Most law firm leaders and managers watch their numbers very closely, but they often fail to notice how those numbers move.
Understanding variation in performance -- how the numbers move -- can provide profound insights into improving profitability.
The concept of variation is based on the observation that nobody does the same thing exactly the same way two times in a row.
Variation is natural in any human activity. Few things ever move along strictly at "average." In some months, for example, performance might be above average and in others it might be below. However, when the numbers start to move significantly above or below the average, this might be unusual variation, and also a sign of a problem.
Variation is one of the most important aspects of performance measurement. The extent to which performance varies -- better or worse --- from the average usually is more important than the number itself. It can be a sign of a chronic problem or vulnerability that should be corrected, or, sometimes, a sign of something that the firm is doing very well (usually with realizing it).
Why is variation important?
At Walker Clark, we use variation as one of the most important diagnostic tools to help our clients improve the financial performance of their law firms and the productivity of their fee earners. An understanding of variation in financial performance -- how the key financial measurements change from month to month -- has at least three important benefits:
- Monitoring variation in performance can help us spot an oncoming problem long before it becomes a crisis. Normal variation in performance is seldom a reason for concern. However, repeated and drastic swings in performance are often a sign of a chronic problem in the underlying work processes of the firm, i.e., how the firm prepares and delivers legal services and products to clients. In law firms, perhaps to an even greater extent than in other businesses, these problems can have a profound negative effect on profitability.
- A process that operates within the normal range of variation (also described as being "in control") is usually easier to manage than one that is unpredictable. Although variation can never be completely eliminated, greater consistency in performance makes it easier to make reliable business plans and management decisions.
- Finally, understanding that some variation is normal keeps us from over-reacting to short-term peaks and valleys in performance. We know what variation is normal, and we know when variation should alert us to the need to investigate. Over-reacting and constant “adjustments” in response to normal variation can actually make things worse.
What should be the response to unusual variation?
The important word is unusual.
One month of unusual variation is not usually cause for alarm; but continued variation over three or four months usually should be investigated. In most instances, law firm partners can easily explain a one-time peak or low point in a measurement. (This is known as a special cause.) However, when the unusual variation persists over time, and there is no special cause that explains it, the time has come to examine the work processes that produce the highly variable measurements.
The good news is that, in many instances, finding and fixing the cause, usually buried deep inside the work processes of the firm, can substantially reduce the variation back into normal limits. Moreover, using variation in performance as a guide to dig down to the underlying causes will produce sustainable improvements, not the short-lived superficial quick fixes that result from brainstorming, hunches, or exhortations to "just work harder."
five reliable diagnostic indicators to watch
There are five performance measurements to watch especially closely for unusual variation.
Most law firms produce these measurements quarterly, and some even monthly; but many law firm partners and managers focus on the numbers themselves, rather than how they might have changed from the previous month or how they are significantly higher or lower than average. Each of these five measurements has a direct relationship to the profitability of a law firm, a practice group, and, in some instances, an individual partner's book of business.
- realization rates
- fully-loaded operating cost per lawyer hour
- fee yield per lawyer hour
- profits per lawyer hour
- lawyer utilization rate
Are your numbers moving around too much?