It’s often said that legal departments are now being asked to do more with less. Budget squeezes as a result of the challenging economic climate have inevitably hit legal spend, but the demand for timely, cost-effective and high-quality legal advice remains. Companies want to know where the legal spend is going, but how can GCs put a value on the legal team’s contributions?
Through measuring the return on investment (ROI) on legal spend, GCs can approach budgeting with more discipline and credibility, and show continuous improvement in the performance of the legal function. It’s not just about cost cutting; this exercise can help demonstrate the value of legal in an understandable way for management buy-in.
What is the ROI on legal spend?
ROI is a common business metric used to measure the gains from an investment relative to the investment’s costs. The higher the percentage, the greater the return.
From a legal department’s perspective, maximising ROI on legal spend can help slot the legal function into a company’s profit generating objectives.
The first and most straight-forward part of the equation is quantifying and minimising costs. There are plenty of ways to do this, and here are some ideas to get started:
Review and forecast - a review of the previous year’s legal spend will likely give a good indication of projected costs. Legal departments can also anticipate, to a certain degree of accuracy, any legal spend required to support foreseeable business needs, such as a looming acquisition, a product roll-out or projected growth.
Reduce external counsel costs - this is an area where major savings can be made. Outsourcing particular areas of work to boutique law firms with lower overheads can help companies save a considerable amount on legal fees; smaller, niche firms often specialise in a particular legal area, offering both value and experience. In addition, alternative fee arrangements such as fixed fees or fee caps increase the predictability of any external legal spend. Lexoo is able to help companies engage senior lawyers from our carefully chosen panel of high-quality, low-overhead boutique law firms, click here to find out more.
Unanticipated costs - these invariably arise in dynamic businesses. One way to reduce their impact is to implement processes that aim to reduce the cost per hour of an in-house lawyer’s time, while reducing the number of hours of external lawyer time.
It may seem difficult to measure the gains created by a legal function in the same way as, say, a sales function. Many of the legal team’s important contributions to the business - such as avoiding fines, litigation or reputational damage - are difficult to evaluate. However, the impact of legal spend in many areas can be tracked accurately with the help of big data and state-of-the-art technology.
A good example is the legal team at VMware, a technology company, who were able to reduce the time taken to sign a new customer contract by half by thoroughly analysing their contracts and streamlining them to simplify the language and remove often conceded clauses.
The potential for gains from adopting new legal technologies should not be underestimated, despite the potential costs. A 2014 benchmark report by Blue Hill Research found that the expected ROI for implementing electronic billing, automated processing and spend analytics was 766.0% in the first year alone.
It is also possible to make a solid business case for legal spend on the right technology by using the data that is collected and showing improved productivity, time savings from administrative tasks, shortened cycle times and increased responsiveness.
Instead of just reducing legal spend, companies can use innovative legal technologies as an opportunity to improve the business’s capabilities and competitive advantage.
Keeping the company afloat is no small feat, but in an environment where legal teams are now being managed like businesses and having to fight against other revenue-generating departments for budget, calculating the ROI on legal spend is a clear way of demonstrating the value of the legal function.
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