How to Build a Large, Influential Law Firm (Part #9)
Know Thy Numbers — the Indispensable Success Factor
This series lifts the kimono and exposes the unvarnished details on how we built Sterling Law from scratch to be the largest, most influential family law firm in Wisconsin in less than 3 years.
I hope our story and the lessons help you build your practice or business.
In business we hear about “numbers” all the time. Lots of smart people say “know your numbers!” Or they ask, “what are your numbers?”
Maybe someone scary has even threatened you with termination if you didn’t “hit your number.”
What does this mean?
There are two types of “Numbers”
There are financial numbers. This is the firm’s revenue, expenses, profit, etc. These numbers show up on a profit and loss reports, a balance sheet, or a cash flow statement.
The other type is performance numbers, often called “metrics.” This could be a million different things. Popular metrics that companies track are leads, sales units, client complaints, calls made, and so forth. Our firm’s operating system requires everyone in the business have one number to achieve, and that varies by each position.
The numbers tell the condensed story of a business. That is one of the great things about business — you can know the story by looking at a few numbers. You don’t need to read a bunch of words.
Knowing what to measure is difficult for a start up
One of the first challenges that any start up confronts is knowing what to measure. The obvious things are easy, such as sales units, website visitors, conversion rates, downtime, etc.
However, there are always subtle metrics that are leading indicators to big problems. Measuring and managing those metrics can move the business in big ways. Sometimes these metrics can be counter-intuitive.
For example, we measure the number of times a client calls our front desk, instead of direct to the attorney. Over time, we figured out that a client calls our front desk after a few unsuccessful attempts to call their attorney.
This metric is a leading indicator and tells a story of that client’s relationship with their attorney. It tells us about the client’s experience. It impacts the future likelihood of a referral. It tells us about the attorney’s organizational skills.
When we started the firm, we did not understand the relationship between client calls and referral rates. It took years of working at the business to understand the importance.
Data integrity is a pervasive problem for businesses
Once you know what to measure, collecting accurate data is vital to your business. If the data collection is automated, such as website sales, then, the problem is easy to solve.
If humans are doing the collection, good organization and people management are the only ways to do it right. The team has to agree on the definitions and then consistently follow the process to compile the information.
This is where management and leadership skills make the difference.
It took us about nine months to get our data collection process in place for the basic metrics we wanted to measure. We were not alone in this problem. Most, if not all, new businesses struggle with collecting accurate performance data.
Our financials told a sad story
Our financial results were dismal and embarrassing in our first 18 months. We made a lot of mistakes. I itemized the most glaring blunders in part #7 of this series.
Revenue – $1,735,752. This was our top line number. Of this amount, which represents our “billings” to clients, we collected about 88%.
This is a decent collection percentage for a small law firm serving individual clients. Many attorneys that I talk to are happy collecting 75-80% of what they bill.
We had to work very hard to collect 88% of what we billed in our hourly billing. I estimate that we expended about 10% of our firm’s resources in cajoling clients to pay their bill. We had a whole bureaucracy within our firm devoted to collections.
We were spending 47% of our revenue on client acquisition (marketing). This number was terrible. A break-even firm in our business does not spend more than 20% on client acquisition. I guess we thought we could make up the losses in volume.
Our attorney labor costs were 47% of what we collected. This was a good number.
The support labor costs were 16%. This cost was for paralegal help, receptionists and office manager.
We spent another 6% on insurance, office supplies, and “other” expenses to maintain the office.
Our rent and related occupancy expenses were 4%.
The total expenses amounted to 120% of what we collected. So, for every dollar we collected, we spent $1.20 to do it. We were clearly losing.
Our performance metrics are useful for benchmarking purposes
Our performance metrics were not much better.
We had 537 people select our firm in our first 18 months. That is a lot of new clients.
Sounds good so far, right?
That is great until you understand that we had to spend $1,356 in client acquisition costs to get each client. To make matters worse, the average client paid us $2,847.
We did have 4,499 people contact our firm to inquire about our services. We called these potential clients “Leads.” These people had a legal problem or question. Later, as we understood our firm, we quit focusing on this number and further qualified a lead into an opportunity.
From all our leads, 1,018 came into our firm and met with one of our attorneys. This is the number of completed consults.
As noted above, 537 people became clients of our firm. So, 53% of our free consults turned into paying clients. They came to us for help in solving a variety of problems. At that time we handled family, criminal, estate planning, probate, and personal injury.
Broken business model
Our business model was a disaster.
It’s only a matter of time before the grim reaper pays a last visit to a business when it is spending $1.20 to make a $1.00.
If this wasn’t bad enough, our core legal service sucked. We were not very good, and we knew it.
We use a client service scoring system called Net Promoter Score (NPS). Good firms have a NPS in the 40s. We were at 24, which was dreadful.
Time to pivot the business
Math does not discriminate. No matter how we worked the math, we were losing. It was time to change.
Tony and I made the decision to hit reset on the firm in December of 2015. We headed off to Miami to meet with a consultant, clear our heads, and plot our next steps.
Takeaways from looking at our numbers from the first 18 months:
1) What gets measured gets managed. This timeless wisdom informed many of our decisions. As we learned what to measure in our new business, we learned how to manage the firm.
2) At the start-up stage, expect to spend significant time in your first year on data integrity. There are two issues here. The first is figuring out what to measure. The second is collecting the data so it’s accurate. Every business must learn how to master both of these issues if they intend to win.
3) Know your numbers. If someone wakes you at 4:00 a.m., shines a flashlight in your face, and demands that you recite your key numbers, and you can’t do it, you don’t understand your business. Likewise, if you can’t accurately project your business, you don’t understand it.