practical business development advice for lawyers.

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