In The Lean Startup, author Eric Reis emphasizes the distinction between actionable data and vanity metrics. The latter appeals to your ego (total clients served, total dollars earned this year), whereas the former helps you make better judgments and decisions in managing the business side of your law office. Vanity metrics are easily manipulated and often don’t correlate to the numbers that really matter - the actionable data. 1 This data includes metrics such as active clients, engagement, and other key indicators of a company’s or product’s status.
How do these concepts apply in the setting of a law office?
Like any other business, running a successful law office involves maximizing profit (revenue in excess of costs). For most attorneys, revenue derives from one and only one task: representing clients. In general, there are only a few ways that lawyers generate revenue from client representations - hourly billing, contingency fees, flat-rate billing, and sometimes differing combinations of these. In all of these cases, the key input is attorney time. Even in a contingency practice, lawyers are always seeking to maximize the return on their time - there are only so many hours that a lawyer can work in a year. Constantly spending long hours on cases with a low effective hourly return is a recipe for going out of business. The trick is figuring out how to keep one’s effective hourly rate as high as possible, or in larger law offices, how to increase total hours worked while keeping effective rates at the highest level possible. In most modern law offices, lawyers spend a good portion of their day in a CRM or law office practice management software - a good product of either type will provide a feature for tracking important actionable data for your firm.
What kind of actionable data should law offices be considering? One actionable data metric that’s always valuable is marketing data. There are numerous ways that law offices get clients, and it’s almost always worth measuring their costs and their effectiveness. To do so, a firm should use its CRM or practice management tool to track the method by which it acquired each client. For example, a law office can group clients into sources such as online paid advertising, referrals from other attorneys, clients who attended talks given by lawyers in the firm, or clients who discovered the law office through free training materials. Each of these marketing channels bears both an out-of-pocket cost and an opportunity cost. The trick is to apply resources to the channels with the highest value in comparison to their cost and to get the best value for the next dollar spent. The trick is also to look at all the data, and not just the vanity metrics.
In this example, only the surface metrics are being examined:
|Presentations & Articles||$30,000||$100,000||$70,000|
This data could be read as suggesting that radio advertising is the most valuable marketing channel and therefore more resources should be directed towards it. But this conclusion isn’t necessarily correct because the key factor is a rate rather than a constant. To get the most out of the data, a few other data points should be added:
|Channel||Total Cost||Clients Acquired||Cost per Client||Total Revenue||Average Revenue per Client||Net|
|Presentations & Articles||$30,000||2,500||$12||$100,000||$40||$70,000|
In reviewing the data, it still looks as though the best ROI is on radio advertising, so that is a great place to start. However, it is important to bear in mind that it might not be true that doubling the amount spent on radio advertising would result in doubling the revenue obtained from that source. In fact, for a variety of reasons, one source could be exhausted and little, if any, revenue might flow from pouring more money into it. In order to determine the best way to spend the next $5,000 on marketing, experimentation is necessary. To do so, you can add a few thousand to one category and measure the result as best as possible. This takes time but is worth the effort. The results could show that, starting from $10,000, an additional $1 spent on pay-per-click advertising will result in $20 of additional revenue, whereas $1 more spent on presentations will only generate $2 of revenue. By examining all of the data, more informed decisions about spending can be made, thereby increasing revenue.
Similar techniques can be applied to any data that a law office can measure, such as profitability by case type, quality of revenue, employee productivity, and optimizing other revenue generating processes. For example, in looking at the profit margins and quality of revenue for each case type, it may become clear that shifting focus away from one practice area and increasing focus on another would significantly increase your margins. In examining the cost paid to a vendor for video depositions, it might be discovered a significant amount would be saved by spending the money upfront to purchase a camera and record it without the use of an outside vendor. By measuring data rigorously and applying some simple economics to business decisions, a law office can increase its performance dramatically.