Articles Posted in Benchmarks

The National Law Journal, in its June 11th issue, published my article on four developments that will enhance benchmark reports in the near future. This article won the BigLaw Pick of the Week in the July 26, 2011 issue. BigLaw is a free weekly email newsletter that provides helpful information for the world’s largest law firms and the corporate counsel who hire them.

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Benchmark reports typically sort participants into recognized broad industries such as manufacturing, high tech, and pharmaceutical. Several times I have taken a swing at these traditional industry classifications because they have flaws or miss factors that might distinguish law departments more usefully. One post alone discusses six attributes that significantly influence legal department size: heavy regulation, significant R&D, mass torts, industry transformation, rapid growth, and corporate concentration (See my post of Dec. 7, 2010: factors that significantly affect legal exposure.).

For benchmark analyses, these attributes of companies – and their law departments by extension – may tell us more than the accustomed broad industry designations (See my post of March 2, 2010: industry benchmarks with 8 references; Dec. 1, 2010: industry ranking of legal intensity; and Dec. 27, 2010: “sector” data below broader “industries”.).

Consider several other attributes on which to group benchmark participants or to analyze those in a broad industry more finely.

The Association of Corporate Counsel (ACC) has expanded to “more than 28,000 members (in 10,000 companies).” That statement from Corporate Counsel’s August issue tells us its membership averages 2.8 lawyers per member department, a calculation that does not support any estimate of the average or median number of lawyers per U.S. law department. Even if all the members were U.S. departments, who knows what percentage of the lawyers in the 10,000 departments belong to the ACC? All we can know is that 100 percent of the solo in-house lawyers in that set are members. Several times I have referred to an average number of lawyers per department, but without support for the estimate (See my post of April 30, 2010: three lawyers per department; May 10, 2010: average of three lawyers per department; Oct. 20, 2010: estimates 2-3 lawyers per department on average.).

Consider two clues for a representative number of lawyers per U.S. department (See my post of Sept. 25, 2005: ACC figures of 71,702 lawyers in 23,540 U.S. corporations averages 3.05; and Feb. 9, 2008: 60% of legal departments in the US have fewer than 5 lawyers.).

First, we can build on that last statement of 60 percent at 4 or fewer. Given power laws and probable distributions, assume 32 percent are single-lawyer departments; 16 percent have two lawyers (a drop in half from one level to the next higher is quite common in many distributions), 8 percent have three and 4 percent have four lawyers. If so, the median would be one (since more than half have only one lawyer and the average would1.6.

An article gave some data on the number of U.S. mobile patents 11 major players in that market have applied for and have been granted. Bloomberg Businessweek, Aug. 8-14, 2011 at 37, shows a chart with data provided by MDB Capital. I eyeballed the numbers for the likes of Research in Motion, Nokia, and Microsoft and calculated one ratio.

First, however, I am staggered that the group as a whole has applied for something like 14,000 mobile-related U.S. patents. And that on top of another 4,000 already granted. No wonder companies seek standards and patent pools as well as maintain clumps of patent lawyers and staff (See my post of June 19, 2011: patents and industry standards.).

As to the ratios, overall about 75 percent of the patents are in the USPTO pipeline, not yet granted. That represents a huge amount of prosecution activity across these major technology companies.

John Lukacs, The Future of History (Yale 2011) at 43-44, disparages what he calls “quanto-history,” the effort to gather data and apply statistical tools in the service of historical knowledge. What others have called “Cliometrics” – Clio being the goddess of history – lack reliable data and, worse, focus on quantities not qualities, according to Lukacs. Clearly, not a numbers guy!

Econometrics, to shift fields but bring in a parallel discipline, applies statistics and mathematical analysis to the study of economic topics (See my post of July 4, 2006: econometrics.). Benchmark studies for law departments, we might analogize, attempt to quantify management topics in part of the legal industry. One day we might learn from the field of Themismetrics about quantification of legal management.

We make the estimate by multiplying lawyers per billion dollars of market value against the world-wide total of market capitalization and then dividing by the average number of lawyers in law departments. Perhaps the result is directionally correct.

From four posts on this blog, let’s loosely estimate lawyers per billion dollars of market capitalization to be three (See my post of June 4, 2007: Rio Tinto and 1.6 lawyers per billion in market cap; July 2, 2007: about 2.1 lawyers per billion of market capitalization among 35 large US companies in 2005; Nov. 19, 2010: among US manufacturers, about 3 lawyers per billion of market cap; and Feb. 15, 2011: using General Counsel Metrics data, about 4 lawyers per billion.).

The NY Times, Aug. 6, 2011 at BU3, informs us that total world market capitalization as of Dec. 31, 2010 was $35.5 trillion: US ($14.3 trillion), Europe ($8.6), East Asia ($6.4) and Other ($6.2). If the US ratio of three in-house attorneys per billion of market value holds everywhere, the 35,500 billion in market cap suggests 106,500 attorneys – in the publicly traded companies only. Dividing by an average of three lawyers per department, that means 35,500 law departments in floated companies. The next step needs a ratio of publicly traded companies with law departments, which I assume to be close to 100 percent, and the ratio of privately held companies with law departments to publicly traded companies with law departments. Then we tack on government law departments!

Larger law departments, those with say fifteen or more lawyers, tend to be in companies with equivalently more revenue. Since economies of scale in legal spending benefit those larger departments, surveys whose participants are skewed toward large companies will produce distorted, lower benchmarks (See my post of Dec. 16, 2010: data from $10 and $20 billion companies.).

Total legal spending as a percentage of revenue suffers the most, since it declines with company size in a fairly constant and predictable trend. Other than lawyers per billion of revenue, which also declines, although less regularly than total spending, most metrics hold fairly constant. General counsel in smaller departments should take account of the their size relative to the median size of the population, unless they can obtain metrics for their own size category.

“With some exceptions, any average of a large number of similar terms will have a normal, bell-shaped distribution.” This powerful statistical discovery by Pierre Laplace in 1810 as described by Sharon Bertsch McGrayne, The Theory That Would Not Die (Yale Univ. 2011) at 6, means that if a law department takes the average of successive invoices, for example, those averages will have a Gaussian distribution. In accordance with the central limit theory, if every month you take the average of new cases that month and the previous month, the series will distribute normally.

So what? You can use standard deviations and many other statistical tools when the collection of metrics takes the form of the well-understood bell curve (See my post of March 12, 2009: bell curves with 8 references.).

The greater a company’s revenue, the less it spends on legal expenses in proportion to that revenue. Despite having amassed 15 possible explanations for that pattern, another one came recently to my attention (See my post of Aug. 21, 2008: client satisfaction or what leads to it, invention activity within the company, pay of in-house counsel, and the ethical stance of companies; and Dec. 3, 2007: 11 more reasons for economies of scale.). The source was Amar Bhidé, The Venturesome Economy: how innovation sustains prosperity in a more connected world (Princeton Univ. 2008) at 16.

The larger the department, the more its managers are likely to learn about an innovative management method; more importantly, the more they will have opportunities to match that new idea to some need. They have more needs, in the first place, than a smaller and simpler department. They can also stick with the innovation longer to rub off the rough edges. The larger department can absorb more trial and error and it has more talents and skills that can extract value from the new idea. In other words, more opportunities and more resources are at hand so the department is more likely than smaller departments – at smaller companies – to take advantage of the novelty and improve the benchmark metric.

A report a few years ago had data for a group of law departments about “the largest expense item incurred by” the participants. The median figure for that big ticket item was fairly consistently about eight percent of the total legal spending of the departments, whether you looked the participants as a group, by a revenue range, or by certain industries.

What came to mind was that somewhere near half of a department’s total legal spend comes from compensation, facilities, and internal charges that don’t vary much year from year. Therefore, the costly whopper is an external expenditure, typically stemming from a major deal or a large lawsuit.

Consider some implications if a single matter – the acquisition of a company or a class action – accounts for 16-20 percent of a typical law department’s external spend in a year. Right out of the box, you can guess that often the tsunami could not have been anticipated during the budget period months before. Then too, why play around with minnow expenses if one whale deserves the most attention. Third, if each year a budget-buster comes along, then in fact you can budget for it, even if you do not know anything about its specifics.