Clocktimizer: Changing law firms: Understanding the ROI of law firm process improvement
A survey performed by LexisNexis as recently as 2018 found that 74% of mid-sized firms in the UK do not measure the ROI for investments in technology. This is in spite of the fact that 87% believe that technology contributes to profit growth to ‘some extent’. Plainly, these two statistics are at the heart of a conundrum facing the legal world. On one hand, we see an increasing acceptance of, and investment in, new technology. On the other hand, it can be difficult to provide clear data about its effect on profitability.
As part of our Changing Law Firms blog series, we are looking at best practices for change management and process improvement in law firms. In previous weeks, we have covered the core principles for good change management, and how to organise an effective tech roll-out. This week we will be covering a topic close to the heart of many firms. How to monetise change. We look at traditional ways to capture your ROI, how to adapt this to law firm processes, and offer tips for the collection of the necessary data streams. Finally, we will cover a few ways that research suggests to draw the greatest value from your tech investments.
ROI - the traditional approach
A return on investment has the potential to be a complex calculation. Traditionally it involves a calculation based on ‘upstream’ activity. Namely, one must look at all of the investments of time and money in bringing a new technology or process to fruition. But how do you draw a line between what to measure and count towards spending, and what to ignore? In many cases ROI is easier to calculate on individual pieces of technology. The calculation of a business level ROI for innovation is an inevitably daunting task.
Over time, ROI calculations have become more sophisticated outside of the legal world. McKinsey & Company explore a particularly interesting model based on ratios. Erik Roth, a Senior Partner, shares research suggesting that it is sufficient to monitor the ratio of R&D spending to new product sales; and the ratio of new product sales to gross profit margin. The information needed to make such a calculation is (generally speaking) easily obtainable. For firms with an existing R&D department, this could be an interesting avenue to pursue when determining their overall innovation ROI.
Setting a benchmark
While the methods for calculating ROI are relatively varied, there is some cristallisation around what an acceptable ROI is. Rhonda Robati, Chief Revenue Officer of Velpic inc., stated that the ROI for technology investments generally falls between 47 and 87%. Of that band-width, Robati suggests shooting for 67% as a best practice.
Firms should note that this is a benchmark for a piece of technology. As such, if the change is linked to process improvement, or increased client service without the use of technology, then this ROI may not apply. In general, try to set a target prior to the process improvement, based on an assessment of what you will be changing. If you believe this process should make your team 20% faster, expect to see that improvement relatively reflected in your ROI. If you expect a piece of technology to completely automate a process, expect to see a significantly higher ROI. If your expectations and ROI results do not match this is a good reason to investigate further. Is your ROI calculation faulty? Or is the improvement not living up to expectations?
How to measure change in a law firm?
In light of the lack of ROI measurement in firms, we would advise starting small. The majority of firms do not currently have an R&D department, so the separation between innovation and non-innovation spending can be blurry. By focusing on an individual piece of technology, or a change to an individual process, you can more easily capture the necessary data to measure the ROI.
To give your firm the best chance of an accurate ROI, ensure you have the following abilities or technologies to hand:
- The ability to identify and categorise timecards (with detail). Without the ability to identify how much time each person is spending on a task or with a piece of technology, you cannot hope to make an accurate ROI calculation
- The ability to identify and separate processes, with tags. Again, being able to group activities under a process will make it considerably easier to identify your ROI
- A tool to manage your data comparison, and data streams which make that possible. To this end, you should be capturing all of your data in the same format so you can make easy comparisons pre and post change
- An integration between timecard data and financial data. You should be able to extrapolate from how much time is spent, how much this has cost your firm in revenue
- If necessary, you should also be able to integrate pricing and discount data with the aforementioned time data. This will ensure that you can identify the true cost of a service or process, once client discounts have been applied
There are many ways of collecting and analysing this sort of data. If you are a smaller firm, something as simple as a spreadsheet and a pivot table may be the solution. For larger firms, platforms like Clocktimizer can automate this entire process. Clocktimizer uses natural language processing to read and analyse time card data. This can then be tailored to a firm’s classification system, or used out of the box, to build easy ROI calculations. Processes are tagged, and can be compared over specific time frames to show whether new technology is reducing time spent, or the number of write offs given, or even the profitability of an activity.
Calculating an ROI - tips and tricks
Above the Law share a pretty in-depth break down of ROI calculation methods for law firms. They advise the following method:
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
This is a pretty standard calculation method, but may be off putting to many firms due to the amount of data necessary, and the amount of uncertainty in some of the figures. We would advise, where possible, to follow a like-for-like comparison. Most firms will use iterative, targeted change management (see our blog here for reasons why this is most effective). As such, the introduction of new technology is likely to be towards a specific purpose. The reduction of time spent on due diligence, say. Or the speeding up of enterprise search.
The first step should be to identify how many hours are currently logged by a test group under this activity. Next, identify how many of those hours are billable, and whether any discounts were offered for this work. This will represent the cost of the initial process. Next, split your test group into two parts. One will be the control group, who will not change their existing work method. The second will work with the new process/technology. Take a second measurement of hours logged to the activity, amount billed and discounts applied. Finally, factor in the cost of the technology. Has the process been improved? Don’t forget that all of these calculations can be done automatically with a tool like Clocktimizer.
If you do not have a tool to help with the analysis, remember that data formats, and like-for-like comparisons are essential. The activities should be as identical as possible, on similar matter types of similar complexity. Any deviation will skew your data and leave the outcome inaccurate.
Beyond ROI analysis
It is important to realise that understanding whether innovation offers a good ROI, is a business best practice. If you introduce change in a small, iterative way, not only can you measure its ROI better, but you can avoid the sunk costs fallacy. As we established in our last blog, iterative change is cheaper, more effective and increases your profit margins. The key takeaway should be this: Process improvement is uniquely tied to your firm's overall profitability. But if you aren’t measuring and testing your process improvement, then you might as well not be doing it at all.
Secondly, you may discover that investing in innovation has financial implications beyond the improvement of the process itself. Acritas’ Sharp Legal dataset, compiled from a survey of top in-house counsel, produced the following fascinating insights:
- Clients spend more with innovative firms. Clients who perceive a firm to be more innovative typically allocate two-thirds higher share of spend to that firm. They allocate 35% of spend to innovative firms and only 21% to those perceived not to be innovative.
- Clients are more likely to recommend innovative firms. Net Promoter Score is a commonly used measure of a customer’s willingness to recommend a provider’s service or product to others. The Acritas data shows that clients who perceive a firm to be innovative awards twice the Net Promoter Score to that firm than to others (57 vs. 28). Acritas
Clearly, innovation can pay dividends, if properly managed and tested.
Next week, we tackle the fourth topic in our Changing Law Firms series: The vendor perspective. We talk to Nick Schils of TIQ, a time capture firm working with a range of law firms globally, about the way law firms engage with technology.