Metrics of Legal Success: KPIs for Modern Legal Departments

Are you responsible for managing your company's legal department?

Are you accountable for the efficiency of the legal operations in your company?

Managing a legal department can be a daunting task.?

The pressure to do more with less is constantly present, while at the same time, in-house counsel is required to deliver high-quality work at high velocity.?

If you are operating a legal department or a rapidly growing business, you are certainly aware that the efficiency of your legal department can directly translate to the overall success of your organization.

Having managed a legal department for many years, I wanted to share some of my thoughts on key performance indicators (KPIs) that you should measure to track the efficiency of your legal operations.

Let’s get started!

Attorney to Support Staff Ratio

Ensuring an optimal staffing ratio is crucial to running a legal department effectively.?

Typically, a 1:1 ratio of attorneys to paralegals is ideal, but this may vary depending on the organization's nature.?

In some organizations, we can even see ratios of 2 or 3 lawyers for each paralegal.

If you are managing a legal department, you must find ways to allocate work effectively to maximize productivity.?

According to a Deloitte study, legal teams spend an average of 34% of their time on administrative tasks, which can reduce efficiency.?

To minimize this, delegating tasks to paralegals or support staff can free up attorneys to focus on more strategic work.?

By separating pure legal tasks from low-value legal tasks and administrative tasks, you can then allocate your resources in the most optimal way.

Legal Spend as a Percentage of Revenue

Legal Spend as a Percentage of Revenue is a metric used to track the efficiency of a legal department and to determine if a company is spending too much on legal services.

While the dollar amount of legal spending is important, the percentage of revenue spent on legal services is a more meaningful metric because it takes into account the size of the company and its revenue stream.?

Generally, you should aim to keep your legal spending as a percentage of revenue within a reasonable range to ensure that you are not overspending on legal services.

Keep in mind that the average legal spend by a percentage of revenue can vary by industry and type of company.?

According to different reports, the average legal spending as a percentage of revenue is around 0.31%.

However, you can have industries with lower percentages (such as manufacturing) and others with higher percentages (such as healthcare).

Some reports have found that efficient legal departments have a legal spend as a percentage of revenue varying between 0.14 to 0.25%.

The lower you can bring this percentage, the more efficient you are operating your legal department.

Tracking legal spending as a percentage of revenue can also help you identify trends over time.?

For example, if you notice that your legal spend as a percentage of revenue is increasing year over year, it may indicate that you need to address inefficiencies or explore alternative options, such as hiring more in-house counsel or implementing cost-saving measures.

Internal-to-External Spending Ratio

The internal-to-external spending ratio helps legal departments track how much of their budget is spent on outside counsel compared to in-house resources.?

This KPI can provide you with valuable insights into the efficiency and cost-effectiveness of your legal department's operations.

It's not uncommon for legal departments to spend a significant portion of their budget on outside counsel.?

In fact, according to a 2014 survey by Altman Weil, the most common split was 43 percent "make" (work performed in-house) to 57 percent "buy" (work performed by outside counsel and other vendors).?

When considering the internal-to-external spending ratio, you should take into account your specific operational needs, such as the complexity of your legal mandates and the amount of legal support required.?

You should also consider the potential risks and benefits of relying on outside counsel versus building up in-house expertise.

When you have in-house counsel, they will have an intimate understanding of the business and can collaborate more effectively with other business units when compared to outside counsel.

As a rule of thumb, if you find that you are spending more on outside counsel year after year, you should investigate what is driving those costs and if the spending remains justified.

Total Costs of In-House Counsel

The cost of in-house counsel can have a significant impact on the overall budget of a legal department.?

To calculate the total cost of in-house counsel, you should take into account not only the lawyers' salaries, but also other expenses associated with their employment, such as benefits, bonuses, and overhead costs like office space and equipment.?

By dividing this total cost by the number of lawyers in the department, you can determine the average hourly rate of fully loaded inside counsel.

If you find that you are regularly spending significantly more on outside counsel than the fully loaded hourly rate of in-house counsel, it may be time to consider hiring additional lawyers for your department.?

This can help you reduce your reliance on outside counsel and potentially save money in the long run.

Having managed a legal department, I caution you that sometimes the decision to hire in-house counsel should not be based solely on cost considerations.?

Hiring in-house counsel can also provide other benefits, such as increased flexibility, better communication and collaboration with business units, and a deeper understanding of the company's needs and goals.

Budgeted to Actual Costs

The Budgeted to Actual Costs KPI is an important measure for evaluating the financial performance of a legal department.?

It involves reviewing the overall budget for the department and comparing it to the actual costs incurred over a specific period of time.

While it is important to review the overall budget, it is equally important to pay close attention to budgets for specific matters.?

By doing so, you can gain insights into the drivers behind cost increases, identify areas of potential waste, and set realistic goals for reducing costs.

When evaluating your budget to actual costs, there are a few key questions that you should consider.?

For example, in how many areas of operations did the department exceed its budget, and was it justified??

By analyzing the reasons behind these cost increases, the department can identify areas of inefficiency and waste.

You should also compare your department's spending metrics to those of other companies within the same industry.?

This benchmarking can provide a frame of reference and help the department set realistic goals for reducing costs.

Spend by Contract Type

Spend by contract type is a KPI that measures how much money a legal department is spending on different types of contracts.?

This KPI helps you identify which contract types are consuming more resources so you can streamline your processes allowing you to execute your tasks efficiently and at lower costs.

For example, you find that you are spending a significant amount of time and money on non-disclosure agreements (NDAs), even though they are relatively simple contracts.?

This information can help you identify areas where you can improve the efficiency of your contract management process and potentially reallocate resources to more complex and high-value contracts.

The spend-by-contract type KPI can also help you identify areas where you may be able to negotiate more favorable terms with external legal vendors.?

If you are spending a significant amount of money on a particular type of contract, you can use this information to leverage your buying power and negotiate lower rates or better terms with your vendors to help you with that process.

You can also create a system for categorizing and tracking the different types of contracts they are managing.?

They can then use this data to compare spending across different contract types and identify areas for improvement.?

Time to Sign

Time to sign is a KPI that measures the length of time it takes to close a contract from the initial draft to the signature.

This KPI is critical because it directly impacts the efficiency of the legal department's contract creation process and can affect client satisfaction.

By tracking the time to sign, you can identify bottlenecks and areas for improvement in your contract management process.

This can include identifying areas where contracts tend to get stuck in the review process, or where there are delays in getting signatures from clients or other stakeholders.

You can use this KPI to set goals for reducing the time it takes to sign contracts, which can improve efficiency and increase client satisfaction.?

For example, if the average time to sign a contract is 14 days, the legal department could set a goal to reduce this to 12 days or less.

By measuring the time to sign for different types of contracts, you can identify areas where the process is particularly slow or inefficient.?

For example, if non-disclosure agreements (NDAs) take significantly longer to sign than other types of contracts, the legal department could investigate ways to streamline the NDA review and approval process.

Top Firms by Spend by Role

The Top Firms by Spend by Role KPI is a metric for understanding which outside counsel firms are using the most financial resources of a legal department.?

By examining the top firms and their staffing practices, you can make informed decisions about which firms should get future work or be included on panels.?

This information can be used to help you negotiate fees, focusing efforts on those roles that will have the greatest impact on your spending.

You can also use this KPI to track the performance of external counsel.?

By analyzing the performance of top firms, legal departments can evaluate whether they are providing value for the money spent and whether their work is meeting the needs of the organization.?

Matter Volume by Practice Area

Matter volume by practice area measures the volume and types of legal matters being handled by the legal department in each practice area.?

It allows you to assess whether you have sufficient resources and staffing levels in each practice area and if you are aligned with the company's goals and objectives.

By analyzing matter volume by practice area, you can identify areas that require additional resources, such as hiring new lawyers, paralegals, or support staff, or outsourcing work to external law firms.?

You can also adjust workloads and prioritize matters, ensuring that timekeepers are spending their time on the most important and high-value matters.

For example, if there is a sudden increase in the volume of work in a particular practice area, you can investigate the cause and determine whether it requires additional resources or a change in staffing levels.

Matter volume by practice area is often tracked over time to enable the department to monitor changes in demand for legal services and to adjust staffing levels and resource allocation accordingly.?

Takeaways

Tracking KPIs is crucial for legal departments to measure their performance and identify areas for improvement.?

It enables legal departments to understand the effectiveness of their legal processes and provide insights to other business units, enabling better decision-making across the organization.

By tracking legal department KPIs, you can better communicate with other departments, especially with non-legal colleagues who may not understand the specifics of the legal industry.?

Sharing KPI data in a clear and concise manner can bridge the communication gap, helping lawyers to speak the same language as other business units.

Ultimately, tracking KPIs helps legal departments to be more efficient, effective, and aligned with the broader business objectives.?

By using data-driven insights to make informed decisions, legal departments can better serve their organization and provide greater value to the business as a whole.

I hope this article gives you a baseline understanding of various KPIs that you can start measuring so you can take full advantage of your budget and the resources available.

Good luck!