This is the next installment in a series of articles examining legal spend and e-discovery analytics. As discussed in prior articles, the most obvious metrics to track relate directly to legal spending, or, if measuring e-discovery metrics, relate to data or custodians. However, to increase process efficiency, or figure out whether to invest in technology, tracking or estimating the benefits of technology use is also helpful. This article offers a few ideas and methods to track the benefits of technology use.
You Can’t Improve What You Don’t Measure
“Accurately measuring KPIs (key performance indicators) is crucial to building a successful law firm,” says Chelsey Lambert of Smokeball, a legal case management software company. Lambert points out that there are many uses of technology that may be used to automate and streamline processes in modern law firms. But to accurately assess the actual value of implementing the technology, Lambert says tracking certain data points is a must. For instance, firms implementing document assembly technology could track increases in margins on based on the lesser preparation time. Similarly, firms utilizing case management systems could also track the value of the software by tracking and comparing response time to client requests.
As the old adage goes: you can’t improve what you don’t measure, but, depending on what you are trying to measure, it may make sense to estimate the benefits of a technology purchase before you actually make the purchase.
Identify Multiple Uses and Outcomes to Increase ROI
Chris Doig of Wayferry, a consultancy that advises companies on software purchases suggests that the first step in determining the ROI in a technology investment is examining the outcomes that flow from use of the software. Specifically, he suggests looking at the “hard benefits” and “multipliers” gained through use of a new technology.
Hard benefits are those for which a dollar amount can be estimated. For instance, let’s assume an e-discovery tool costs $25,000 to bring in house and assume further that its use saves 200 hours at $250 an hour annually. Thus, the value of hard benefits is $50,000.
Gaining a “multiplier” is achieved by identifying another use for the software. For instance, if a company licenses e-discovery software to deal with third party subpoenas, but also uses it for compliance matters, it achieved a multiplier.
Under Doig’s formula, the total value of hard benefits is determined by adding the sum of hard benefits for all uses. So for our example, assume using the software for compliance matters saves another $15,000 making total hard benefits $65,000. Keep in mind, however, that to accurately estimate hard benefits, the purchase price of the software must also be deducted. So, in year one, the total hard benefits in our example would be $40,000.
Once you determine the total value of hard benefits, Doig suggests expanding that figure over a time horizon. Meaning, the time over which the technology investment will generate value. If a company intends to use e-discovery software for three years, the savings and costs would be evaluated for all three years. Looking at the value of technology over time is important because often cost is higher in the first year if there is work that is need to set up or implement the software. In our example, let’s say the cost decreases to $15,000 annually for the second and third year.
Additionally, to determine the return for a technology project, you must adjust for any risks that the technology will not work. Continuing with our example, assume there is a 25% chance that the e-discovery software will not create the expected efficiency, so the risk adjusted return of the hard benefits is 75%.
Finally, to calculate the actual ROI, the risk adjusted return must be divided by the total cost of the technology over the expected lifespan.
The ROI in our example is 191% = ($105,000 / $55,000) * 100%.
The last thing to consider when evaluating technology purchases are intangible benefits that may be difficult to quantify. For example, you may be able to recruit and retain talented people by providing access to intuitive software. Knowledge and use of more advanced technology may also open doors to connect with potential clients and other partnership opportunities. While these may be less important than hard benefits, intangibles can have real, positive impact on your business or law practice.
The bottom line? The use of technology makes better lawyers and to fully appreciate the benefits of using technology, its use should be measured. However, jumping in and buying an expensive piece of software without first weighing its value and return on investment, may actually cost more than not using it at all. There are a few questions to ask before making a software purchase. Also, there may be alternative avenues to investigate rather than direct purchase (such as managed services) that provide the benefits of access to technology without long term commitments and price tags. Once the decision is made to employ technology in your legal practice, you may want to work backwards to make sure you are maximizing the savings, value and benefits of its use.