William D. Henderson, Director of the Center on the Global Profession and law professor at Indiana University School of Law, participated in a recent Legal Executive Institute panel on “Alternative Ways of Measuring Law Firm Performance”. LEI sat down with Prof. Henderson afterward and asked him about the new metrics and how the industry looks at these performance measurements.
LEI: The panel talked about alternative ways of measuring law firm performance. What are these measurements and why are they important now?
Henderson: In a general sense, it’s not much different than before. It’s measurements of market share, declining per unit cost, and some sort of client satisfaction measure, because the client has to be delighted with what he’s getting.
It’s more that the legal ecosystem has really changed—this is a really hard business right now. It’s not complicated what you need to do, but it’s extremely difficult.
The big issue is that the market is fundamentally different now than in the past. The market is not growing organically, so firms are fighting over market share. Clients are using their superior market power to pushback on pricing and the use of associates. As a result, there is a need to rethink the business.
Basically, it gets to be a question of trying to drive up revenue or drive down costs. So one of the first questions is, what is the cost of doing the work we’re doing? Can we substitute out different ways of doing the work, and bring the cost down, without impacting quality? These metrics can address that.
LEI: What has been the reception from the industry on these metrics?
Henderson: I fear that a lot of what’s going on right now is that firms are looking for better metrics to maintain or increase profitability. But that’s the wrong mindset. Unless you’re going to find a new way to delight your client into giving you more work than some other firm, it may be very difficult to maintain historical profit levels.
The entire conversation about metrics needs to be around market share and better cost accounting. The first step is how to get market share. The second step is how to use that volume to drive down costs and to maintain or even grow the firm’s profit margin. There’s nothing to it more complicated than that.
Ultimately, I think this is an operational rather than a metrics problem. Metrics are the formulas you would use to help execute a strategy, and it’s an integral part of the execution. But you have to have the problem in focus—you can’t begin with metrics and solve your problem.
LEI: How should these strategies look in today’s environment?
Henderson: If you look at the companies doing managed service, like the Axiom, Novus, Radiant—everything is process driven. The metrics is on the work. Is the work being done high-quality? What’s the through-put, the actual measure of per-unit production and costs? This is important because most of that work is priced at a flat-fee basis.
A simple example might be the metric would be profit-per-unit of partner time. If partners are asking how can I get $1,000 per hour for my time… well, the answer is, you can’t in most practice areas because there is someone just as good who will do it for less. Maybe the better question is how can I assemble a group of legal professionals and technologists and put them together to do the clients’ work, where they’re employees and I’m primarily managing and maintaining the client relationship.
With this, it is possible that you could make $3 million or $4 million for your equity stake because you’re taking market share away from competitors, you’re managing to margin and showing your client that you can do this better, faster, cheaper. After that, it’s really hard for clients to get rid of you—and eventually, you will have pricing power again.
LEI: As long as you keep the focus on strategy, and not just metrics.
Henderson: That’s right. You can’t solve your problem by focusing on the metrics—you have to have a clear strategy first and use the metrics to assess and manage your progress.