In an earlier post, I commented on some metrics used by insurance and other in house legal departments used to measure the value of outside law firms engaged to represent them in litigated matters, e.g., insurance coverage or bad faith litigation, the latter of which has at risk real corporate dollars.
I’ve received a thoughtful question or two from lawyers who were interested in how I went about demonstrating to my clients (and prospective clients) what kind of return they could expect in exchange for every dollar of legal fees they invested in our firm to defending them. I’ve referred to this metric as Return on Investment (ROI).
It’s somewhat of a subjective exercise up front, which involves making an educated estimate of the insurer’s reasonable exposure at the start of the case. You don’t need to actually DO the estimation at the start of the case, because the ROI calculation cannot be done and fed back to the client until the case has ended, and both the final case outcome and total legal fees are known. The initial exposure assessment is the only subjectivity in the process; all the rest of the numbers are hard data.
So, here’s a quick and dirty ROI calculation, which can be used for a single case, or aggregated to account for a number of completed cases.
For any case, let
a=the initial, reasonable worst case exposure for client at case outset
b=the final payout, if any; and
c= the amount of legal fees incurred to arrive at the final result
The ROI calculation is simply:
What Do The Numbers Tell Your Clients About Value?
This calculation is a ratio, which expresses the relationship between the company’s investment in legal fees and the reduction or elimination in the contingent corporate exposure which the fees produced. In terms of quality or value, a reasonable initial target might be a 3:1 to 4:1 ratio. 5:1 and above are good benchmarks, as a general proposition. But there is a caveat: a 5:1 ratio is not satisfactory if your clients average ROI from outside firms is, for example 8:1.
And you may never get data about your competitors. The solution? Shoot for as high a ratio as possible, and work to keep it high. You will know how well you are doing by the number of repeat engagements you are given.
Originally, I simply used the plaintiff’s initial settlement demand as reasonable worst case exposure, but was quickly educated by clients, and by experience, that a plaintiff’s opening number cannot always, or even usually, be considered reasonable. I also quicly learned that using such unreasonably high demands to plug into the equation led to ratios which were unreliably flattering, and as a result, not useful to discerning clients.
Return on investment (ROI) can only be used as marketing feedback if the numbers are reasonably reliable, and viewed as such by your clients.