LegalTech ROI Calculation by InvestCEE Advisors

│ Key metrics for legaltech ROI & best practice tips by Chuck Henrich

Investing in legal technology is fundamentally a business decision: will the benefits of the investment outweigh the costs? Return on the investment must justify the effort and expense of upgrading a legal team’s infrastructure and skills. A return-on-investment (ROI) calculation should support the decision making process with realistic numbers and flexible variables to account for different users and use cases. 


Editor’s note: InvestCEE clients often ask how legaltech solutions increase productivity, generate profits and enable efficiencies for their legal and business teams. This overview of legaltech ROI calculation was prepared by InvestCEE consultant Chuck Henrich to provide a data-driven approach for client discussions around legaltech investments. All opinions reflected below are his own.


Gartner Research has found that value assessment tools are highly rated by technology buyers. In this article, InvestCEE’s legaltech advisor Chuck Henrich explains what metrics legal teams should take into account in calculating ROI for tech-assisted legal services, and how to do it.

 

What is a useful LegalTech ROI calculation number?

An ROI calculation demonstrates the total value of benefits minus costs. 

There are many ROI calculation formulae for various types of investments. For our purposes in the legaltech domain, we can use this basic formula:

{ total value of benefits – total costs } / total costs =  ROI percentage

Note that in this case ROI is calculated as a percentage. If the value of the benefits returned is higher than the cost of investment, then the ROI percentage is greater than 100% – i.e. you get more than 100% of what you put in.

Sometimes technology vendors explain ROI simply as money or time saved. But that kind of ROI figure doesn’t explain whether the proposed benefits justify the expense and effort of investment.

Best practice tip #1: Using a percentage for ROI calculation simplifies the cost-benefit ratio: something that costs €100 but delivers only €90 of benefits – or a 90% return on investment – obviously doesn’t make sense.

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What to calculate?

That ROI formula is deceptively simple. Some costs and benefits are obvious like software licensing and time saved. Others are more difficult to put a price on, but just as important – like risk mitigation and clients’ perceptions. For discussion purposes, let’s differentiate “hard” and “soft” costs and benefits. 

#1 Calculating costs

Hard costs are verifiable expenses while soft costs are business impacts that are challenging to quantify:

Hard costs Soft costs
  • Licenses and related fees
  • Research time to find suppliers and products
  • Proof of concept – time and resources
  • Training
  • Development and configuration
  • Implementation
  • Overheads like admin and ongoing help desk
  • Risks – introducing change vs not taking action
  • Quality – reputational damage of sub-optimal delivery
  • Client service – unbillable work wasted in inefficient processes
  • Stress – people working harder and longer than they need to damages productivity and health

Hard costs are mostly pretty obvious. But soft costs often get ignored. Yet, soft costs impact a legal team’s ability to address business needs. When lawyers don’t work effectively, they risk lost income, liability, and reputational damage:

Quality and risk

Poor quality work product increases risks in legal work:

  • content may be out of date / no longer correct due to changes in legislation etc
  • data leakage can occur, like one client’s content being sent to another client
  • manual proofreading is tedious and error-filled
  • document formatting may be obsolete or not correspond to law firm or corporate brand standard
Client service
  • Manual processes take more time and reduce responsiveness to client needs, causing friction in the relationship
  • When clients find mistakes in documents they question whether they are receiving good legal advice 
  • Automation speeds responsiveness, increases perceived value of legal work, enhances client loyalty in the case of law firms, and elevates the reputation of corporate of law departments for their internal customers 
Stress
  • Doing things the hard way – manually – frustrates people 
  • Repetitive and awkward tasks cause mistakes, increasing the time people need to fix and finalise
  • Many document creation tasks cannot be billed to clients, increasing professionals’ anxiety about meeting targets
  • People work harder / longer, cutting into time better spent on wellbeing and personal lives

Best practice tip #2:  It’s essential to include some sort of valuation for soft costs in any ROI calculation. For example, in the case of law firms, one way to calculate risk associated with quality assurance could be to estimate the cost of losing an important client because they lost faith in the firm’s ability to serve them properly. Calculating the cost of stress could include the number of sick days staff take due to work-related stress.

#2 Calculating Benefits

Hard benefits can be measured more or less easily, while soft benefits are less tangible:

Hard benefits Soft benefits
  • Greater productivity – reduced time and resources needed to achieve goal
  • Less risk of mistakes
  • Less training
  • Fewer support calls
  • Reduced write-offs
  • Enhanced reputation and client satisfaction:
      • quicker, agile responsiveness
      • increased perceived value
      • enhanced client loyalty 
  • Less stress – people can rely on the tech and work more confidently

Like soft costs, soft benefits are essential to a true evaluation of ROI. The value of a soft benefit like greater agility in responding to client needs could be calculated as the difference in time needed to respond to a client request. If it takes 50% less time to deliver with automation, then that time savings should be valued at the billable rate for that work and considered as a benefit the lawyer can use for another – valuable – purpose.

The value of that time saved should also be included in the “opportunity cost” of not investing in legal tech: the cost of lost opportunities like increasing business by landing new clients, or improving wellness by ending the working day earlier.

Best practice tip #3: Turn time savings into a marketing message. While a lawyer, practice group, or firm may see time savings as lost billing and income, they would be better advised to see it as a new opportunity for enhancing client loyalty. With tech-assisted legal work clients will usually feel better served and not taken advantage of. Happy clients come back for additional legal help.

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How to calculate LegalTech ROI?

Step 1: Specify your metrics

Before plugging numbers into the ROI formula, establish your costs and benefits:

  • Get quotes on hardware and software
  • Keep track of research time
  • Budget proof-of-concept time / resources
  • Get vendor commitment on time / resources needed for:
      • training
      • implementation
      • development
      • ongoing management
  • Estimate the value of any soft costs:
      • How much time is written off fixing mistakes?
      • What are potential penalties for data leakage, non-compliance, etc?
      • How much time is lost on delayed responsiveness?
  • Establish baselines regarding time / resources:
      • Ask users to demonstrate how they do things currently or do it yourself and document the actual work. Count seconds/minutes, clicks, and screen hops!
      • Review current output for quality – note any mistakes and test how long it takes to fix them
      • Test the same process using the proposed solution – again count clicks and screen hops!

Establishing accurate baselines is critical. Don’t rely on users to estimate how much effort or time it takes them to do something. Confirm it for yourself. Two examples:

  • A Dutch law firm’s applications manager counted the clicks and seconds needed to accomplish the same task in several competing software solutions and discovered that one solution required fewer than half the mouse clicks than other candidate products. That translated into tangible time and effort savings across the firm.
  • One large multinational law firm has calculated that every mouse click costs that firm US$6 in lost productivity. They realized that extra clicks or screen hops or steps in a process have a major impact on the firm’s bottom line even if those clicks / hops / steps seem innocuous. Try to include those individually small but large in aggregate numbers. Factoring in hidden costs and benefits will have a major impact on ROI calculations.

Best practice tip #4: Factor in any variables that might affect how people will use the proposed solution. Adoption rates may vary – some users may use the new solution frequently, others not at all.

Step 2: Assess values in a Spreadsheet

You can calculate the value of benefits by subtracting the costs of using the proposed solution from the costs of the current process. For example, if it takes 3 hours at €150/hour currently (€450), and 1 hour with the new solution (€150), then the value of the benefit is €300 (€450-€150 = €300).

Use a spreadsheet to input costs and benefits to calculate ROI. Your spreadsheet formulae will allow you to test different scenarios, like varying adoption rates or prices.

Best practice tip #5: Focus on multi-year ROI. The first year’s ROI will usually be lower due to up-front costs like research, proof of concept testing, development, initial implementation, etc. Later years won’t incur those costs, so the ROI will be higher.

 


Consider outsourcing LegalTech ROI calculations

Calculating LegalTech ROI involves essential yet time-consuming work. Oftentimes, it interferes with existing responsibilities, so it easily gets neglected. 

Hiring a specialist consultant to gather information and document results can deliver quicker, more detailed data that enables better decision-making. Also, having an experienced ROI advisor on your side gives you an extra advantage in evaluating and negotiating with vendors, accurately analyzing ROI, and preparing business cases.

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