In today’s fast-paced legal landscape, technology is no longer a luxury but a necessity. From matter management software to e-discovery platforms, legal technology solutions are transforming how in-house legal departments operate. However, investing in these technologies requires significant financial commitment. Therefore, it’s crucial to understand the Return on Investment (ROI) to ensure that the technology is not just a shiny new toy but a strategic asset.
This article aims to guide you through the process of calculating ROI for legal technology solutions.
What is ROI?
Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It is calculated by dividing the net profit or net savings from the investment by the initial cost, then multiplying by 100 to get a percentage. The formula is:
ROI = (Net Profit or Net Savings) × 100
Initial Cost
Why is ROI important in legal technology?
ROI is essential for several reasons:
- Budget justification: Legal departments often face budget constraints. Demonstrating a high ROI can help justify the cost of new technology.
- Strategic alignment: ROI helps ensure the technology aligns with the firm’s strategic goals, such as increasing efficiency or improving client satisfaction.
- Performance metrics: ROI can serve as a KPI (Key Performance Indicator) to measure the effectiveness of the technology over time.
Steps to calculate ROI for legal technology
Step 1: Identify costs
The first step in calculating ROI is identifying all the costs associated with the technology. These could include:
- Software licensing or subscription fees
- Hardware costs
- Implementation costs
- Training costs
- Maintenance and support fees
It is best practice to set out the costs over a three-year period and identify any costs anticipated in the future.
Step 2: Estimate benefits
The next step is to estimate the benefits that the technology will bring. These could be quantifiable benefits like:
- Reduction in manual errors
- Costs savings from external legal spend
- Time saved in case research
- Time saved from using automation
Or qualitative benefits like:
- Improved client satisfaction or service delivery
- Enhanced data security
- Process improvement
- Organisational capacity
- Risk mitigation
Step 3: Quantify benefits
For ROI to be meaningful, you need to quantify the benefits in monetary terms. For example, if the technology saves 10 hours per week, what would you do with that extra time? You might do work that would otherwise be briefed out, in which case the value of the time could be based on an average billable rate. If you will use that time to accelerate internal legal projects, then look to use a suitable value for an internal resource.
For example, if you assume that the value of the time is $200 per hour, the weekly benefit would be $2,000.
The qualitative benefits can be challenging to quantify, but they are no less important. CFOs and CEOs are familiar with the concept of a Balanced Scorecard, so be sure to clearly articulate and set out the non-financial benefits loud and proud alongside the financial benefits and returns.
Step 4: Calculate net profit or net savings
Net profit or net savings is the total benefits minus the total costs. Use this formula:
Net Profit or Net Savings = Total Benefits − Total Costs
Step 5: Calculate ROI
Finally, use the ROI formula mentioned earlier to determine the ROI percentage. Follow the same steps for Year 2 and Year 3. The subsequent years will likely have a much stronger ROI than the first year, as implementation fees should not be necessary.
For example, if a legal team estimates that they will save 10 hours per week, with a value of $200 per hour, and the total cost of the software is $20,000, then the calculation will be as follows:
Total Benefits = 10 hours/week × $200/hour × 52 weeks = $104,000
Net Profit = $104,000 (Total Benefits) – $20,000 (Total Costs) = $84,000
ROI = ($84,000) x 100 = 420
$20,000
Providing a ROI of 420% for this software.
This can also be reported as an investment multiplier, where you could describe this project as having a 4.2x ROI.
The term “multiplier” signifies the idea that the investment is expected to generate returns multiple times greater than the initial capital invested. It’s a way to express the potential profitability and attractiveness of an investment opportunity.
Time-based payback
Aligned with Return on Investment, payback is a financial metric to help evaluate the ROI. Time-based payback measures the amount of time it takes for an organisation to recover the investment in a software system through the benefits or cost savings it generates.
It is usually expressed in months or years.
For example, if a company spends $20,000 on a new software system and expects it to generate $104,000 in cost savings each year, the time-based payback period would be 2.3 months (initial investment divided by annual savings multiplied by 12 months).
Conclusion
Calculating ROI for legal technology solutions is not just a financial exercise but a strategic necessity. It helps in-house legal departments make informed decisions and align their technology investments with long-term goals. By following the steps outlined in this article, you can make a compelling case for your next legal tech investment.
