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.
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
ROI is essential for several reasons:
Step 1: Identify costs
The first step in calculating ROI is identifying all the costs associated with the technology. These could include:
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:
Or qualitative benefits like:
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
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.
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).
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.
This article was originally published on our sister site lawcadia.com.
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