Corporate executives often express frustration that their legal costs are too high. In-house and outside counsel alike can sometimes add to that frustration by failing to communicate the value their efforts provide. How can corporate executives more effectively measure return on investment (ROI) with respect to legal spending? Here are some tips.
Business and Legal: Different Mindsets
A company’s business and legal functions do not measure their value to the company in the same way. While business departments such as Marketing or Sales generate revenue more or less directly, legal spending is focused instead on preventing or reducing costs. Moreover, legal spending is often directed to more long-term concerns, such as future litigation risks, while business departments may be incentivized to focus on quarterly or short-term results. While this distinction should not remove the legal function from fiscal scrutiny, understanding the purpose of legal spending can help to justify both its variance and magnitude.
Measuring Value in the Legal Department
Though a company’s legal function will not use the same profit-oriented metrics as others within the company, this does not mean legal spend should be guided by mere intuition. In fact, just the opposite is true: A company’s legal function must rely on a data-oriented approach to evaluating performance and measuring cost savings over time. The following metrics can help:
Outside Counsel Spend per Matter: Instead of evaluating total outside counsel spend over a given quarter or year, look at outside counsel spend per matter. While total outside counsel costs over time can be helpful, understanding the specific types of matters that result in high outside counsel spending can result in better planning to reduce costs in the future. For example, if intellectual property licensing matters consistently cost the company more relative to other matters, the company may consider hiring in-house counsel with a specialty in that field. Or, the company might consider a high quality, competitively priced outside counsel solution like Priori Legal.
Total Hours Spent by In-House Counsel Per Matter: If you have one or more in-house counsel, you should examine the number of hours spent by attorneys per matter. Not only does this metric provide insight as to the efficiency of each attorney within the legal function, but it also provides a useful comparison against which to measure outside counsel costs and hours spent per matter.
Cost Savings from New Technologies and Approaches: When you implement new legal technologies or processes—say, improving the procedures for creating and entering into standard form contracts—you should identify the cost savings specific to that improvement. This achieves two goals: First, when evaluating whether to implement new technology in the future, you can run a baseline comparison with savings generated from past technology upgrades. Second, demonstrated past savings can help generate the engagement and buy-in necessary to make future upgrades successful.
Litigation and Settlement Results: While executives often want to know the number of cases and settlements won and lost as well as the costs incurred as a result, this metric can be misleading. Your company may “win” all of its lawsuits in a given year, but at a cost that exceeds the highest expected damages resulting from a loss. In analyzing wins and losses, make sure to consider the costs incurred to generate those wins and losses.
Performance Reviews from Corporate Employees: You should solicit feedback from the people in your company who work with your outside and inside counsel. These periodic reviews provide a useful opportunity to compare performance with goals and understand where your legal function could be improved.
Remember the Intangibles
Although you should be as diligent as possible in quantifying the ROI of your legal spend, it’s important to understand that investing in legal can provide many intangible benefits that will be difficult to reduce to a simple measurement. These intangibles—such as risk management when entering new ventures—should be assessed along with the more easily measurable benefits. Otherwise your risk underinvesting in legal to the detriment of the company.