Introducing an effective performance management system is not made easy by the resistance of fee earners, argues Friedrich Blase. But law firm executives must be tenacious to improve their bottom line

The conservative practice of law has generally had an uneasy relationship with technology. That is only too evident in attempts to measure, analyse, direct and thus overall manage the performance of lawyers at the individual, group and firm level. 

No doubt, anyone who has been around lawyers for the last decade can recall many stories of partners ignoring, deriding or sabotaging policies about billable-hour targets, time-entry procedures, inventory cycles, and – with particular vigour – any form of numerical analysis and reporting of their performance. 

Over the past 15 or so years, technology solution providers have delivered a robust framework for law firms to be run as businesses through enterprise-level financial management that consolidates the largely autonomous activities of often hundreds of 'production units'.

But the generally beneficial uniformity through the billable-hour model has proven to be a challenge in most recent years as pricing and delivery of services diversified.

Holland & Knight has seen the benefits and faced the challenges of these developments as we paid particular attention to performance management. Since 2009 the firm's profitability increased by 40%, while its peers on average showed half that improvement and none posted a better compound annual growth rate. 

Performance analytics and reporting

Many firms purchased additional business intelligence software, such as Redwood Analytics, over the past 10 years to help better understand the drivers of financial performance. 

But like many other firms, we struggled to deploy this resource effectively. Producing meaningful reports requires not just careful consideration of the information they contain, but also a lot of tenacity and empathy in deploying the reports to readers outside firm management. 

The threshold for success is remarkably high since lawyers are notorious for picking apart evidence they do not like. They will challenge every aspect of critical reports, demand to know how certain key performance indicators (KPI) are derived and then proclaim the reports utterly useless if they can find fault with a small component of them.

Some influential partners will develop significant energy to stop reports from circulating if they somehow suggest that the partners' practice or group is anything but stellar. 

Seemingly insurmountable headwind is inevitable when the innovations in this area are first launched. The key is to work with the headwind but never to choose a different destination because other aspects of the business seem easier to navigate. We developed a base set of very similar reports for individual and group-level performance.

These KPI reports reflect the basic financial drivers of any practice at the working, billing and originating timekeeper level including production and inventory management and cost allocations. Of course, all of these data points need to be cleanly established first before they can be shared in reports. 

All KPI are measured against budget and prior year. At the individual level for partners, we included decile rankings for some of the KPI helping the partners understand how their performance compares to others in the firm and providing a motivator to fix underperformance. These reports are provided monthly at all levels of the firm; additional reporting is done at different intervals or on demand.

While these reports can be pushed out, they are probably going to be either ignored or, worse, misunderstood without proper education. Relentless training and reinforcement of the rationale behind the reports as well as a suite of tools and techniques to reading and understanding the reports is, of course, of paramount importance. 

Once the same language is spoken at all management meetings, at every briefing of directors, office heads or practice leaders and in monthly partner or all-lawyer meetings, the practice of the reports begins to sink in.

We can safely say today that we have sailed past the point of acceptance of the reports, while we are mindful that we have quite some progress to make before all parts of the firm engage in effective management based on the reporting.

A robust performance analytics and reporting function must revisit existing reports and shut them down if they are of no or little value. In some instances, we did not have any complaints from recipients when the reports stopped, suggesting that they were generally ignored.

If there are interested parties, their request to find the relevant data needs to be addressed through individual consultation. Today, we disseminate about 40% fewer performance reports and expect the total to continue to decline.

Abandoning timesheets

While technology can be the enabler of innovation but prove to be ineffective without proper management of the change in people and processes, we also found the reverse to be true: when innovation is driven by people or processes, technology can be a challenge to adapt. 

This was the case in our project of abandoning timesheets and thus the billable hour from our public policy and regulatory practice. It is largely based on retainer relationships with clients; the time records were principally relevant only for internal purposes including performance management. 

Of course, abandoning timesheets caused uncertainty among professionals who saw the resulting metrics as a proxy of their performance and were thus concerned about how their contribution would be measured. Also, even if it does not determine the price of the 'goods sold', time spent as the main cost of production might make performance management impossible. 

To accommodate this, we developed a thorough replacement system that baked in the advantages of prospective matter planning and thus contributions by individuals with periodic progress reviews, which could amend initial expectations about performance. 

Extensive training of lawyers and other professionals, as well as a test period in which we ran both systems, helped ensure a decent transition on the people and process aspects. However, on the technology side we faced more structural obstacles.

First, there was no technology solution that could support our prospective planning and review process in a sophisticated way. The solutions available, largely based on fixed-fee matter management, were either too generic, too rigid or too complex to be adapted to our needs. Hence, we needed to initially rely on a relatively labour-intensive process, before being able to supplement it with custom-built work flow processes based on OpenText. 

In hindsight, an earlier review of the technology options would have allowed us to understand better the interplay between our processes and the cost of off-the-shelf vs custom solutions. This would have shortened the transition period as the labour-intense processes were more error-prone and caused some resentment from those in the group who had to bear a significant portion of the additional work. All this required time to be worked out to a generally satisfactory level.

Second, we wanted the new approach to be reflected in our firm's overall financial management system, based on Elite. The metrics needed to be comparable on an 'apple-to-apples basis'. That required another improvisation as the financial management system is so strictly tied to the billable hour model that every other form of performance management must be converted back to that model. 

For example, the prospective allocation process includes contingency hold-backs for redundant work, scope creep and unexpected requests that do not lead to additional revenue. Since those are not included in actual performance 'by the hour' until the end of a reporting period, the numbers are not exactly comparable. However, the differences are acceptable as they are not any more significant than those experienced between other practices of the firm.

The technological challenges notwithstanding, implementing the alternative performance management system for the sizable retainer-based practice has provided us with extremely valuable insights into most of the issues that legal services professionals are confronted with when having to manage fixed-fee based and similar matters in a profitable and sophisticated way.

These two examples highlight opposing experiences of using technology in innovating law firm performance management. Without question, it is imperative to understand the possibilities and the limitations of technology as much as people and firm culture in developing new approaches to business challenges.

Friedrich Blase is chief international officer of Holland & Knight.