The recent debate among managing partners about whether law firms should be focusing on wider issues than profits per equity partner (PEP) has highlighted the question of what really drives firms forward and whether robust financials are, in isolation, a good indicator of a firm's long-term health.

In today's increasingly competitive culture, should law firms not be identifying new key performance indicators (KPIs) which measure more than just their 'bottom line'? Firms may be ignoring a range of new metrics which are fundamental management tools in assessing their underlying performance and ultimately driving the firm forward.

Financial KPIs are often equated to looking in a rear-view mirror – they only give firms an indication of what has already happened and do not show the road ahead. Obsession with profitability as the sole indicator of firm performance often overshadows the measurement of successes or failings in other areas within a firm.

It is imperative for all firms, regardless of size, to at least identify its non-financial KPIs which, if not satisfactory, may give an early indication of trouble lying ahead – bumps on the road that will ultimately hit the bottom line. Some of these metrics could be:

- human capital KPIs (attrition metrics, gender staffing ratios, employee termination rates, net hire ratios, employee engagement metrics, employee bench strengths);

- productivity metrics (fee earner productivity, lost time, time per matter);

- client satisfaction metrics (e.g. client referrals, longevity of clients and key relationships);

- growth KPIs (new business conversion rates, market penetration, fee earner growth);

- innovation metrics (new services launched; new ways of delivering services); and

- know-how KPIs.

As a law firm is the ultimate 'people and knowledge' business, there is a need – now greater than ever before – for firms to be measuring their success in areas such as human capital, client satisfaction and know-how.

Human capital KPIs

It may seem obvious that a firm's ability to attract, retain and motivate quality staff at all levels is vital to its continuing success. Yet despite this being so high on the agenda, firms often do not measure how their investment in human capital is aligned with their strategic goals.

How often do firms measure retention rates or metrics on overall attrition rates? Or resignation and termination rates? What about the cost of attrition and the time it takes to replace a lawyer? These are all valuable indicators. When staff leave a firm the most negative effects are often the non-financial ones: loss of team motivation and employee engagement. Metrics such as the percentage of staff completing satisfaction surveys, the level of engagement through optional benefit take-up and rates of absence are good indicators of the level of motivation and engagement of staff.

Other human capital KPIs that can be introduced involve training and employee performance. These would normally include measurement of training spend per employee, training courses delivered, percentage of staff receiving performance appraisals and percentage of staff performing above the benchmark.

Some of the most valuable KPIs relate to succession planning and talent management. Metrics such as the rate of talent retention, rate of succession and rate of promotion from the talent pool provide a good indicator and, if positive, can be a used as a recruitment message.

For commercial companies, reporting on human resources KPIs is now a key requirement under the Companies Act 2006. Under the new legislation, quoted companies must, "to the extent necessary for an understanding of the development, performance or position of the company's business", include information about the company's employees and include, "where appropriate", non-financial KPIs about its human capital.

For law firms, although these factors may not immediately affect profitability, they are an invaluable supplement to the traditional measures of hours billed and they will, in the medium to long term, become a critical differentiator as firms compete to recruit and retain the best resources from what is a diminishing pool.

Client satisfaction

Although firms may appear to be assessing their client-base growth as a fundamental component of their profitability, they often only do this by counting numbers of net new clients gained, without attempting to measure the long-term sustainability of their existing client relationships.

KPIs that provide a deeper insight can add significant value as well as help retain and grow existing clients. Metrics provide a baseline as well as a constant point of reference and are, therefore, invaluable tools in strategic planning and goal-setting and pinpointing areas of client service strength and weakness. The most proven, effective metrics of client service performance include:

- client satisfaction;

- recommendation rates;

- client retention;

- realisation rates;

- profit margins by client; and

- practice area penetration.

Those firms that have already taken steps to measure client satisfaction should go beyond the metrics and start evaluating trends. For example: is their clients' spend with them going up or down? Is the firm's share of the client's legal spend rising or diminishing?

Knowing client satisfaction levels enables firms to take sound customer relationship management decisions. They form a fundamental base for any firm looking to achieve sustainable growth in an increasingly competitive environment.

Know-how

Knowledge assets within a firm underpin its key differentiating and enabling capabilities and are the backbone of any law firm. KPIs for knowledge management can be used not only to identify areas where improvement is required but, more importantly, serve as a guide to the activities that should be undertaken to improve performance.

Knowledge assets have many characteristics that should be measured. Some key ones are:

- importance. Metrics will seek to measure the potential importance of a given asset (e.g. the extent to which the knowledge is important in satisfying the firm's and client's needs);

- purpose. Metrics will seek to measure whether a given asset is fit for purpose (e.g. whether the knowledge base is of sufficient quality to meet the needs of the firm/client);

- re-usability. Metrics will measure how often knowledge assets are re-used and what time and cost savings have been achieved as a result; and

- knowledge capture. Metrics measure the adherence to policy and accountability; the level of know-how that is captured by practice areas or firm-wide.

The correct choice of KPIs will vary depending on the maturity of the framework, infrastructure and
processes within each firm but it is clear that, without these, one of the most valuable assets within any firm is likely to diminish over time as staff retention remains an issue.

Finally, KPIs gain even more importance when the benchmarking dynamic is introduced. This is often overlooked by professional services firms. Firms should incorporate changing industry trends into their KPIs and constantly be aware of what others are measuring and how their own performance compares with the norm.

Professor Kaplan of Harvard Business School in The Evolution of Management Accounting states: "If senior managers put too much emphasis on managing by the financial numbers, the organisation's long-term viability becomes threatened."

To continue the rear-view mirror analogy, the correct use of non-financial as well as financial KPIs is tantamount to driving a firm's progress using the best Sat-Nav system on the market.

Jitendra Valera is vice president international at Thomson Elite.