Redwood Analytics

I recently read an article posted on Bruce MacEwen's blog Adam Smith, Esq. titled "The Great "Laterals" Conversation, Chapter 2".  The article itself is insightful and speaks largely on (surprise, surprise) lateral hires.  However, a portion of the article that I found extremely interesting was a short blurb regarding KPIs. 

In MBA Land, professors delight in teaching about and management gurus delight in writing about "KPI's," or "key performance indicators."  What is a KPI?  Well, it depends on what your company does, but if you're a retailer (think Amazon, or Dell), a KPI might be the number of inventory "turns" you can generate annually.  Another might be how fast you can collect cash from your customers before you have to pay your suppliers (both those firms, amazingly, have that metric in negative territory, meaning they collect their customers' revenues well before they pay their suppliers--you might want to think of that trick next time you're tempted to indulge a client who's 90 days late and wants to be 150 days late).

But my secret suspicion is that, for every KPI, there has to be an evil twin:  Call them "KRI's," or key risk indicators, which are dials on the dashboard indicating you might be headed for the guardrail, or over it.  For law firms, one big KRI, in my book, is excessive and promiscuous lateral recruitment.  Yes, "excessive" and "promiscuous" are both fudge phrases, but I think you know where I'm going and I think you know it when you see it.  As I said originally, the best predictor of getting divorced is having been divorced.  This is nothing, really, other than the flip side of home-grown talent's loyalty.

Redwood has used the concept of KPIs extensively (particularly in our Dashboard tool) and when we speak on it, everyone always nods and appears to agree that yes, they are very important to monitor.  But I think that Mr. MacEwen makes an extremely valid point in this section of his blog.  Even if it is simply semantics, the idea of Key Risk Indicators is a much more compelling statistic in my mind.  For example, two common (and in my mind over-simplified) KPIs that are used are Bill Speed and Collect Speed.  How quickly did we bill and collect what we billed and collected.  While I think the trending of this type of metric is important, what does it tell me if a partner's collect speed suddenly goes from 45 days up to 300 days?  Obviously, a higher Speed means she is taking longer to collect and I should be concerned with this precipitous drop off in performance. 

Actually, without more data points, my first reaction would be to congratulate this partner.  She went out and actually collected something that was obviously fairly old (at least 300 days).  Is this a "bad" thing?  Well, maybe we hoped she would have collected it earlier, but at least she collected it. 

In the same vein, what happens if I see someone with a low collect speed of 30, month after month?  Good work, you are bringing in your cash in a timely manner.  Again, at first glance it may appear not to be a concern, but it is perfectly feasible that this individual simply doesn't collect a large portion of his A/R that has aged and only captures low hanging fruit, ignoring the older, more difficult potential collections.

The concept of KRIs is much easier to interpret and in my mind tells a better story.  A metric like Speed is like a pat on the back.  Good work for something you have done, a metric like Age of Unbilled or Age of Uncollected is much more telling of what is to come and what is at risk.  Seeing an Age of Uncollected of 30 tells me that there is little or no old A/R out there and I shouldn't be concerned with losing cash due to stale invoices (in most cases, aged A/R is more difficult to collect then that which is still timely).  Vice versa, having an Age of Uncollected that is nearing an average of 365 days is a sign of concern.  So in this case, the "Evil Twins" of Bill & Collect Speeds are the Ages of WIP & A/R.  In fact, if you have to choose, the Ages are much more important to monitor, although in combination, they definitely pack a punch towards understanding inventory management.

In the end, solely using metrics (KPIs, KRIs or whatever you call them) can be misleading without proper interpretation, but by focusing on this idea of Key Risk Indicators, you can keep a lookout into what is coming up, not what has happened, which is what a firm always needs to be concerned about.