March 23, 2021

law firm consulting technology and digital law department consulting innovation return on investment opportunity cost budgeting law firm innovation

For innovators in law departments and law firms, one of the hardest tasks isn’t finding a great use case, selecting technology, or generating excitement for new ideas; it’s getting potential projects funded. Establishing a return on investment for a data analytics project or machine learning application can, in many cases, be difficult. For one thing, the cost of current legal processes is rarely measured and tracked adequately, which makes it difficult to establish a baseline for potential savings. For another, some of the use cases are so new that quantifying potential benefits is equally challenging.

Kenneth Jones of Tanenbaum Keale provides a useful framework for establishing project ROIs in his recent Law.com article, “Legal Technologist Finance 101: What’s the Impact of Budgets on Legal Innovation?”

Beyond the standard frameworks for evaluating project ROI, innovators need to consider the impact of “opportunity costs,” defined as “the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.” To properly evaluate the true return on an innovation proposal, an organisation needs to understand the benefit of spending its investment dollars elsewhere, as well as the costs of not pursuing the suggested innovation. Looking at the numbers for just the proposed project is not enough – the costs and benefits of alternative courses must also be considered, including the option of doing nothing.

The latter concept is perhaps the most important. What happens to a law firm’s book of business when its competitors can produce detailed performance data and the law firm can’t? What happens to corporate profits when competitors’ law departments are reducing sale cycle times using RPA and data on contract negotiations, and your company’s law department can’t? It won’t happen overnight, but a failure to modernize through data tracking and analysis will, over the long term, adversely affect the finances of both law firms and law departments. Decisions on innovation projects need to be made through that lens – with the understanding that a failure to modernize eventually brings obscurity.