Knowledge is power – but does this also apply to companies with an in-house legal department? By using KPIs, the legal department can evaluate its performance, identify weaknesses and take measures to improve its efficiency and effectiveness.

However, in legal departments meaningful measurements of internal processes are often hardly carried out. This means that in many cases, subjective perception has to serve as a benchmark for decisions or for assessing process efficiency and effectiveness. 

Especially when deciding on the introduction of digital solutions to optimize processes, KPIs are useful reference points. Management rightly asks questions about productivity gains and cost reductions before introducing new technologies, such as automated contract review. In some cases, management only knows one metric: the ROI (Return on Investment). 

For this reason, it is helpful to know certain metrics from your own measurements – or even to define KPIs for the legal department – before introducing new legal tech.

In this article we show you which KPIs are suitable for legal departments and into which categories they can be grouped.

KPIs for the Legal Department: A Guide for Companies

Key Performance Indicators, or KPIs for short, are important metrics used to determine performance in companies.  Businesses around the world use KPIs to monitor and understand the success of their departments and business units. KPIs are used in many different areas, e.g. in manufacturing, retail, marketing, IT and the legal department. The metrics already play a particularly important role in finance and business administration. But creating KPIs for the legal department is also worthwhile for companies. 

Legal department KPIs can be used to assess how effectively the department is working and to manage resources more efficiently. Based on the results, striking patterns and trends can be identified in the data. These help company leaders to take suitable restructuring measures when needed or to factor them into future planning, such as the digitalization of the legal department.

Typical KPIs for the Legal Department

Some examples of typical legal department KPIs are:

• In-house lawyers in relation to revenue
  
• Cost per lawyer
• Variance between budget and actual spending
  
• External vs. internal spending
  
• Total spending on services (internal and external)
  
• Cost per matter
  
• Legal spend as a percentage of total revenue
  
• Spending with Legal Software compared to spending without it
  
• Compliance with deadlines
  
• Response time to inquiries

Categories of Legal Department KPIs

KPIs for the legal department and their categories can be defined individually by the company or department, depending on need and focus. Nevertheless, it makes sense to cover and evaluate the following categories with KPIs for the legal department:

• Legal risks: This category shows how quickly you identify and assess legal risks and how effectively you address them. 

• Litigation: This measures how often the legal department has to resolve disputes, how many disputes are successfully resolved and how many disputes have to be decided in court.

• Compliance: Here, KPIs determine how reliably the legal department's compliance guidelines are followed and how effectively compliance programs are implemented.

• Legal advice: The legal advice category covers how many legal advice requests are answered, how quickly they are answered and how satisfied clients or company executives are with the answers.

• Contract management: This category of legal department KPIs measures how quickly contracts are made available and how successful the negotiations are.

• Costs: Among other things, this shows how much money the legal department spends on consulting and other legal services.

• Customer satisfaction: The goal is to protect the company's legal interests while ensuring customer satisfaction. Possible KPIs for the legal department that also take customer satisfaction into account are customer feedback or the success rate of customer claims.

• Cycle time: A company's legal department is often busy with many different tasks and processes. Therefore, measuring cycle time can be a useful KPI for assessing the legal department's performance. Examples include contract cycle time or response time to inquiries.

How to Define Legal Department KPIs

A legal department is an essential part of a company because it ensures the legality of the company's business activities. To make sure that the department does its work efficiently and effectively, a clear definition of KPIs for the legal department is required. This is done according to the principle:

• Plan
• Do
• Check
• Act

Plan:

The first step in defining KPIs for a legal department is to perform an analysis of the department in order to determine which types of activities the department carries out. This includes reviewing contracts, advising department heads and other employees, negotiating with third parties and supporting the department in complying with legal regulations. The results of this analysis must then be used to define the KPIs for the legal department.

Do:

The process of capturing metrics also consists of three steps: identifying critical areas, defining a precise measurement method and an expected level of performance. Important here: decisions should never be made unilaterally, but always in close coordination with management and other related departments. This ensures that they are aligned with the company's short- and long-term goals. 

Check:

As with all KPIs, the legal department's KPIs must also be clearly formulated, measurable and achievable in advance and validated against comparable benchmarks. This way, they can then be effectively communicated to all parties involved. The points of achievability and benchmarking in particular should not be neglected. It can quickly become a disadvantage for a company if it sets utopian goals and clings to them for too long.

Act:

The entire process of data capture, measurement and analysis must be carried out with the highest precision. That is why systems must be in place to enable these steps before legal department KPIs are defined. However, defining and measuring KPIs for the legal department is only half of the process. The second and decisive part is to analyze the data obtained and to determine whether and where adjustments need to be made in the legal department in order to improve the current situation. An evaluation may also show that processes and systems are already working well. 

Why KPIs Are Important in the Legal Department

KPIs serve to measure the success of individual categories within the legal department and to identify optimization potential based on the values.

Performance:

KPIs in the legal department are one of the most important instruments for gaining an objective insight into the actual performance of the department and for improving it when needed. To make success measurable in a targeted way, it is helpful to use selected legal department KPIs. For example, the cases just closed or the share of case completions, the number of cases won in court, and other relevant metrics from this area.

Costs and profit maximization: 

In addition, legal department KPIs are also used to monitor the department's costs. This aspect is of particular interest because companies are constantly striving to reduce costs, generate sales and maximize profits. In this case, legal department KPIs help to monitor and ultimately evaluate spending on external consulting and lawyer fees. Legal department KPIs can also be used to review headcount and to compare the per-capita performance of corporate counsel. From this, executives can deduce, for example, whether the workload is too high and whether new staff should possibly be hired.

Risk management: 

Finally, legal department KPIs help to monitor the department's risk management. KPIs are used to review the number of cases lost in court, the number of cases won and the number of cases that ended through an out-of-court settlement. In this way, this type of legal department KPI reveals possible risks that need to be managed in the future.

Legal department KPIs are an important instrument for ensuring that the company's results remain at a consistently high level. Introducing intelligent, clearly defined KPIs creates incentives for better performance, especially when fees or bonus payments are agreed for employees. They also contribute significantly to cost control and cost reduction. So it is worthwhile to review current performance figures and processes before introducing KPIs.

Key Takeaways

The use of KPIs is of great importance for the legal department in companies. They help to monitor the effectiveness and efficiency of the department's work and to improve it when needed. To define legal department KPIs, it is important to perform an analysis of the department. The results are used to determine the metrics best suited to the specific case.

Here, legal department KPIs should follow the system: Plan, Do, Check and Act. It is important to understand that legal department KPIs are not subject to a one-time review, but must be monitored and analyzed regularly. The goal is to achieve permanent improvement and to verify whether the measures taken have a measurable effect. It must also be ensured that the decisions on defining the KPIs are made in close coordination with management and other related departments. This ensures that they are aligned with the relevant guidelines and the company's short- and long-term goals. 

As everywhere, there are also a few critical voices on the topic of legal department KPIs in connection with the challenges of the legal department. Critics argue that the use of KPIs can lead to a rigid approach in the department that does not always lead to better results. Others argue that legal department KPIs are not always accurate and that they do not take all relevant factors into account. To make an effective selection, companies and departments should ensure that a precise analysis is always carried out before selecting the KPIs, in order to identify the ideal KPIs for the legal department and ultimately apply them successfully.

Interested? Now learn more about Challenges for the Legal Department.