KPIs for Lawyers: Measuring Your Law Firm’s Financial Health, with Bernadette L. Harris (Remastered)

Transcript

Stephanie Everett:

Hi, I’m Stephanie.

Zack Glaser:

And I’m Zack, and this is episode 595 of The Lawyerist Podcast, part of the Legal Talk Network. Today, Stephanie has an interview with Bernadette Harris about financial KPIs in your law firm.

Stephanie Everett:

Yeah, Zack. So this comes at a great time because this episode’s going to air at the beginning of the year, and hopefully people are starting to think about their business strategy, their business goals, and then as a piece of that, financial health and KPIs.

Zack Glaser:

Well, if they’ve been reading your blog over the last month or so, or reading the Wednesday emails that we have sent out from you, then they should be thinking about their strategy and specifically strategy as opposed to goals.

Stephanie Everett:

Yeah. So we sort of relaunched the blog. We’d kind of gotten maybe a little bit away from it. I mean,

I don’t know. Now, I’ll just say it this way. If you haven’t paid attention, head to the website because now every week on Wednesdays, we are publishing a new blog post. And I have really enjoyed getting back into writing them. It’s fun. And in December, I really dug into this concept of what are your goals and what is your strategy? Because I think a lot of people mix them up, right? Like this idea of like, “Oh, I’m just going to grow revenue in 2026.” Maybe you’re saying that to yourself right now. We need to grow revenue. Okay. Well, that’s a goal-ish. We could tighten it up. But then the real work comes in, how are we going to get there? Because that’s where strategy comes into play. And more importantly, what are we going to not do? In fact, I did a whole blog on subtraction.

Why you need to subtract more than you need to add in the new year.

Zack Glaser:

I liked that one a lot. I liked that one a lot. And just to kind of plug, you can find these blog posts at lawyers.com and then just kind of go to the resources there. I think it’s lawyers.com/news, right?

Stephanie Everett:

Maybe, but I always go to the homepage. If you’re on our homepage, go all the way to the bottom and you’ll see the latest ones there. I’m sure there’s also other ways to navigate to it.

Zack Glaser:

You can probably just Google it.

Stephanie Everett:

Yes. And if you haven’t checked out our Wednesday email, that’s the one coming from me where I sort of then take a piece of that blog and kind of dig into this one bold idea. So obviously in December, it’s been all around this concept strategy and goals and starting the new year strong. And so now Bernadette’s conversation around KPIs and financial health is sort of then just the next step, right? Because you start with what are the goals? What’s the strategy to make the goals happen? And then your KPIs are really, what are you going to be monitoring along the way to make sure you’re on the right path?

Zack Glaser:

That makes sense. Okay. Well, without further ado, here is your conversation with Bernadette about financial KPIs in your Law Office.

Bernadette L. Harris:

Hey guys, it’s me again, Bernadette L. Harris. I’m the finance coach here at Lawyers and thrilled as always to be back on the podcast.

Stephanie Everett:

Yes. We always have such fun conversations about numbers. Everybody’s- It’s favorite topic. I think it’s fair to say after listening to you, they realize that they actually do love their numbers.

Bernadette L. Harris:

Yeah, that’s my goal. It’s always to help people kind of demystify it and just realize that it’s not as bad as you think. And when you get into the habit of actually looking at your numbers, it could be fun.

Stephanie Everett:

Yeah, I think so. So today we though we talk about KPIs a lot. We talk about different parts of finances. Some of Bernadette’s past episodes, if you haven’t listened to them, we’ll make sure to list them in the show notes. But she’s talked us through how to read your income statement and your balance sheet, some of the basic financial reports that you get. And those are super helpful. We’ve talked about tax planning before. So today we thought we’d tackle some maybe lesser known KPIs. There’s always the, maybe, I don’t know, there’s the normal ones that probably people think about, but maybe we thought a different spin on that or some different KPIs you should be paying attention to.

Bernadette L. Harris:

Yeah. Hopefully these are some that you … Something new. Everyone will leave here with a new KPI to start tracking.

Stephanie Everett:

So if you’re not sure, KPI, key performance indicator. So I always say it’s just numbers, it’s data. How are we assessing if we’re moving closer to our goals or further from our goals? And what numbers can we look at to see if that’s the case? Is that how you would define it?

Bernadette L. Harris:

Yeah, I think it’s a good … I like to think of KPIs as like, when you think about your KPIs, think about when you go to the doctor and you get a physical and they give you your blood work and it tells you that your iron is this number, and then they give you a range to let you know what’s good or bad. So KPIs is kind of like that. Those numbers that just let you know how your business is doing.

Stephanie Everett:

So the first one we’re going to tackle is net profit margin. And people probably are familiar with the concept of profit, but maybe let’s just break it down so there’s no questions asked. When we talk about a net profit margin, what does that number represent?

Bernadette L. Harris:

Yeah. So the net profit margin, it tells you how much revenue you’re actually keeping in the firm after you paid your expenses. So you get fees, you pay your people, you pay your expenses, what’s left is your profit. And the net profit margin is that percentage that lets you know how much of your income you’re actually keeping in the business. And so to figure it out, it’s pretty basic. Yeah. We basically just take your profit and divide it by your total revenue and then multiply it by a hundred to get the percentage.

Stephanie Everett:

Perfect. So just so I think everyone knows this, but sometimes with accounting stuff, people get all nervous. Profit is we’re looking at money

Bernadette L. Harris:

Income- The bottom

Stephanie Everett:

Line. Yeah. So how much money’s coming in? How much money’s going out for expenses? What’s left over? That’s your profit. And then you’re saying we look at that as a percentage of our revenue. So simply take that number, divide it by the total revenue amount, you have to multiply it by 100 to make it a percentage.

Bernadette L. Harris:

Yep. Yep.

Stephanie Everett:

So when we do that exercise and we get that percentage, are there some benchmarks? I know what we talk about here at Lawyers, but what benchmarks are you looking at for that percentage to be to see that it’s healthy?

Bernadette L. Harris:

So I think anywhere between 20 and 30% is healthy. I mean, of course, if you have a higher profit margin, that’s sweet, right? But if your profit margin is 10% or less, then you want to look at your expenses because maybe your expenses are too hot or your prices are too low.

Stephanie Everett:

Now, I think it’s probably fair to bring in a little bit of a nuanced piece here because I know that a lot of attorneys, a lot of law firm owners will not pay themselves any kind of, let’s just call it salary or wages. I don’t care if we’re … I always tell people, I’m not trying to give W2 tax advice, right? But if there’s nothing in the expense bucket for-

Bernadette L. Harris:

For you.

Stephanie Everett:

… for you paying yourself … So a lot of law firms, especially the big firms, they love doing this game. They may have hundreds of partners on their team and they account for zero in the expense bucket for the wages of those partners. And so then they report like, “We have profit margins of 45, 55%.” And I’m always like, “Well, slow down because that’s not really an accurate picture of your profit margin because your most expensive, your most valuable people are showing up as big fat zeros.”

Bernadette L. Harris:

Yeah, I agree. And so in that expense bucket, if you haven’t taken into consideration your compensation, then your numbers are skewed. They don’t really tell us the picture that they should tell us. And so if you’re looking at 20, 30% profit margins and you are not paying yourself, you have a problem.

Stephanie Everett:

Yeah. Or if your spouse is doing some, maybe doing some work on this side, maybe doing some of your marketing or your office, we see this- Or

Bernadette L. Harris:

Billing or something. Yeah.

Stephanie Everett:

Yeah. And you’re not paying that person that also is going to skew that percentage because that’s an expense your business would otherwise incur that you’re getting basically for free. By the way, pay your spouses. They are good. Just

Bernadette L. Harris:

Pay your spouses. Yes. Or your children, if they’re working in your business, yes, pay people.

Stephanie Everett:

Exactly. But I say that because I think when we talk about a benchmark of 20%, I always say 15 to 20% is a sign of a healthy firm, but if you haven’t done that math and put something in the expense column for you, then you may be thinking you’re doing great and you actually aren’t.

Bernadette L. Harris:

Absolutely. Great point.

Stephanie Everett:

All right. So then if we move on from there, I guess the second number we’re going to tackle is utilization rate.

Bernadette L. Harris:

So the utilization rate, this is the number that tells you how much your team’s available time is spent on billable work. And this is really for firms that are tracking billable hours. And even if you don’t bill hourly, if you track time, which I think is a good idea, especially when you have a team so that you know what your utililization rate is, you can see how much of the time that your team is working. If your team is working 60 hours a week, I hope they’re not, but if they’re working 60 hours a week, how much of that time is spent doing billable work? So to get this number, you will take the billable hours and divide it by the number of hours total. So let’s say they work a 40-hour week, which is reasonable. If they’re working a 40-hour week and they’re billing 20 hours a week, then their utilization rate is only 50%.

Stephanie Everett:

Yeah. Which I’m assuming is probably lower than we want it to be. What would be a target- Absolutely. For your team, what’s a good target utilization

Bernadette L. Harris:

Rate? Usually with attorneys, I would say somewhere between 70 and 80% is a good utilization rate. Anything below 60% is you have unused capacity.You’re paying people to not do anything essentially because if they are working, if they’re only billing 40% of their time, what are they doing with the other 60?

Stephanie Everett:

Right. Now, I’m curious, you and I haven’t talked about this yet, so I don’t know what you’re going to say, but I know here comes … Sometimes with my law firm owners, I’ll often give them this example where I say, “Sometimes we think not billable means not valuable.” And I’ll give them this example. If I told you you could spend 10 or 20 hours building a new product that you were then going to maybe sell for a flat fee and it was going to be scalable and you build it once and then you sell it over and over and over again, would you be willing to make that investment? And they usually are like, “Well, yeah, that makes sense.” So I’m just kind of curious because I think when we put our owner’s hat on, our roles shift and our responsibilities shift. And so then it might be, I suspect, this is what I said, I don’t know what you’re going to say to this, that the utilization rate depending on the role may look different than what you just said at that 60 to 70%.

Bernadette L. Harris:

Yeah. And it does depend. So my questions is, if your utilization rate is, if they’re only billing 40% of their time, then the question is, what are they doing with the other 60? And to your point, if they’re using half of that time to do something to document SOPs or if they’re training someone else to be able to take on something, there may be a reason for the utilization rate to be there. But we’re talking in optimal situations, you have an employee that is working for you and this person is, you’re trying to determine whether they’re high performing or not. Sometimes that utilization rate is a good indicator that things are well. But I know that every single rule has an exception and so I think the-

Stephanie Everett:

It’s good because it’s good to sometimes remember because … And then I guess too, to think about, it also probably helps you determine capacity. Sometimes people are wondering, when should I hire, when should I add to the team? And looking at a number like utilization rate might give you an indication like do they really have full plates? Do they have capacity for more work because maybe you can redistribute work before you need to hire somebody else.

Bernadette L. Harris:

Exactly, exactly. And that’s a great point. So utilization rate tells us a lot of things. And then you can use this utilization. The 70% is for attorneys. So you may have a paralegal or you may have an assistant who they’re not doing “billable work.” But to your point earlier, they’re doing important work. They’re doing things that are essential. And so if you have someone that’s answering the phones and keeping your calendar and keeping the office moving organized and all of those things, those are things that you can’t bill a client for, but there are definitely things that add to the overall efficiency of your firm. And so I don’t want you to take this utilization rate conversation too literally and not actually look at it. But I would challenge you to look at what everybody is doing to make sure that everybody’s working to their full capacity.

Stephanie Everett:

Perfect. Makes sense. All right. The third number we’re going to talk about today is realization rate. I can’t talk today. It’s a mouthful. All right. So let’s find

Bernadette L. Harris:

That one. So realization rate, this rate tells you how much of your billable work you actually get paid on because it’s great to track billing and to send invoices. But if you’re not getting paid on those invoices, you need to understand what your realization rate is. So this looks at how much money you’ve collected versus or divided by the amount that you’ve actually billed. So you send out invoices for $10,000 and you collect nine, then now you have a 90% utilization rate. And so 90 to 100 is ideal. Anything below 85 is saying that you’re writing off a lot of stuff. And so you might want to look at your processes, look at your procedures, or does your engagement letter speak to what do you do in the instance of uncollected funds? And are you enforcing it? Because many of us, you’re lawyers, right? So you may have the really tight engagement letter that says if you don’t pay by 30 days, this happens, and if you don’t pay by 60 days, this happens, but do you do it?

Stephanie Everett:

And I know we’re going to talk about that more in a minute, but I think also there’s kind of two utilization rates if you think about it, because the way you defined it was after you invoice, right? So how much do you invoice? How much do you collect? But for a lot of attorneys, a sneaky one they’re not paying attention to is that pre-bill process. So as attorneys, we like to run our pre-bills and we look at what the bill’s going to look like. And then we look at it and say, “This client, they’re not going to like that charge or they’re not … I think this person spent too much time on that. I couldn’t possibly charge them this amount for that work.” So what do we do? We write down the bill before- Before it goes out. Before it even goes out the door and you need to pay attention to that because that also is an indicator of like, why are we writing stuff down?

We used to have a rule in my firm, if a partner wanted to write off more than, I think it was like 10% in a pre-bill process, it had to go to another partner for review because sometimes it’s just like you said, it’s our, maybe not self-worth, but we feel bad. We’re like, lawyers do this, “Oh, I shouldn’t charge this person that much.” And so we had somebody else look at it to see were we really justified in the write down or were we being too sympathetic to the client and not standing by our bills? And we really found that really kind of cleaned up that part of the process where we were writing down more than we should have been.

Bernadette L. Harris:

So it sounds like you were taking the emotion out of it because the lawyer that’s actually working on the case, they know the client, maybe they talked about their kids and they’re feeling like, “Oh, she’s really nice. Maybe I shouldn’t do this. ” Yeah. And so now the attorney, the partner who has no idea who this client is, is looking at it more objectively and being able to kind of make … And I think also in that pre-bill conversation or that process, it’s also an opportunity, again, to look at efficiencies in the firm because if you feel like this took too long, then the question is why? Why did it take so long? And is there software that can help us to improve this process? Was I just off my game that day? And it took me a little bit longer because my kid was acting crazy before we left home and I was distracted.

You want to actually look at the why of why is this happening and are there opportunities to improve?

Stephanie Everett:

Absolutely. Another reason alternative billing makes a lot of sense because as you know, we kind of get away from that and we can say upfront, this is what this task is we’re going to charge for. It just incentivizes differently. And a lot of times lawyers like to say, “Oh, if I was charging you by the billable hour, I would have collect…” They say, “I would have made X on this project.” And I’m like, “But would you have because you got to think about that pre-bill write-off then like you said, how much are you writing off after you send the invoice? How much are you actually collecting?” Lawyers kind of forget those numbers in the equation, but if we agree upfront, the client’s going to pay me X for Y work, it’s very, very rare that I hear about flat fees getting written down or not collecting- Yeah,

Bernadette L. Harris:

Because you’ve already had the conversation. And as a non-attorney and being on the other side of receiving that invoice, it’s frightening to receive an invoice and you don’t know if you say you’re going to work on this matter for me and I have no idea how long it’s going to take you to do that matter. And then I find out when I get the invoice, I’ve been on the other side of that and it’s not a great feeling. So I’m very much a proponent of the flat fee model because it helps both ends. It helps the attorney understand exactly what they’re going to get for providing this service. It helps your client understand exactly what they’re going to pay for receiving that service.

Stephanie Everett:

Absolutely.

Bernadette L. Harris:

I know this session is not about flat fees, but I know … Yeah.

Stephanie Everett:

Everything is about flat fees with me. The audience already knows that. If I can work it in, it’s coming, which directly impacts our fourth KPI that we’re going to talk about today, which is AR Aging, because like you said, we’re less likely to have those aging invoices if the client’s prepared and knows what they’re going to pay. But for all our listeners, let’s define AR, accounts receivable and aging.

Bernadette L. Harris:

So this tells you how long it takes your clients to pay you. And this is one of the things that helps us to determine if you even have cashflow problems. So when your clients are not paying their bills when they’re supposed to pay their bills, or it could be you that you’re not invoicing when you’re supposed to be invoicing, these are all things that cause us cashflow problems. So an AR aging is something that you can actually get from either your accounting software or your practice management software wherever you’re sending your invoices and it’ll let you know which clients are current, which clients are 30 days behind, 60 days, God forbid, 90. And this helps you. And I like to encourage business owners, law firm owners to really pay attention to this and enforce your policies, whatever your policies are. If your engagement letter says that you are going to apply a late fee after 30 days, apply it because they’ll pay attention.

I believe that they pay the bills late that they know they can get away with paying late.

So this is a personal story a long time ago when I first started my firm, I learned this lesson very early. I’m an accountant. So I was doing some work for this company and it was an after the fact type thing, which where I would go do the work and then send them the invoice later. And my contract said that after 30 days … I don’t even think I gave 30 days. I don’t have 30 day terms. Those are ridiculous. 15 days, it was a late fee was going to be applied. Whatever my contract said, I applied the late fee and sent the invoice again with the late fee. And the client was like, “Oh my gosh, we got a late fee.” So I remember the next time, and I was doing some onsite work with this client. So the next time that I went to this client’s office, the owner said, “Make sure you pay Bernadette’s invoice on time because we don’t want to pay any more late fees.” But it just speaks to if they know they can get away with paying you late, they will pay you late.

And so yeah, do the nudges, send the reminders, add the late fee, do the things that your contracts say that you’re going to do.

Stephanie Everett:

Yeah. I always remind people, you did the work, that’s money that should be in your bank account, not theirs. And so I know nobody likes collections. There’s companies out there that can help you with that. There’s tools out there, there’s reminders. I mean, I even tell people, I’ve had lawyers get their mom to make the calls for them because I know, again, back to the emotion, it’s like, well, I don’t want to call my client and have to ask for money. I’m their zealous rep, there’s advocate. I’m like, set up an email. Every law firm should have an email of something like accounting at the name of your … You can set up an alias so you can make it look like the email’s coming

Bernadette L. Harris:

From- It’s not you.

Stephanie Everett:

Yeah, it’s coming from the accounting department and then you don’t have to feel as bad. And then you can also hire a friend to make those calls for you that somebody who doesn’t have any emotion to it,

Bernadette L. Harris:

I

Stephanie Everett:

Know our friend- Or

Bernadette L. Harris:

Have your assistant do it or something. Yeah.

Stephanie Everett:

Or our friends over, I’ll give a shout out to our friend Matt at Callbox because that’s their whole business. They have US-based team. They’ll make the calls on your behalf, which is awesome because I know nobody wants to do it. So if you do call them, tell them Stephanie@lawyer has sent you. I think they have a discount. So that’s my unintentional plug for the day. Awesome. And then the last one we’re going to cover is revenue by practice area.

Bernadette L. Harris:

And I like this one because this KPI actually lets you know which services are the most profitable and it helps you to figure out which work to focus on. Sometimes we think that sometimes the practice area that we enjoy the most may not be the most profitable. And you have to have those hard conversations with yourself and it’s like, “Hey, you really like doing uncontested divorces, but they’re only bringing in 10% of the revenue, whereas custody cases are bringing in 60%.” And it’s just being able to look at data and make decisions based on data and not emotions, not your feelings, but what does the data say?

Stephanie Everett:

Yeah. And I know so many times I get on with a firm when we’re looking at their budget and working on a forecasting model and I’ll say, “Okay, well, how much revenue did you generate from this case type last year or how many cases?” We’re trying to back into some numbers and a lot of people have their accounting system set up where it’s just one big bucket that’s income- And

Bernadette L. Harris:

Everything just goes into

Stephanie Everett:

Services. And I know you’re relying on your bookkeepers to help you set these things up, but this is where you as the owner really need to think strategically about what information do you want to have about your business? And then it’s simple, easy. The technical word is chart of accounts. You tell your bookkeeper, “Hey, I want to set up these in my chart of accounts so I can start tracking this kind of income versus this kind of income, this kind of case.” And you got to think about it. I always say, “What kind of buckets do you want to track?” That helps us when it comes to marketing. It helps us, like you said, in so many ways, there’s going to be so much information about our business, but if we don’t have the data set up on the backend, it’s really hard to

Bernadette L. Harris:

Look at that number. It makes it really, really hard. And it also helps you when you’re thinking about so many ways. Like you said, marketing, hiring, all of these things when you’re looking at the way that you want to structure your firm, if you know that this practice area brings in 60% of the revenue of your firm, then you got to really take care of that 60%. And so it just helps in so many ways. And whether it’s in your accounting system or your practice management software, you got to be tracking how much money you’re making. And like you said, when you’re looking at forecasting, you’re not able to really give good forecasts when you don’t know how much money you’re generating per case type, per practice area, all of those kinds of things. And so knowing this data is more than just staying on top of your goals, but it’s also helping you to run your firm more efficiently.

Stephanie Everett:

And this is where I think you and I love to work with firms, right? We love to dig in. When you’re in our lab program, we are like, open up the bookkeeping, share your screen, let’s go to your bookkeeping, whatever. I know we’re always scared to feel scary, but then when you start walking through it and every time we do it, I mean, people are just like, “Oh, this was so great. This is so helpful. I just learned so much.” And I know it’s so helpful and we both just really love to do it. And you can see, we’re not scary people. Not at all, not at all. No, we’re not going to have fun. We’re not going to yell at you or do anything or shame you. I always tell people, no judgment when I askquestions, I’m like, “No judgment. We’re just trying to see where we are so we can get you where you need to be.

“

Bernadette L. Harris:

Exactly. And I love it when, and I know you’ve probably experienced this, but you may be on a Zoom call with someone and the shoulders are here and then at some point you see them go down and it’s like, yes. Okay. So the shoulders are down and now you’re not as tense about having this conversation because it’s an important one.

Stephanie Everett:

Absolutely. And we have some good news. So hopefully if you’ve been listening for a while, you probably know that Bernadette is our financial coach. And so she’s available to our labsters to talk specifically about finances. But as you can tell, she knows a lot about business. So she’s also just an amazing business coach. She can help you. She’s done it. She’s been a business owner. She’s been in your shoes. And so she knows what it’s like to have to do the marketing and do the hiring and do all the things that we talk about with our lawyers in our lab program. And the good news is she has some openings right now. So if you’re listening to this or you’ve listened to Bernadette before and you’re like, “I wish I could work with Bernadette one-on-one.” She sounds pretty cool because she is. I can vouch for her.

Thank you. Yes, yes. I want to fill up your schedule because you’re kind of doing some more with us and we want to get your roster filled up. So if you are at all interested in working with Bernadette, here is your chance because I know she’s going to be in high demand, so her schedule’s going to fill fast. So this is kind of your sneak peak chance to get on that schedule now, if you know what I mean. So make sure you reach out to us. You can always just email us if you’re interested in talking about what we do in lab and working with Bernadette. We’ll put all the information in the show notes, but you can always send me an email, [email protected] and I’ll get you connected to the right people because I cannot sing Bernadette’s Phrases enough. She is amazing. And she’s also super fun and I don’t know, so many good things, right?

Bernadette L. Harris:

Well, thank you. I appreciate it. And I do. I look forward to it. I can’t believe that I’ve been in business for 23 years because I’m only 25. But yeah, just being in business for 23 years, I’ve seen and done it all. Absolutely. I love being able to help business owners see the blind spots. See the blind spots and just show you where to go. So it’s more than just finances. And honestly, even when I do a lot of the financial coaching calls, Stephanie, most of the time it’s not finances. The problem is it’s operations or it’s marketing or it’s hiring or firing or something like that. And they all kind of bleed into the finances, but the real issue is in finance. And so we get a chance to, even in our finance calls, have some conversations about some of that other stuff. So yeah.

Stephanie Everett:

Absolutely. I mean, that’s why the Healthy Firm model is a circle, right? Everything’s all connected and-

Bernadette L. Harris:

It’s all connected.

Stephanie Everett:

We start peeling away at one area and then it impacts another and another and another. But when you start chipping away at those problems and making them opportunities and fixing them, that’s where you also really start to see those opportunities and everything starts clicking and growing. And that’s when the fun and the magic happens.

Bernadette L. Harris:

Yeah. And the shoulders go down. I love that.

Stephanie Everett:

Love it. All right. We may call that … Yeah, shoulders down. All right. Well, thank you, Bernadette, for being with me again. Another great conversation, and we will talk to you soon.

Bernadette L. Harris:

Thank you.

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