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Top five practice KPIs: part 1 – profitability and net gains

If firms want to grow the business and target any future development activities, they need to monitor key areas of practice performance. Over two articles, we examine the top five to watch.

Why use KPIs?

Many firms would like to improve profitability and/or cash flow. However, they will struggle to do so if they lack an adequate grasp of the areas that are preventing improvement together with a way to monitor these areas and communicate progress to staff.

Setting KPIs

Before rolling out a KPI process, confirm that your information systems are able to produce sufficient timely data for assessments to be made. Having ascertained that you can measure them, you can then identify the firm’s overall KPIs.

Finally, break them down for different departments and individuals as appropriate, so that the whole team contributes to the overall target. Clearly there may be some KPIs that are confidential (eg, partner profitability) but you could still set appropriate income and / or cost targets for individuals.

In the first year, it is advisable to start with a “light touch” as you increase your understanding of the business’ weak and strong areas. In future years, more ambitious targets can be set and staff challenged to match their performance against them.

Top five KPIs

The top five KPIs for practices to manage are:

  • profitability
  • net gains
  • productivity
  • recovery
  • lock-up

Profitability

How profitable do you want to be? Decide an ambitious but realistic figure, eg, to increase pre-tax profits from £140,000 to £180,000; or set a percentage of total fee income. What would the business that generated these profits look like? Would you need to increase fees, reduce costs, reduce the number of partners, or a combination of all three?

Profitability is often seen as the most important KPI, but is realistically the demonstrable result of hitting other KPIs such as achieving growth, controlling costs and dealing with succession effectively.

When setting KPIs, don’t assume that issues such as cost control, only apply to senior individuals. Instead, ask staff to identify cost savings. Some firms have successfully challenged staff to save £1,000 each on areas of the practice, with prizes for the best ideas, making the exercise both fun and profitable.

Net client gains

Natural wastage will occur, so you always need new clients. Even firms at capacity will want new “good” clients. Measuring net client gains shows a growing practice where those gains come from. It highlights to a struggling practice where its losses occur. For example, is a particular department or individual winning new clients? If so, how do you release them to gain even more? Should you, for example, divert work to efficient ‘grinders’ to free your rain-makers to convert more leads to clients?

Conversely, is an area of the practice losing clients? Does that indicate a problem with the work there, a client care issue, or just an ageing client base? Having identified the problem, you can then work with the relevant individuals to solve it. For example, start a marketing campaign to attract younger clients; or use performance targets to improve client care.

In the second part of this series, we’ll look at productivity, recovery and lock-up.

May 2014