Originally published on October 4, 2010 in our free SmallLaw newsletter.
Not so long ago, law schools regularly delivered a lecture for new students to the effect that the practice of law was a profession, not a business. Advertising was frowned upon (with severe restrictions imposed by many state bar associations). When Web sites arrived, a debate ensued over whether they constituted advertising. The practice of law today is clearly a business, not a profession. Small law firms must increasingly adapt to business rules if they want to survive. Below, in my first SmallLaw column, I'll tackle the critical issue of return on investment (ROI) analysis.
The Two Pain Points in All Law Firms
Many small law firms do not use ROI analysis. ROI can be very difficult to quantify (if you buy a new server, how do you calculate ROI?), but is not that difficult when it comes to specific types of productivity or lack thereof. The practice of law can be broken down into three activities:
- Gathering information.
- Analyzing the information and applying your legal training and experience to that information — i.e., practicing law in the traditional sense.
- Producing documents based on that analysis.
To the extent that technology can be used to decrease the amount of time spent on activities 1 and 3, a lawyer has more hours in the day to spend on the actual practice of law. With that in mind, lets look at some types of ROI, both positive and negative.
Basic ROI Analysis
Basic ROI analysis goes like this: If my firm adopts (and implements properly, including training), practice management software, document management software or similar programs, and each user saves 12 minutes a day (a conservative estimate) that they would otherwise waste hunting for documents, finding paper files, and so on, that amounts to an hour a week. Multiply that 50 hours per year by the blended billing rate of your attorneys and the number of attorneys and you get your firm's savings. Thus if a firm has 10 attorneys at a blended rate of $250 an hour, that's 10x250x50 or $125,000 a year. Add in paralegals and staff, and this number will far exceed the cost of implementing any system.
Some people object that these are "soft dollars," that is, not actual income. This is true, but even so it adds up. As an additional bonus, your employees will be much happier if they get to leave at 6 instead of 6:30.
Hard dollars (actual income) can be generated by adopting automated time/billing/accounting systems. These systems enable you to track your time more accurately and help prevent time from "falling through the cracks." Do you really remember how long that phone call lasted, how much time you spent on an email, etc.?
People almost always underestimate the amount of time they spend on many tasks. A generally accepted estimate is that the nagging of an electronic time and billing system will help you capture 10-15% more time for the same amount of work. So a conservative estimate would be that an attorney who bills 1,000-1,200 hours a year will capture an additional 100 hours. Again, at a blended rate of $250 per hour for 10 attorneys, that's $250,000 a year in actual billable income.
Beware of Negative ROI
The converse of an ROI analysis is how much time you waste. As one client said to me, "I know that if I don't clean up my system I am just hemorrhaging money." The two most common forms of waste consist of inadequate training and the lack of document templates (the most elementary form of document assembly).
Lack of training not only causes users to lose time by flailing about and not being able to work efficiently, but frequently doubles the waste of time because the flailing user bothers more knowledgeable users to ask them how to do something. Thus, the more productive employee also becomes bogged down by being an unofficial "help desk." One solution to this problem is to sponsor "brown bag lunches" on particular topics. This lets people ask questions and helps ensure that there is a minimum standard of training that lets everyone be more productive.
Regarding document templates, even without integration into a practice management system every firm has a number of form letters that it frequently uses. A simple "fill in the blanks" form is faster than taking an old document and changing the names, pronouns, etc., plus it also prevents errors.
You Don't Need a Degree in Econometrics
Acting on a ROI analysis for software and productivity practices does not have to be an exact science to yield tremendous financial benefits to your law firm.
Written by John Heckman of Heckman Consulting.
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