The Sente Playbook

The Fear of ROI

Ryan McClead

Kate Boyd

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1/16/2023

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This post originally appeared on

LegalTech Hub⁠

Is there a tiny little voice in the back of your head whispering, “what is the ROI for all of the legal tech you bought last year?” If you’re lucky, it’s just a mean little voice inside your head spreading fear, uncertainty, and doubt, but if you’re responsible for procuring new technology at a law firm, it might also be your boss standing behind you.

It’s likely that your first attempt to determine an ROI is to simply add up all the money you spent on legal tech last year, and to subtract it from the vast sums of lucre that all that new tech generated.

Unfortunately, if yours is a typical firm, that first attempt results in a very large negative number that you can’t possibly take to management as your ROI. You need a better way to explain the “return” side of your Return on Investment and that starts with reimagining how you make your legal tech “investments” in the first place.

Think (sort of) like a Venture Capitalist

A VC typically gives money to a company in return for a percentage of ownership in that company. When the company is sold, or goes public, the investor hopes to receive a payout worth multiple times their original investment. As an “investor” in legal technology projects, you do not get an ownership stake in any company you buy from and you are unlikely to receive anything if a company is sold, but following some basic VC investment principles can help ensure that you get the best return from your legal tech projects, while minimizing your risk of wasted legal tech spend.

The core “investing” principles that we’re going to borrow from private funders are the following:

Ensure the right people are in place

Invest in a broad portfolio of companies at different stages and in different industry sectors

Invest incrementally to manage any potential losses

Analyze the returns for each investment independently, but grade yourself on the full portfolio

1. Ensure the right people are in place

When assessing potential investment opportunities, VC’s spend as much time looking at the management teams and “talent” in the company, as they do evaluating company products and services. Having experienced and capable people in place, ideally with a proven track record of success, gives VC’s confidence to invest.

Similarly, a legal tech “investor” must ensure that the right people are involved in each project before making an investment in the project. Do you have the right Subject Matter Experts, knowledge engineers, developers, and project managers in place? Without the right people dedicated to the project, no technology is going to be successfully deployed.

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2. Invest in a Broad Portfolio

A good VC ensures that their investments fall along a continuum of corporate stages, industry sectors, and “harvest” (or pay out) timeframes.

Corporate Stages

Startup

Series A

IPO

Restructuring

Industry Sectors

Legal Services

Financial Services

Education

Time remaining to pay out

6 Months

18 Months

36 Months

Ideally, your legal tech spend portfolio will have a similar mix of projects at different stages, covering a range of practice areas, and delivery timelines.

Project Stages

Prototyping / Pilot

Early Adoption / Growth

Fully Deployed / Delivering Returns

Aging / In Need of Replacement

Practice Area

Litigation

M&A

Bankruptcy

Delivery Timeframes

Quick Wins

6 Months

18 Months

A balanced portfolio with projects spread across project stages, practice areas, and completing at different times will help to limit factors otherwise outside of your control that could sink your projects.

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3. Make Incremental Investments

VC’s don’t generally hand over their entire investment in one lump sum and walk away. They invest incrementally, re-evaluating their investment constantly, and only increasing their investment when it makes sense.

In legal tech projects, you invest both “hard-dollars” and “people-time” and those investments must similarly be constantly validated and should only increase if and when it makes sense. A “failed” project should not be a significant loss of money or time, unless you keep throwing money and time at it.

Just as funding a company at each stage of its growth requires different levels and types of investment, each stage of a project has different “investment” requirements too.

Prototyping / Pilot Stage

Make small investments to prove the project’s concepts and check in frequently with stakeholders to ensure that the initial “returns” are inline with expectations. Be prepared to pivot to another solution if these initial prototypes aren’t successful and be willing to walk away from vendors if their technologies don’t perform as expected. Do not sign long term contracts or license for all users at your firm at this stage.

Early Adoption / Growth Stage

Having proven the initial concept with prototypes or pilot programs, the growth phase often requires substantial increase in your investment of both time and money. This may include additional or longer term licensing, as well as more wide-spread training, technical support, and marketing initiatives. In this stage, project leads should focus on proving the business case, identifying the market fit (internal or external) and gaining adoption. Regular check-ins with project stakeholders should gauge adoption levels and be prepared to pause the project to re-evaluate if adoption goals are not being met. Understand why the project isn’t gaining full adoption and correct that before moving on to the next stage. Adoption is the single greatest indicator of value in most legal tech projects.

Fully Deployed / Delivering Returns Stage

By this stage, all technologies should be fully licensed and full time staff or consultants should be allocated for training, support, and project maintenance. Maintenance will include regular communication with any legal tech vendors to understand how changes to their technology will impact your successful project. Be prepared to dip back into the previous stage to re-evaluate any significant updates, upgrades, or adjustments to existing technologies. Only once you reach this Fully Deployed stage, should you expend resources to ensure that others beyond the initial project stakeholders, approvers, and users are aware of the project. Firm management, other partners and practice areas, marketing, industry groups, and legal tech award providers should all find out about your successful project at this stage.

Aging / In Need of Replacement Stage

Inevitably, technology moves on, team membership changes, firm strategies adjust and every project comes to it’s end of life. This stage too requires different investment. Now is the time to invest in research, as you can rarely shut down an existing process without replacing it with something better. You should enter into this project stage shortly after deploying your project. This research investment should continue through the Fully Deployed stage, checking in with project stakeholders periodically to update on the state of the market, competition, and other potential solutions. With regular review, stakeholders will know when it’s time to begin the prototyping / pilot stage for a replacement technology.

Analyze investments individually, but calculate ROI across your entire “portfolio”

Venture Capitalists are essentially making bets on companies that they think will be successful enough to turn their original investment into a substantial return within a set timeframe. In a good year, they’ll have larger positive returns than losses, but they also have more realistic “harvest” timelines than most law firms do. A three-year investment is a short-term return for a funder, whereas many law firms expect immediate returns year over year.

As you attempt to calculate an ROI for your legal tech “investment portfolio” you should take the same approach as funders. Obviously, your goal is to end the year with a positive number, but that does not mean that every project will have a positive economic or productivity return this year.

At the end of the day how should you calculate or explain your ROI?

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The basic formula for ROI is net gain divided by cost.

For a VC the ROI is relatively simple:

How much did I make when the company sold? Minus original investment. [Net Gain]

divided by

How much did I originally invest? [Cost]

Typically, that number is multiplied by 100 to give you a simple percentage increase for every dollar invested.

Legal Tech ROI can be more complicated.

Legal Tech Project Gains

Depending on your project, gains may include any or all the following:

Revenue generation — Does the project enable new billing opportunities?

If you are building a product or service that the firm charges to clients, how much do clients pay for it? This is probably the easiest gain to quantify, but not every legal tech project directly generates new revenue.

Greater lawyer efficiency — Can your lawyers do more work in the same amount of time?

This one is dangerous and can easily become a net negative if your more efficient solution is reducing billable hours. That doesn’t mean efficiencies are bad, just that you need to thoughtfully pair efficiency gains with creative work allocation and clever pricing to ensure that the firm continues to make money.

Improvements in work quality — Are your lawyers making fewer mistakes and do you have greater confidence in their work product?

This too is tricky to calculate, because to calculate correctly, you will run up against the hubris of law firms. “Our lawyers don’t make mistakes!” But it’s not true. If you can find accurate data, this can be a major return. Still, unless your firm has had a high profile mistake in the recent past, you may struggle to find any data at all, nor anyone that wants to look for it.

The ROI for this one can instead be the peace of mind your partners get, when they are confident that no typo by a sleep-deprived first year is going to slip through to the final client documents.

Brand enhancement — Are there improvements in client perception of your firm? Did the project increase your firm’s brand awareness in the market? Did the project win any awards?

Again, how do you put a financial number on this? Unless your project constitutes the primary interaction with a particular client, it’s difficult to parse out the specific value a single project contributes.

Strategic benefits — Has your project helped the firm meet it’s strategic goals? Diversity, Equity, and Inclusion? Environmental, Social, and Governance? More efficient pro bono work?

Internal political capital — Did the success of this project lead to more requests coming to your team? Have you been given more budget, control, leeway to select projects?

This last one is probably not a part of your ROI for management, but do not underestimate the value of projects that increase your and your team’s political clout within the firm. Even failed projects, if not contributing to substantial losses or tying up significant resources, can pay dividends well into the future.

It is certainly possible to get hard numbers for many of these potential gains, and you should try, but do not leave out the more qualitative gains just because you can’t nail down hard numbers. All of these have economic benefits whether they can be easily calculated or not.

Legal Tech Project Costs

Similarly, your project’s costs can take a lot of different forms. You will rarely have a single dollar amount to place in the denominator of your ROI calculation.

Typical project costs may include:

Software licensing

Hardware (if necessary)

Legal team hours — this may include both the time the team spends working on this project and any client work that is not billed.

Project team costs — salaries of internal team members multiplied by the percent of their time spent on this project.

Consultants — for implementation, knowledge engineering, development, etc.

Technical Debt — This is the cost of implementing a “quick fix” that is long-term insufficient. Future projects will need to account for, and potentially re-do some work that you did on this project.

This doesn’t mean you should never take on technical debt, just that it’s a real thing and you should be aware of it. Also, this is nearly impossible to calculate accurately.

Opportunity Costs — This is the cost of choosing a technology to the exclusion of other (potentially better) technologies in the market.

You can’t avoid this. You can’t accurately calculate this, either, but like Technical Debt, you should be aware of it and potentially address it in your ROI report.

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So where does this leave us?

Legal Tech Project “Investing” is messy and calculating a hard number for ROI on any given project is probably impossible. At the very least, the time and effort involved in seeking a definitive hard number, will not provide its own positive return.

Still, your boss (or the mean voice in your head) probably won’t accept “It’s impossible!” as an answer, so get a spreadsheet or an ROI report document and start writing.

Write down the names of all your ongoing or completed projects from this year and indicate when they started, when they completed or are expected to complete, what practice area or partner is sponsoring, and what stage the project is currently in.

Quantify your gains and costs for each project as best as you can and get a hard ROI calculation from the standard equation. It won’t be right, but it will be a starting point for discussion.

For projects that have not yet returned any gains, highlight when they are expected to deliver. They are not “losses” unless and until you have passed the expected completion date and they have failed to return any value.

Enumerate the qualitative gains and costs for each project. Maybe give them a “Star Rating” or other visual indicator, but also write up explanatory notes for each.

Show the economic ROI calculation side by side with the Qualitative Gains and Costs and then check your gut:

Do the economics stand on their own?

Do the Qualitative Gains outweigh Economic losses and Qualitative Costs?

Do Qualitative Costs outweigh Economic and Qualitative Gains?

Be honest and make the case for each project individually. Ask yourself whether you can defend your valuation of each project if called out in front of your boss or firm management? If you cannot defend your assessment, re-evaluate.

Based on your honest judgement, give each project a “thumbs up” or “thumbs down” or other positive/negative indicator.

This process will not give you a simple ROI number, but it should give you a single portfolio report that shows all your projects in one place with a generally positive or negative assessment for each.

Your boss doesn’t have to accept your assessment, but if you’ve built the report well, they should have access to all the same information you used to reach your own conclusions.

Conclusions

Return on Investment is a complex art form purporting to be a simple equation. To excel at this form of art, you need to do some math, but you also need to think more holistically about the role of your projects within the firm at large. You need to be able to address qualitative and stubbornly intangible gains that are no less beneficial to the firm than new revenue, but much more difficult to quantify. You don’t have to show a 400% return on investment for each project you approve, and even some losses are to be expected, but ideally any losses should be outweighed by gains in other projects.

If you follow some basic “investing” guidelines as you consider which projects to green light; if you are honest with yourself and your firm about the results of each project; and if you can defend your decisions and learn from your mistakes; calculating ROI doesn’t need to be a significant source of annual anxiety.