June 13, 2023

LegalTech and Return on Investment (ROI)

I.            Introduction

When purchasing new technology in legal industry it is very important to try to understand the value of your investment, in the terms of benefits and returns that investment brings to you or your business. Investing in legal technology is a business decision and its crucial to consider, if the benefits outweigh the costs. The term ROI stands for Return on Investement. It is widely used when enterprises (including legal industry) are deciding whether or not to undertake an investment. Having said that, ROI is basically a ratio between net income and investment. Higher ROI means the investment’s gains compare favorably to its costs. In addition, according to Gartner Research, value assessment tools are highly appreciated by technology buyers. Also, lawyers’ work hours would decrease by 13% if all new LegalTech were implemented immediately into a law firm as suggested by MIT labor economist Frank Levy and Professor Dana Remus. Since technology is advancing rapidly it is crucial to choose which technologies offer a real return on investment and which do not.

The reality is that there is often a gap between knowledge and expectation when investing in any technology – software tool will increase the productivity and efficiency, but when it comes to providing quantitative proof of returns, it’s difficult to show those benefits. Therefore, measuring ROI can be tricky but not impossible. There are a number of factors that could and, in many cases, should be used to calculate ROI, but any ROI calculation needs to start with agreeing the problem point it is trying to solve in the first place.

II.            ROI formula

There has been much debate on how to measure ROI in legal technology. In LegalTech widely accepted formula for calculating ROI is:

(total value of benefits – total costs) / total costs x 100 = ROI percentage

Difference between total value of benefits and total costs is called net income or net profit. As shown above, ROI is calculated as percentage in this formula. So, if ROI percentage is 100% it means that the investment is equal to benefits of that investment. Or if it’s higher than 100% it means that you get more than you put in. Generally, we are aiming for ROI that is more than 100% because let’s say something that costs more than benefits it brings obviously doesn’t make sense.

III.            Calculating costs

Costs represent a very significant part of ROI calculation formula and they are rarely just the costs of technology itself. Often, costs include: implementation costs, ongoing and future costs, timeframe for implementation, level of effort and involvement from their own team it will require in learning to use the system, loading data or content into it etc.

Moreover, some costs are obvious and they are called hard costs (e.g. software licensing) while other costs, called soft costs, are more difficult to put a price on but they’re just as important (e.g. risk mitigation). Hard costs are also time spent on researching suppliers and products, training staff, development and configuration, implementation, overheads. Soft costs might be harder to see but they also impact legal team’s ability to address business needs. Very important questions when deciding about future investment are:

How much time is lost correcting errors?

What are the potential repercussions of data loss, non-compliance, etc.?

How much time is lost due to slow response times?

What are the consequences of slow response times?

Those are all questions related to soft costs. They can be grouped into: risks (e.g. compliance failure), quality (e.g. reputational damage), client service (e.g. unbillable work wasted in an inefficient process) and stress (e.g. people working harder and longer). Poor quality work increases risk in legal work and things like data leakage, non-compliance might occur. Client service refers to manual processes which might take more time and reduce responsiveness to client needs, causing friction in the relationship. Stress, generally means doing things the hard way, which is manually, and it frustrates people. Also, repetitive tasks that can be automated thanks to LegalTech, make people stressed if they have to do it manually.

When lawyers don’t work effectively, they risk lost income, liability and reputational damage. So, let’s say one way of calculating a soft risk would be estimating the cost of losing an important client because they lost faith in company’s ability to serve them well.

IV.            Calculating benefits

As well as costs, benefits can be hard benefits and soft benefits. Hard benefits are the ones more or less easily measured while soft benefits are less tangible. Greater productivity, less risk of mistakes, less training, fewer support calls, reduced write-offs are all hard benefits from an investment. On the other side, enhanced reputation, client satisfaction and reduced stress are soft benefits. Same as soft costs, soft benefits are essential to a precise ROI evaluation. As an example, let’s see what it means in terms of greater agility to respond to client needs and time savings: If it takes 50% time less to respond to such request with automation, than those time savings should be valued as billable rate for that work and considered as a benefit. The value of that time saved should also be included in new opportunity cost of not investing in LegalTech. Those costs of lost opportunities like increasing business by landing new clients should be taken into consideration when deciding whether to undertake an investment.

Time savings can be used for marketing purposes too, it not only means saving billable hours for companies but it also means enhancing client’s satisfaction by being better served and not taken advantage of.

Some companies calculate that every additional mouse click costs the company in lost productivity. Therefore, applications managers in companies, count number of clicks and seconds to accomplish the same task in several competing software solutions and discover which solution requires less mouse clicks. They realized that extra clicks have a major impact on company’s bottom line even when those clicks seem innocuous.

VI.            Conclusion

When assessing costs and benefits of the LegalTech investment focus should be put on multi-year ROI. The first year’s ROI will usually be lower due to initial costs like development, implementation, training etc. Later years ROI will be higher since it won’t include those costs. Some of the key questions that should be considered should be:

Will implementing this legal technology address key inefficiencies?

Can vendors demonstrate successful implementations?

Does the technology meet critical security and compliance requirements?

What are the costs and the benefits of implementing your chosen legal technology?

How easy is it to implement the technology?

The legal technology marketplace is becoming more competitive every day. As such, implementing LegalTech that don’t offer a real ROI is an expensive lesson. On the other hand, intelligent technologies that appropriately and adequately address critical inefficiencies in legal practice are very valuable and money worth.

The cost of replacing a lawyer is high and the best measure of whether a piece of software helps a lawyer do their job more efficiently is them coming back to it and using it again. It might be different from lawyer to lawyer but empowering lawyers by giving them access to technology and then training them to use it enables them to make an informed decision. In many cases, they are the best people to judge whether any implementation was worth it.

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About Drazen Nikolic
Dražen Nikolić is a legal professional from Bosnia and Herzegovina with experience in corporate governance, compliance, contracts and financial crime. Also, he’s a LegalTech enthusiast in his free time.

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