Lessons Learned from KPIs from Other Industries…and the Developing Evolution of Legal’s

It’s always interesting comparing Key Performance Indicators (KPIs) and operations with other industries to find parallels and useful new concepts. The basics of each industry may vary dramatically, but the ultimate goal for every competitor is the same: the highest financial return/optimal profitability from the annual investments of time and money in the available resources.  When highly competitive, performance-focused individuals strive for this outcome, they sometimes cannot see the forest for the trees – they obsess over individual statistics that they view as a proxy for the ultimate outcome rather than seeing the carefully choreographed blend of efforts needed to truly optimize profitability.

This point was reinforced recently when I met Ed Bridgman – a Six Sigma Black Belt who was on the team at Motorola in the earliest days of that program’s development and implementation.  He also helped implement Six Sigma into the supply chain of businesses working with Motorola. While he consults across many industries, he told me about his recent work in recreational vehicle campgrounds – an area where he sees tremendous growth potential and upside based on a demographic shift in its core customers that is skewing younger and more loyal.

As we chatted, he described a recurring conversation that he has with campground and RV resort operators, many of whom boast of a 100% occupancy rate as evidence of their optimized profitability.  Ed calls this out directly with his clients.  A 100% occupancy rate, he tells them, is not the goal.  Furthermore, it usually just means the price is too low. His counsel instead is to raise fees by roughly 10% per year until occupancy settles at around 90%. That, he says, is the point at which the economic picture of the facility is actually much stronger in relation to what the market will bear, and the operator is capturing the value being created rather than giving it away to keep a scoreboard number high.

Listening to Ed, I could easily replay years of conversations with partners who were enormously proud of their near-100% realization rate (the share of standard billing value that actually gets collected from clients). In their minds, a rate that high was proof of a job well done and a practice that must be highly profitable.

While exceptions exist, I generally think that a realization rate that hovers near 100% is a huge opportunity lost, not a badge of honor. It’s frequently a sign that the billing rate itself is set well below what the market would bear — priced so conservatively that clients pay every invoice without pushback, discount, or write-off. It is the law firm equivalent of a campground that’s booked solid every night of the year – gratifying to look at while quietly leaving money on the table.

Many law firm Partners routinely adjust rates based on whatever they experientially think the market will bear, but skewed with a personal fear of losing business and/or internal bragging rights. The question Ed’s story raises is whether law firms could go a step further and treat realization the way he treats occupancy — as a KPI to be deliberately managed toward an optimal overall target, not maximized individually. Push rates until realization eases off 100% and settles in the 90% range, and you are very likely capturing more value overall, even though the metric you’ve been taught to worship just went down.

The statistical case for this is compelling. The table below models an attorney who experiences raises in the standard billing rate 10% a year while realization gradually eases from 100% down to 90%, holding billable hours constant at 1,600 per year.

(Illustrative model, not client data — figures are rounded.)

Even as realization drifts down 10 points, the effective collected rate climbs about 32% and total collections grow by roughly the same. The firm “underperforming” on realization in Year 5 is, in real dollar terms, comfortably outperforming its 100%-realization self from Year 1. The metric partners are proudest of and the outcome they want turn out to be pointed in opposite directions.

Note – Very high utilization levels could also indicate a low billing rate.  There are multiple drivers of profitability, and I am focusing on realization only to link back to my conversation with Ed.

Once you see this pattern, you notice it everywhere a business tracks a utilization percentage as a stand-in for profitability. A few examples from other industries make the point even sharper.

Hotels. Hospitality figured this out decades ago and built an entire discipline — revenue management — around it. Hotel GMs no longer get praised for hitting 100% occupancy; they get praised for maximizing RevPAR (revenue per available room). A property that’s consistently sold out is treated as a pricing signal, not a victory lap — it usually means rates should go up until some rooms start going unsold at the margin. The optimal occupancy rate for a well-run hotel is often somewhere in the 80s or low 90s, not 100%, for exactly the reason Ed describes with campgrounds.

Airlines. Airlines watch “load factor” — the percentage of seats filled — obsessively, but the metric that actually determines whether an airline makes money is RASM (revenue per available seat mile), not load factor on its own. An airline can run a very high load factor and still lose money if it discounts seats too aggressively. Revenue management teams may deliberately let some seats go unsold at the lowest fare buckets, betting that a smaller number of higher-fare passengers will produce more total revenue than a full plane sold cheaply. A packed flight is not automatically a profitable one.

Subscription/Software and App businesses. The equivalent trap here is chasing 100% retention or 0% churn by very modestly raising prices. A software company that hasn’t lost a customer in years may be underpricing its product relative to the value it delivers. The healthier discipline — familiar to anyone who has run a pricing review — is to raise prices deliberately, accept a small, predictable increase in churn among the most price-sensitive accounts, and track net revenue retention (expansion and price increases minus churn) rather than retention alone. A little churn, managed on purpose, is often the sign of a price that’s finally correct.

Manufacturing capacity. Even inside Ed’s original home turf of Six Sigma and operations, running a plant at 100% capacity utilization is usually a risky proposition rather than an achievement — it leaves no slack for changeovers, maintenance, quality issues, or a rush order from a key customer, and it tends to increase defect rates and overtime costs enough to erode the margin the extra output was supposed to generate.

The Common Thread

In every one of these industries, a tempting metric — occupancy, load factor, realization, retention, utilization — is easy to measure and easy to feel good about when it’s high. However, each one can be seen as a proxy for the KPI that actually matters, and proxies break down at the extremes. The operators and firms getting it right are the ones willing to let the proxy metric come down on purpose, in a disciplined and measured way, because they’re managing toward economic optimization rather than a scoreboard number.

For law firms, that means resisting the instinct to treat a 100% realization rate as an unambiguous win. The more useful question isn’t “how do we keep realization at 100%?” It’s “what would our rates and our realization rate need to look like if we were managing toward the optimum outcome?” The answer, more often than firms expect, is a little lower on the metric, and a lot better on the number that actually pays the partners.

Looking Ahead

I fully acknowledge that a focus on standard billing value realization is quite old-school at a time when AI influences more of what we do each day.  By sharing the more focused and sophisticated metrics used in other industries, I also want to encourage some thinking on where these will go for our legal industry.  A shift in our KPIs is inevitable…and exciting and scary and rapidly approaching us, all at once. 

A sound KPI has two parts

• The numerator – the outcome, usually financial, based on the deployment of the value-producing asset
• The denominator – the value-producing asset

Revenue per lawyer and Profits per Partner (and a few others) have been the simple mainstays in the law firm world for decades but the nature of our value-producing asset is rapidly evolving away from a timekeeper headcount with the deliberate incorporation of AI.  What will be our new KPIs that correlate most closely with optimized profitability?  It’s not too early to start developing these.  Look at the precision and focus of the KPIs referenced above.  These industries are operating at a higher and more real-time level, and one that we will need to start achieving as an industry.

 I’ll get deeper into this with my next blog.