Bruce MacEwen needs no introduction. He is known world wide for his incisive commentary on law firm economics, the business of law and law firm strategy. You can find his thought-provoking posts at Adam Smith, Esq.
[These are my notes from the International Legal Technology Association’s 2012 Conference 2012. Since I’m publishing them as soon as possible after the end of a session, they may contain the occasional typographical or grammatical error. Please excuse those. To the extent I’ve made any editorial comments, I’ve shown those in brackets.]
- What Does ROI Mean?. It depends on what approach you use: present discounted value (PDV), net present value (NPV), internal rate of return (IRR).
- What’s the Problem With Them?. They are too easy to manipulate, we often forget what they are, they have a false precision to them and they don’t always tell us what we think they do.
- How to manipulate ROI?. Smooth out the numbers, display them on a pretty graph, then print it on thick glossy paper — in color.
- Why do we waste time on ROI?. Lawyers like evidence. Besides which, lawyers feel that asking about ROI is the responsible thing to do. Unfortunately, most of them do not have a grasp of basic economics and many are “allergic to numbers.” As a result, they aren’t always in the best position to understand the ROI implications. Nonetheless, if they ask for an ROI, they can’t later be faulted for failing to consider ROI.
- False Precision. Since ROI is expressed numerically, it seems more concrete and reliable. Yet we forget that ROI by itself is meaningless without context. While the numbers remain, we all too often tend to forget the context. As a result, the sense of precision is fleeting at best.
- There are Three Kinds of Investments. Investments that involve unknowns; investments that are one-of-a-kind events; investments that are structural and make other things possible. Few conventional projects involve complete unknowns. With one-of-a-kind events, no one can predict outcomes, so it’s very hard to talk sensibly about ROI. With structural investments (e.g., high speed rail), while the project itself may not always pay for itself, chances are that it will allow other positive returns to arise. (In his example, there has been a great deal of real estate development around rail lines or extra tall buildings near New York City express subway stops.)
- If not ROI, then what’s a better way to analyze IT projects? First ask if the proposed project is plausible. Then, ask if it would make a difference. This second question introduces common sense into your deliberations. It forces you to consider your business context and the impact of the proposed project on the top line or bottom line. At the end of the day, the greater the positive impact on the top or bottom line, the better the project and the easier it should be to win support.