I have been struggling to write this post about KPIs. It’s taken way longer than it should have – with several starts and stops. First, should it be KPI or KPIs? Just like the debate over RBI and RBIs in baseball, passions run hot on this point. I think “KPIs” sounds better so I’m going with that. Second – and slightly more important than the KPI/KPIs controversy – KPIs don’t work particularly well for in-house legal departments. Actually, I had this eureka moment a long time ago when I was first asked as General Counsel to provide “SMART” objectives for the legal department for an upcoming calendar year. I literally had no clue what they (HR) were talking about. And when I asked them for some examples, it was clear they had no clue either – at least when it came to developing SMART objectives for the legal department. For other parts of the business, SMART objectives seemed obvious and worked great. For legal, not so much. But, I (and my team) eventually figured it out and designed goals that were a little squishy – “SMART-ish” – but to which no one objected. You can see some examples of this in an older post titled “Setting Goals for the Legal Department.”
Then it got harder. The next ask was that the legal department create and provide “KPIs” (key performance indicators). KPIs are metrics that you track to determine if you are on target with some goal or benchmark. Besides once again having no clue what to measure (or how to measure it), it was now infinitely harder because the request came from the CFO and CEO. Unlike dealing with my friends in HR, this meant it would be very hard to “fudge it,” i.e., I had to actually come up with KPIs that mattered and worked. Damn. Like SMART objectives, we eventually figure it out and came up with KPIs that measured several different facets of the legal department. Still, it was – and remains – an unsatisfactory experience for many in-house lawyers. Primarily because while looking at numbers and charts on pretty dashboards might be fun for some, there is usually little context conveyed or captured by a KPI. Without context, you miss a lot of important nuance about the value of an in-house legal department. KPIs, for example, rarely capture how departments “think” and “react” to prioritize on the fly suddenly urgent matters, what work gets pushed aside (or extra legal costs incurred) because the CEO or a particular business unit now has a new No. 1 priority. How to distinguish between one in-house lawyer who may be stuck on one complex mega-deal or case, and others are working dozens of smaller, but important, matters. Or how to reveal what risks, litigation, bad deals, costs, and other pain are avoided because the legal department was involved. In other words, KPIs basically suck at measuring intangibles and a big part of what in-house lawyers do every day – and where they add the most value – often comes in the form of these intangibles.
Okay. Breathing deep and calming down. Obviously, I’ve always been a little passionate about this whole KPI/SMART objectives thing. That said, I recognized pretty fast that complaining about it or refusing to do it were not options. At least if I wanted to stay in the General Counsel chair. Moreover, I needed to be honest with myself that there was some real value from KPIs, even if it was just to assure the C-Suite that I was operating the department like any other part of the business. And, if we could figure it out, I intuitively knew that KPIs could help buttress the narrative I wanted to tell about the legal department by showing numerically where the legal team was adding value to the company. Lastly, it was clear that KPIs could show me where there were potential problems that need watching or fixing. And that’s all valuable information regardless of how it comes about. So, I resigned myself – as all in-house lawyers likely must – that legal department KPIs are here to stay. So, let’s talk KPIs.
The biggest mistake most legal departments make, in my opinion, is trying to track too many KPIs. If you have more than ten you’re in trouble and in danger of over-analyzing things. The process should work like this:
- First, figure out what you want to measure and why it’s important.
- Second, determine what information you have that can allow you to make the measurement. Ideally, you’ll have data from previous years (or third-party sources) to compare/benchmark to and, if not, your best insights maybe a few years down the road once you’ve accumulated or obtained that type of data. See, for example, my post on data analytics for legal departments.
- Third, create a format that allows you to present the KPIs – and your progress against them – in the most straightforward manner possible but with a little flair (a dashboard is, despite my earlier comment, an excellent idea here).
- Finally, think hard about what you want to share outside of the legal department. There is no rule that you have to share everything – or anything. Certainly, if someone in a position to ask wants you to create or share a KPI, then you must do it. But, you may also want to use some KPIs to measure things that you aren’t ready to share but about which you do want data and insight. Keep those KPIs close to the vest until you’re ready – if ever – to share them.
With all this in mind, this edition of “Ten Things” will set out the ten KPIs I think all legal departments should track. I will keep them high-level and may set out a sub-KPI or two to show how you can create or tweak KPIs to measure whatever you feel is most important to track. But, these ten KPIs are an excellent start:
1. Contract quantity.
Pretty simple measure: how many contracts has the legal department completed over the measurement period? It can be just a gross number, or – better – vs. some goal set earlier in the year, e.g., 500 contracts per quarter. I like this measure because my belief has always been that one of the highest and best uses of the legal department is completing contracts as contracts are the grease on the skids of the company’s business. If you want to get more granular, you can break out the number of contracts by type, such as commercial, NDA, vendor, complex, simple, by value, or whatever different types of contracts your department works on.
2. Contract quality.
This measure is more complex than No. 1 but it also tells you a lot more. For example, at one General Counsel stop, we instituted a contract scoring process where we developed (with the business) a set of acceptable risk-criteria for contracts. Our contracts were then scored based on how well they met certain criteria. The best contracts got an “A” and the worst a “D” (and low-scoring contracts had to go on a separate approval track). We then set a KPI around having one percent or less of the contracts completed by the legal department fall into the “C” or “D” category. I wrote about this process in a past post titled “Minimizing Risks in Commercial Contracts.” You can also track things like how many times are the company’s forms and templates used, how many times you use “customer paper,” and by the level of “redlines” required to get to a deal, e.g., low-medium-high, with the understanding that the more effort spent on customer paper or deep redlines to the company’s form contracts, for example, the lower the contract quality in general.
3. Budget vs. actual spend.
This is a pretty core KPI as it shows where the legal department is in terms of spending goals, i.e., where actual spend is vs. budgeted spend. This should be tracked on two dimensions – year-to-date (overall YTD spend vs. over YTD budget) and for the most recent month, e.g., June actual spend vs. June budget or forecast. Ideally, you are also tracking by type of matter, e.g., litigation, contracts, corporate secretary, intellectual property, etc. Also of interest are the average hourly rate for outside law firms (especially if you have a goal to lower that number) and how the department is tracking against any other savings initiatives you have in place.
4. Legal spend by business unit.
With many legal departments, this occurs automatically because all outside legal spend is charged back to the relevant business unit/staff group. Even if not, it’s an important metric because it allows you (and likely the C-Suite) to see who are the big users of legal services and can prompt you to investigate whether there is something driving higher spend by one group vs. another. The latter is easier if you are also tracking – within each unit’s spend overall spending number – the type of matter. This is something you can easily do in Excel or Smartsheets (through what’s called a stacked bar chart). Lastly, though I dislike the metric as often misleading, consider tracking legal spend as a percentage of the company’s revenues. I dislike this metric because what drives legal spend at a particular company is subject to a wide variety of variables likely unique to how the business operates. But, this is a common metric and one the C-Suite is likely to ask about or, at a minimum, is familiar with. You can use this metric to help you manage down legal spend or, if you can find that right comparison/benchmark, show that the department is on target for legal spend (or how far off target you may be).
5. IP development.
The company’s intellectual property is often an afterthought. It shouldn’t be. It’s a valuable asset that can really matter if the company is, for example, ever put up for sale, for tax purposes, or as collateral for a re-financing. At a minimum, the legal department should be tracking the raw number of patents, copyrights, and trademarks applied for and/or granted during the year. There is also value in knowing the gross spend on and the average cost to obtain each category of IP. And, if you calibrate No. 4 above to track it, you’ll know which business units drive the biggest IP legal spend. For example, marketing may drive a lot of trademark spending and this may be something ripe to discuss with them in terms of how to reduce the cost.
6. Litigation management.
After drafting contracts, the second most important function of a legal department is managing (and preventing) litigation, possibly the biggest waste of time and money most companies face. Unfortunately, it’s challenging to come up with one KPI to measure litigation management. What seems to work best are several metrics under the umbrella of litigation management. These are:
- Number of litigation matters over a certain amount, e.g., $100,000 USD, $50,000 USD, $500,000 USD. This lets you focus on reporting about the litigation that matters most. A sub-category to consider here is the number of “risky” litigation matters, i.e., cases where stakes are very high. These types of matters are usually of more interest to the C-Suite and board of directors than “run-of-the-mill” litigation.
- The average cost per litigation matter (tracked as both defendant and plaintiff).
- Outside fees/costs.
- Settlement/judgment (paid or received).
- Fines (if you are including regulatory investigations under “litigation”).
- Percentage of cases won/lost.
- Percentage of cases resolved before trial.
7. Compliance management.
This assumes that the company’s compliance function sits within the legal department, something still fairly typical today. Like litigation management, it’s difficult to layout one KPI to track for this area. In my experience (and because the board of directors was always interested in compliance issues), we tracked, among some other things:
- Percentage of company employees who had completed mandatory compliance training.
- The number of compliance matters reported by channel, e.g., hotline, email, via other departments, like HR, and so forth.
- The number of compliance matters resolved/number of compliance matters open
- The average time to close a compliance matter.
8. Strategic project(s).
Typically, there is at least one strategic project or initiative going on inside a legal department during any given year. It may be a big technology implementation, it might be a cost savings initiative, preparing a succession plan or “three-year” strategic plan, or whatever. Regardless of what it is, if it’s important enough it’s worth tracking the progress via a KPI. For example, I once had a KPI for tracking the implementation of a contract management tool where we tracked completion progress vs. plan. This KPI allowed us to quickly see if the project was on-track or off-track and, if the latter, ask why and determine what needed to be done to get it back on track.
9. Legal department engagement.
When it came to my team/staff, the only number I really cared about was their employee engagement score. This is something most companies measure at least annually (sometimes twice-per-year). Basically, it’s a composite score based on the team’s answers to dozens of questions. The higher the engagement score, the more satisfied people are with their jobs, the more willing they are to take on discretionary work, to tout the company, and so forth. It’s also a great predictor of employee retention (or in terms of spotting problems that need attention). Finally, it’s a good indicator of how you are doing as a manager. The good news is that there are many available benchmarks/targets to track against either in terms of the engagement scores of the national average, the company as a whole, the different business units and/or staff groups, or the legal department’s prior year’s score – making this a fairly simple KPI to implement and track.
10. Customer satisfaction.
One of the most important things for a General Counsel to know is how satisfied is the business with the legal department. While anecdotal information is helpful, the best way to understand this is via a legal department customer satisfaction survey – which measures satisfaction across a number of specific items as well as generating an “overall” satisfaction number. The most straightforward KPI is an overall score. We had a target overall satisfaction number and a goal that 85% of the respondents would have the same – or higher – level of satisfaction with the legal department versus the prior year. You could also ask those taking the survey to assign a letter grade to the department (“A” – “D”) and shoot for a “B” or better, or whatever makes the most sense for your circumstances.
There is one other KPI to consider, though it’s a bit controversial. At least it was for me. This KPI would track what people in the department are spending their time on, e.g., administrative tasks, email, meetings, research, “drive-by’s,” drafting, or whatever else you wanted to measure in terms of workflow. The reason it’s controversial is that in-house lawyers generally hate anything to do with tracking their time. Perhaps the biggest reason lawyers come in-house is to escape the time-tracking part of law firm life. If you start asking people to track what they’re doing, you’re going to hear about it. I know I did. And even though I thought the information would be extremely valuable in helping determine utilization, efficiency, the nature of the work getting sent to the legal department (and the level of difficulty of the same), and other important insights, it simply wasn’t worth the blow-back from my team to try to force something like this on them. Maybe other General Counsel have more guts than I did? That said, I did find ways to get some insights on this topic through the data in our matter management and budgeting tools, through my 1/1 meetings with my directs, and by occasionally asking the overall team to “guesstimate” their high-level utilization numbers. Not perfect, but it did get me part of the way there. So, I will leave it up to you to figure out if this is a KPI you want to try to track.
While I do believe it’s difficult to track the true value of the legal department via KPIs, there is value to extract from the process – even for small or single-person legal departments. And, as is probably clear, you can see there are dozens and dozens of things you could measure as a legal department KPI, either as subcategories of my ten or as separate KPIs I did not discuss. What you do measure depends on who is asking for it (if anyone) and why it’s important. At the end of the day, you should have no more than ten (and less is better) KPIs that report out on metrics that are key to running the legal department, meeting specific goals, and protecting the company. This is a task tailor-made for a legal operations person or team. And, no matter what, be sure to find a kick-ass way to present your KPIs. Sounds silly, but the right dashboard, PowerPoint design, or spreadsheet can make a huge difference in how you and the legal department are perceived – regardless of what the KPIs actually show. It could be worth bribing someone from marketing with a free lunch in exchange for some design help. For two great additional resources on legal department KPIs see “Acing the In-House Legal Department Performance Review” by Frank Cerrone and “Measuring Legal Department Metrics,” by Stephen Mabey.