Legal organizations of all types—corporate law departments, law firms, and government law departments (i.e., federal, state, county and local)—are implementing procedures designed to measure and improve their performance and ensure that their activities are aligned with the overall performance and strategic objectives of their larger organizations or, in the case of law firms, clients. Simply put, the legal profession is now attempting to measure law department and law firm performance in the same way that businesses have been measuring performance in other important functional areas such as sales, accounting, human resources and information technology.
One example of how this trend is emerging is the creation of the Open Legal Standards Initiative (OLSI), which has partnered with the Association of Corporate Counsel and The Corporate Legal Standard, Inc. to develop standardized business process and metrics classification systems for the legal profession that will allow for more effective benchmarking of important pre-selected performance metrics, generally referred to as “key performance indicators” or “KPI”. In order to understand how KPI can be developed and used in the legal area it is important to briefly discuss a few key definitions. First, there must be agreement on the meaning of the term “metrics”. A “metric” is generally understood to be a standard of measurement and that can be used as a way for quantitatively assessing the efficiency of performance with respect to a particular process. In order for a metric to be useful, however, there must be full agreement in advance as to how the relevant data will be collected, organized and displayed. Second, metrics cannot be used in isolation and results must be evaluated against pre-agreed standards. This exercise is referred to as “benchmarking” and in the legal area requires comparison of the KPI of one legal organization to comparable organizations (e.g., data from one law department is compared to data of other law departments of similar size). The information necessary for benchmarking is usually collected from larger surveys conducted by consultants and/or trade organizations. Finally, it is likely that a large number of “performance indicators” can be identified; however, the focus must be on those that are truly “key” and worthy of significant management attention. Two points need to be made on this issue—KPI must be easily understood by interested stakeholders, such as other departments within a corporation, and recognized as being compatible with the overall strategy of the organization; and KPI must be limited to those areas that can create the most value for the organization. If doing a particular thing very well does not create significant value it is a nice thing; however, it is not something that should be considered part of the KPI.
The OLSI has suggested 25 top KPI for law departments broken out into seven main categories—general law department metrics; litigation matters; non-litigation matters; intellectual property matters; external legal spending; knowledge management; and compliance. The general law department metrics include the total expenses of the law department in an absolute sense and as a percentage of the total revenues of the company. Litigation, non-litigation and intellectual property matters all track the number of active matters as well as the volume of new and closed matters. Particular emphasis is placed on “process efficiency,” such as the average cycle time to resolve or close new matters. External legal spending is related to the general law department metrics described above by its focus on total fees for outside counsel and other legal vendors and is further broken down into litigation, non-litigation and intellectual property matters. Knowledge management (KM) attempts to track how successful the law department has been in capturing existing knowledge and re-using it as opposed to paying for the creation of the same knowledge all over again. Specific KPI in this area look at how efficient the department has been in storing and organizing electronic or hard copies of documents and research and how often the department engages in KM-specific reviews of closed matters (i.e., what did we learn so we can do it better and more efficiently the next time). Compliance-related metrics include the number of ethics line/hotline calls, cycle time to resolve ethics line/hotline reports, and overall employee awareness of compliance program procedures and activities. With respect to public companies awareness is measured by reference to Sarbanes-Oxley and exchange listing requirements that mandate distribution of a code of conduct or ethics to employees.
The OLSI Top 25 is certainly a useful list and many, if not all, of the items should be included when selecting the KPI for a legal department. However, consideration should also be given to including additional KPI that focus on the level of service provided by the legal department, the level of teamwork and morale within the legal department, the contribution that the legal department makes in the context of pre-selected strategic projects, and the performance of the legal department in relation to pre-approved budgets. For example, with respect to service levels the legal department can and should be evaluated on how readily the legal department can be reached by other departments seeking legal services (i.e., “accessibility”) and how often requested legal services are obtained on a timely basis (i.e., “turnaround”). There is, however, one important caveat in focusing on these measures—are the expectations of the other departments reasonable? If other departments are treating a relatively minor issue as “urgent” and disrupting the workflow of the legal department on matters that should clearly have a higher priority it is not fair to the legal department to absorb criticism with respect to poor turnaround on minor issues which are of little or no value to the company as a whole. With respect to pre-selected strategic projects, such as negotiation of an important new contract or management and disposition of major litigation, the legal department should be judged on how well it does in attaining planned results and its overall contribution to the successful completion of the project. Other departments should be asked how satisfied they are with services provided by inside and outside counsel on these projects.
Legal departments are sometimes asked to suggest KPI without an understanding of how they will impact the day-to-day operations of the department and the lives of the lawyers and other personnel who work within the department. This mistake should be avoided and management should take the time to fully explain how metrics and benchmarking will be used. At an operational level, tracking of litigation and non-litigation matters allows the law department to do a better job of staffing and budgeting and thus realize savings and create value based on more efficient processes. In addition, KPI should be used to establish goals and objectives for further improvement; however, the goal should not simply be to achieve a “better score” but should be supported by specific “next actions” that can be understood, implemented and measured. Finally, and not unimportantly, KPI should be tied to meaningful incentives in order to motivate the members of the legal department to strive for improvements and avoid acting in a way that will adversely affect the score on a particular KPI. Since KPI can and should be a means to incentive behavior the infrastructure of the company (i.e., the organizational design) should be set up in a way that allows the legal department to have a reasonable level of control over the activities that are being measured and other departments should not be allowed to create obstacles that will prevent the legal department from pursued its goals and objective with respect to its own unique KPI. In turn, the KPI of the legal department should be aligned with the actions that other departments are expected to take in order to achieve their KPI.