Cost-benefit analysis sheds light on the difficulty of ROI calculations

Cost-benefit analysis (CBA) resembles some decisions about non-hourly fee arrangements in that both are efforts to match what is paid against the value of what is gained.

A thoughtful article in the Bus. Lawyer, Vol. 63, Aug. 2008 at 1187, analyses closing opinions of counsel in terms of standard CBA methodology and assumptions. Among many points, the author emphasizes the difficulties of deciding before legal services are provided what should be paid for them. “[I]n certain important respects we may not know the benefits of a closing opinion without incurring the costs” (at 1190). Likewise, law departments often cannot put a financial value on legal work without first incurring the costs of that work.

Cost-benefit analysis could help with some of the decisions general counsel make about the return on investment (ROI) of various management initiatives (See my post of May 1, 2005: bill review software; May 14, 2005: knowledge management; Sept. 21, 2005: Cisco’s discovery lab; Nov. 19, 2005: Google’s law department; May 4, 2007: Holcim’s law department; May 14, 2005: knowledge management; June 16, 2006: various management actions; Aug. 16, 2006: portals; Dec. 9, 2006: electronic repositories of law-firm work product; Feb. 17, 2007: products and services; Jan. 14, 2007 GE’s claims; Oct. 8, 2007: knowledge management initiatives; Dec. 11, 2007: DuPont’s EDGE system

I have expressed my doubts about calculations of ROI (See my post of Sept. 28, 2007: criticism of ROI; March 12, 2006: nominal ROI calculations; July 31, 2005: implausible ROI calculations; and June 18, 2007: impossibility of calculating ROI for knowledge management.). CBA analysis offers some new approaches to thinking about ROI.