Measuring the law department’s contribution to the growth or margin isn’t easy, but describing productivity in the language of business goes a long way in budget talks.
The nature of legal work makes proving value to the business a unique challenge for in-house attorneys. While other departments have metrics to show contributions to growth or margin, legal struggles to match a dollar value to its work.
The challenge is pervasive. Nearly three quarters (74 percent) of respondents to a survey of legal operations by Deloitte did not believe they “have clear and accurate metrics on the work performed by internal and external resources”.
As corporate guardians of risk, the work lawyers do centers on avoiding adverse legal actions. The problem is, if successful, how do you prove the value of something that didn’t happen? For example, we know compliance work that helps a business avoid litigation is desirable – but how can legal departments quantify the impact of liabilities that never materialised on profit margins?
These questions are not new or easy to answer, but they could well be more pressing this budgeting season. Businesses are focused on controlling costs amid economic uncertainty, and as a result legal budgets for 2021 are being scrutinised. Demonstrating the value of legal work has arguably never been more important.
I recently facilitated two roundtable discussions for in-house legal teams, which were a chance for lawyers and legal professionals to share knowledge, experience and lessons learned in a safe and private forum with peers. Many of the ideas we heard on these calls are both timely and well-suited for sharing now.
1. Start measuring the easy stuff.
Tracking and measuring the requests legal gets from the business is a good place to start. Some in-house teams are using ticketing and project management software to track request volume, the type of legal work and which business departments are making the request.
Those making requests answer a series of questions the legal team uses to triage the problem and direct the query to the proper legal expert. Measuring requests lays the groundwork for process and data that surfaces opportunities for efficiency improvements.
2. Hours saved with self-help.
Tracking requests produces data that can lead to efficiency improvement. For example, one in-house team uses the requests from marketing to develop legal guidelines to follow. If the marketing team stayed within the guidelines, no legal review was required which freed up the department to focus on more strategic tasks.
Another in-house team automated nine standard low-risk contracts, including non-disclosure agreements (NDAs). These contracts are now entirely self-service, and the legal department has put a value on the time saved. They’ve calculated that reviewing such contracts previously took one half-hour of counsel time. As such, a savings metric is produced by calculating the volume of contracts at an average hourly rate.
3. Get a handle on external spend.
Outside counsel is a variable cost, and so it’s important to calculate what it will cost to outsource a legal project or category of legal work to a law firm. There are two feasible options for gleaning this data: tabulate what you have spent historically and review the industry averages from benchmark studies to support the accuracy of your budget forecasts.
For example, in-house counsel for private equity (PE) firms spend an average of $10.5 million on outside counsel costs annually. For a legal project equivalent, PE firms spend an average of $353,000 on external counsel during a typical merger and acquisition (M&A) transaction.
In-house teams can aggregate the data in spreadsheets, which can be onerous. Alternatively, there are legal software solutions that can pull this all together. Roundtable participants noted having such data and benchmarks at their fingertips was “extremely helpful in this year’s budget meetings with the CFO.”
4. Compare in-house and outside counsel costs (with caution).
When you have a handle on external legal costs, you can compare it with in-house costs. One in-house lawyer on the roundtable determined it cost their company about five times more to outsource work to a law firm. This data helped drive decision making for what work should be kept in-house, what should be outsourced, and most importantly, guided financial conversations with numbers.
There is danger in presenting data in this fashion. On one hand, business leaders can get too focused on cost savings and it shapes expectations for keeping more work in-house – even high value litigation matters that are better suited being managed by a specialist law firm.
5. Collaborate, create allies and collect anecdotes.
Participants on the panels uniformly endorsed a “collaborative approach” to demonstrating value. This was an acceptance that the value legal adds is hard to quantify – and so the team needs to methodically collect anecdotes that convey a narrative for how the legal team delivers value to the business.
This means continuously educating the business on the benefits of legal services, getting involved earlier in the process and fostering allies among the business units by helping leaders solve legal problems. For example, one in-house team supporting an online retail company, helped business leaders find a way to license their proprietary technology which created a new revenue stream.
6. Ask business leaders for input.
What is the purpose of the in-house legal team in the eyes of a CEO? It’s a good question to put to the top executive along with what metrics they’d like to see. It’s a great way to improve the relationship with the business – and the legal team will inherently earn executive buy-in for the selected metrics in the process.
7. Strive to digitise the department.
Paper gets lost and conversations are forgotten but the benefit of going digital is an opportunity to aggregate data for analysis. Chances are the pandemic and ensuing remote work policies have created a culture that has accelerated this initiative. Legal departments should seize the moment to press the case for digitisation.
As you digitise, foster data standards, and look for enabling technologies that are interoperable. According to the aforementioned consulting survey, 77 percent of respondents “felt their legal systems were not integrated with a consistent data taxonomy.”
Proving Value is a Journey not a Destination
All of these measures rely on some assumptions and have a level of subjectivity. Every legal request won’t fit on a form, no two contracts will have the same level of importance, and vertical markets have their own unique requirements. However, participants reported the sheer power of numbers has improved their standing in conversations with the CFO around budget. Cumulatively, the effort put into measuring value moves the legal department forward by speaking the language of business.