Legal departments need to know how to calculate the ROI of their legal technology investments to demonstrate that they are a good steward of company resources, validate their decision-making, and inform future projects in their legal tech roadmap. Here Xakia founder and CEO Jodie Baker gives you the mathematical equation for ROI as well as a link to their brand new legal tech ROI calculator, unveiled exclusively here.
On its face, ROI seems pretty straightforward – a basic math equation that determines the ratio between an investment’s profit and its cost. But with legal technology, this can get a little nebulous: Your department deals in time, not in widgets.
Perhaps that’s why 74 percent of law firms in the U.K. don’t even try to calculate the ROI of their legal technology projects, according to a March 2018 report by Lexis Nexis. While no similar statistic was available for corporate legal departments, we’d make the educated guess that the majority aren’t monitoring their legal tech return – despite the fact that, as a recent Association of Legal Administration presentation put it, “ROI is the only technology acronym that matters.”
Indeed, ROI is the language of the C-suite, and it’s imperative for in-house lawyers to show fluency. (Recall that one-third of CEOs and directors rank “controlling legal spend” as a top-three priority for law department performance.) You need to know your ROI to demonstrate that you are a good steward of company resources, to test and validate your decision-making, and to inform future projects in your legal technology roadmap.
Legal Tech ROI: What You Need to Know
There are two factors behind legal tech ROI: time and money.
Because your department’s output is units of time, your first step is to understand the cost of this time. If you have access to specific HR data, you can nail down the exact cost of your department’s time spend. Without it, you can make a good estimate with industry averages.
According to Indeed salary data, the average salary for an in-house solicitor is £72,904, or roughly £40 an hour. (If you’d like to see salary data based on industry and experience, Hudson’s 2017 Salary and Rates Guide is a helpful resource.)
Now that you have an estimated cost for time, consider all the ways you will spend (and save) it over the course of your legal tech project:
When it comes to money, the questions are simple:
Once you have these answers, ROI is a few calculations away – no matter what stage your project is in. The formula is below – or you can try Xakia’s LegalTech ROI Calculator, which will do the math for you.
The Legal Tech ROI Formula
Start by totaling the investment:
Investment, or Annual Expense = Implementation Cost + Cash Cost
Then calculate the net annual savings:
Net Annual Savings = Annual Savings – Annual Expense
Time to calculate the ROI:
Annual Return on Investment = Net Annual Savings / Investment
Your answer will show you a percentage return. For example, if you generate an ROI of 75 percent, for every £1 invested in this solution, the company will realize £1.75 in benefit each year.
What’s the payback?
To determine how fast your legal tech will “earn its keep,” it’s helpful to calculate the payback.
Start by calculating your monthly savings by dividing the net annual savings by 12. Determine the number of months until payback by dividing the investment by the monthly savings.
(If you pursued law as a career because you were told there was no math, don’t despair. Visit Xakia’s LegalTech ROI Calculator, which will do the calculations for you.)
Beyond the Math: ROI Considerations
Of course, no mathematic equation can account for all of the nuances of a legal department, its processes and most importantly, its personnel.
Your ROI may be higher as you find new uses for the tool and as users become more efficient with it. Moreover, this formula only covers one year; a software solution likely would generate benefits for multiple years (but we’ll spare you any “net present value” advanced calculus).
Your ROI may be lower if the technology doesn’t work as expected or if user adoption stalls. Recall that user involvement is 15 times more critical than having the right tools – although there’s no accounting for attitude or aptitude in the ROI equation, both factors will have a major effect.
Every company will have different expectations for ROI, but it’s helpful to have a target in mind. Rhonda Robati, the chief revenue officer of Velpic Inc., said ROI for technology investments typically range from 47 percent to 87 percent; as a best practice, she said any technology investment should have an ROI of at least 65 percent. In other words, you want at least £1.65 for every £1 spent.
But remember to think beyond the numbers. Any quality in-house legal technology solution should bring myriad benefits that won’t show up in an ROI calculation: less stress, happier staff, happier business clients and fewer missed deadlines chief among them. Numbers matter, but quality intangibles can be the ultimate return.
Jodie Baker is the founder and CEO of Xakia Technologies, which provides practice management software for legal departments of 2 to 2,000.