If you want to measure your team's effectiveness and efficiency you need to understand and apply the basics of financial metrics. Read more for a short summary on the process.

Numbers do not drive the financial performance of a law firm. Performance is driven by the empowered people. It can be limited by the effectiveness of the firm’s strategies and tactics (formal or informal) and the efficiency of the firm’s practices. Effectiveness is about doing the right things, while efficiency is about doing things right.

The numbers (the financial metrics for a law firm) are the outcomes of the firm’s people—the degree by which they are “doing the right things and doing them right.” Numbers let managing partners express the firm’s targeted performance. Numbers enable the partners to compare the firm’s performance to its own targets or to the performance of other similar law firms. Put into a simplified model, numbers help answer “what if” questions by letting the firm’s partners test the impact of various scenarios:

• What is the impact on per-partner income if, through improved collection efforts, we increase realization by 2 percentage points?
• How will an addition in the number of associates alter the bottom line?
• How will an increase in the firm’s fees affect distributable partner income?

The Law Practice Business Model was introduced in 1984 by David Maister as a mathematical expression. Maister's formula is as follows:

Most managing partners do not have financial training. Luckily, lawyers are fast learners, since the model is one lesson that must be learned to be successful at law firm financial management. It is the basic tool for forecasting and estimating per-partner income. It is the tool for expressing the firm’s financial targets and measuring progress against them. It is the standard by which one firm can be compared financially to another. For most of us, the Maister model is easier to follow and understand when illustrated in the more traditional financial statement format shown below.

Maister’s model doesn’t tell the whole story. The financial manager has to be just as concerned about metrics that measure unbilled fees (work-in-process) and billed but uncollected fees (receivables). The managing partner has to be concerned about metrics that are not reflected in the financial numbers but will impact those numbers in the future. For example, are we opening new matters faster than we are closing old ones? Are the partners meeting their individual marketing goals? Is client satisfaction on track or veering off-course? While the Maister model is not the whole story, it is at the heart of the story.