Performance Measurement - Misleading Indicators?

Some of the recent changes in the market could mean that in some firms the main performance indicators which are used may not be giving a true picture of current performance

it has long been said in the consultancy world that “What gets measured gets better” – and this does not just apply to the legal world! Focus on a single measure can lead to unintended consequences –as, for example, was the case at Stafford Hospital.

To overcome this in larger organisations the Harvard duo of Kaplan and Norton devised the Balanced Scorecard, which looked at performance from several different perspectives. This has never really taken root in professional services firms, and in any case has been found to have its limitations. Regular readers will know that at Wilkinson read we have for several years used the concept of the practice pipeline to track work brought in; work done; value created; and value locked up. This information is now available in dashboard format on a variety of IT systems. And yet, only last week I met a new client who said “In the end, the thing we really look at is Costs Received”.

Lagging Indicators

The problem with this is that Costs Received is the ultimate in lagging indicators, and for management to be effective, better, more predictive indicators need to be used.

This is particularly relevant in firms which have family or personal injury departments which have both been subject to significant recent changes – which may make both Costs Billed and Costs Received unreliable indicators.

For many Family law firms legal aid has been a backbone of their workload, and the nature of family legal aid work has been not only modest value but also very long lock-up periods with a significant amount of cash tied up. The scope of family legal aid has been greatly restricted through LASPO and so very little new value will be created in most firms. However, because of the lock-up cycle, there will still be significant billings for months to come – and recorded income from many fee earners may not diminish by much. In most firms if the fee earners are to remain productive they will have to replace the legal aid work with privately paid family work – and if they are commercially aware this will be done largely on a fixed fee basis and often paid up-front. Certainly the lock-up period will be far shorter. If they do this the key indicator, Costs Billed, will increase markedly because two sets of work (old legal aid and new private work) will be being billed at the same time. This will not be because the fee earners are being particularly productive, it will merely be the unwinding or liquidation of the old lock-up. At least this will be seen as good news.

More worryingly, many legal aid firms and fee earners are finding it hard to replace the legal aid with privately paid work and so the fee earners are in fact unproductive and in truth underperforming. However, the Costs Billed data will still be showing reasonable levels of billing and this may persuade firms not to make some very necessary cost reductions soon enough.

By focusing on the whole of the pipeline, starting with new instructions received (volume and value), including chargeable hours, and separating the billings into categories of old legal aid and new, private firms will be able to properly monitor the performance of these departments.

A Changing Market

Similarly, the changes in personal injury can produce a situation where the amounts being billed reflect the market at the time when the cases were taken on, which of course in personal injury can be many moons ago. The levels of income coming from existing files will be greater than the value being generated by the same work on new files, especially in road traffic accidents. This will again lead to misleading indications of the profitability of the work being done today, which will only be capable of being billed at new reduced rates. And of course once the Jackson reforms are fully implemented the situation will only worsen. It will be particularly unfortunate if firms are not able to recalibrate the charging rates to correctly evaluate work in progress being created as this will inevitably lead to write-offs when the matters are billed. The issue of performance management in personal injury departments will become more complex and demanding once the new regulations are in place. It will be absolutely imperative to have more sophisticated leading indicators and to place much greater reliance on proactive management of the pipeline to turn time into cash.

Sadly, those who rely on monitoring Costs Billed or Costs Received as their primary indicators of the health of their firm may find out too late that the main measuring stick could not be trusted.