In-house legal departments don’t often excel at explaining their value to management in quantitative terms. In part this is because it can be hard to quantify the value of preventative legal work, such as heading off a lawsuit or negotiating away an unfavorable contract provision.
But the difficulty of attaching numbers to a legal department’s effectiveness doesn’t diminish the importance of doing so. Performance metrics give a company’s legal function the opportunity to demonstrate its value, clarify goals, gauge success, maximize efficiency, and plan ahead.
With that in mind, here are several metrics your in-house legal function should consider tracking:
Legal Spend Compared to Revenue Or Headcount
Like any other cost of doing business, legal spend tends to grow with the size of a company. As a result, for a growing (or shrinking) company, year-over-year comparisons of absolute legal spend can paint a misleading picture. A more informative statistic may be total legal spend as a percentage of a company’s revenue -- or, if a company is not yet cashflow positive, legal spend relative to headcount.
Budget Performance
Compare actual spend to the legal function’s forecasted budget. Besides reflecting on the accuracy of the forecast, the comparison may prompt an examination of overages and the identification of areas of inefficiency or underestimated needs.
Averted Costs
Keep a running estimate of the fees, expenses, fines, litigation, lost revenue, etc. your company has avoided because of its investment in legal. While it may be difficult to estimate total averted costs, it’s worth it to try. A few illustrative examples are often all you need to make a powerful impression on management.
Internal v. External Cost Comparison
To assess the savings created by your in-house lawyers, compare the average hourly expense of in-house counsel for a given matter relative to what that matter would cost if it were handled by the company’s outside counsel. Arguably this is the most conservative way of estimating the value of in-house counsel -- it does not account for the strategic value that in-house lawyers bring to their work, value which cannot be replicated by outside lawyers who typically have a less nuanced understanding of the business.
Number of Matters
By tracking the number of matters, a company’s legal function can show how demand for its services has changed over time. More matters may or may not mean more workload -- it’s always possible that a few large matters would take more time than a host of small ones -- but more matters almost certainly means more time spent switching between matters and more general administrative time.
Hours Per Matter
Tracking the average number of hours per matter helps identify which matters are getting the most attention and whether or not those matters in fact represent the most important issues facing the company. It provides specific answers to the question, “Where is our money going?”
New Matters Sent to Outside Counsel
Which legal matters a company chooses to keep in-house versus which it chooses to outsource can have a profound impact on both the effectiveness and efficiency of that company’s overall legal function. Tracking the nature and quantity of matters sent to outside counsel can also help identify gaps in a company’s in-house legal function.
***
It is important to carefully consider which metrics to apply to a given company. One set of metrics certainly won’t fit all. But there is no doubt that any company can benefit from the data, discipline, and accountability that comes from applying quantitative performance metrics to its legal function. To get more information on measuring legal department success, check out this event recap.
