Articles Posted in Benchmarks

The NJ Law Journal published its “2011 Directory of In-House Counsel.” It lists 1,944 individual names. It lists them on 55 pages by company, but does not state the number of companies (i.e., law departments). To calculate that, I counted the number of companies on every other page for the first fourteen, found 12.6 companies on average per page, and therefore estimate about 700 departments (12.6 times 55 pages).

Coincidentally, an ad in the Directory for the New Jersey Chapter of the Association of Corporate Counsel (at 21) states that its membership directory has “more than 1,200 in-house counsel at more than 450 companies.” Since it costs to belong to the ACC, but not to be listed in the Directory and lawyers in the government are not allowed to be ACC members, it makes sense that the ACC chapter has about two-thirds as many lawyers and law departments. I have not cross checked membership against each other, but let’s assume overlap to a large degree, but not completely.

So, grant 2,000 in-house lawyers in New Jersey at 750 companies. The average therefore would be 2.7 lawyers per department. Meanwhile, New Jersey in 2010 had 8.8 million residents out of 308 million in the United States. So, at 84.3 law departments per million residents in the Garden State, the United States would extrapolate to 26,000 law departments.

As I watch last year’s participants in the General Counsel Metrics benchmark survey return to the fold this year, I have wondered why some do not. Several possible explanations have occurred to me. These reasons, other than the first one about cost, apply generally to my efforts as well as to the Hildebrandt law department benchmark survey, the ACC-Empsight survey, and the ALM benchmark survey (purchased a few years ago from Altman Weil).

Budget cuts preclude participation. If a law department doesn’t want to spare $600 to $2,000, that’s it.

Participants might not have found the survey report useful to them. The most likely reason, I think, is that the industry they are in was not adequately represented.

Bill Henderson, Director of the Center on the Global Legal Profession and a Professor of Law at Maurer School of Law, co-authored an article in the ABA J., July 2011 at 41. The authors write that “over the last 25 years government data shows legal services constitute a slightly larger proportion of the nation’s GDP – now nearly 2 percent – with no hint of decline.” Let’s assume that “legal services” means work done by law firms, that our gross domestic product in 2009 was $14.5 trillion, and that “nearly 2 percent” is 1.9%. That calculation says $280 billion paid for “legal services.”

There are something like 75,000 in-house lawyers in the United States (excluding government lawyers) who each spend on average roughly $600,000 a year on outside counsel (See my post of May 4, 2009: outside counsel spend per lawyer, about $600,000.). The General Counsel Metrics benchmark study for 2010 had data from 370 US law departments and found that median figure to be $511,000 per lawyer (but it includes some government departments). On those rough estimates, corporations in the US paid about $45 billion to law firms. (Yes, non-US companies pay for services of US law firms, but I don’t know how much.)

If the legal services market was on the order of $280 billion and corporations accounted for $45 billion, something seems off. Consumer spending makes up two-thirds of the GDP, but surely companies pay more than one-third of total legal fees. Part of the answer might be that “legal services” includes employed legal staff and perhaps the court system as well as fines, judgments and awards.

“On average, in France, approximately 350 new patent cases are initiated every year in first instance [trial courts] and 110 appeals are lodged.” I knew from that sentence in FocusEurope, Summer 2011 at 54, that good metrics lay ahead in an ad by Véron & Associés. C’est vrai. Based on the firm’s research, that volume makes France fourth in world for patent litigation, trailing the United States, China, and Germany.

Interesting to me also was the firm’s analysis of 1,820 patent cases during 2000-2009 before the Tribunal de grande instance in Paris. Infringement claims made up 81 percent of those cases followed by five percent “employee invention” cases. I think that litigation by employees against their employers over an invention is rare in the United States (See my post of Dec. 13, 2010: some countries’ laws require compensation for employee inventors.). The article explained a liberalization of awards of legal costs since 2007: “Nowadays, several winning parties have been awarded sums ranging from €200,000 to €300,000, which covered a significant part of their litigation costs.”

I mention these metrics not merely to gratify the thousands of French lawyers who hang on my every post, but to stress that empirical data – numbers of lawsuits, types of issues litigated, and costs – helps managers of law departments. To have a handle on the volume and expense of legal issues helps greatly in planning and implementation.

The second release has 317 participants from 23 countries grouped into 21 industries. Somewhat more than half of them are headquartered in the United States. One quarter of the participants reported revenue below $500 million. One quarter reported revenue greater than $5.8 billion. The median revenue was $1.5 billion.

The participants reported $8.5 billion in total legal spending in support of $3.1 trillion in revenue. At the end of 2010, they had 8,154 lawyers and 6,783 other legal staff (medians of 8 and 6 respectively). In the smallest fourth, departments reported from 1 to 3 lawyers. The next fourth reported more than 3 lawyers but fewer than 8. Twenty-two departments have more than 100 lawyers.

The report provides medians, quartiles and trimmed means on 25 different metrics related to staffing and spending.

An article on requests for proposal in the ACC Docket, June 2011 at 74, states that hourly rate arrangements are more and more giving way to metrics “to assess efficiency and effectiveness.” The metric proffered is “percentage of work handled by partners and associates, respectively.”

I am at a loss to understand this claimed metric. How could a law department say for similar kinds of matters handled by different law firms that, for example, 20 percent partner time and 75 percent associate time (the rest going to paralegals) outperforms 40 percent partner and 55 percent associate. The total number of hours billed makes a big difference as do hourly rates. If held constant, then, sure, one firm works more cost effectively than the other, but that also assumes comparable outcomes.

Delegation is no panacea; lots of associates milling and billing will improve the ratio but destroy the value (See my post of Feb. 4, 2007: the ratio of partner time to other timekeepers’ time.).

Benford’s law, named after statistician Frank Benford, holds that in most lists of numbers from real life, the digits in the first place should occur according to a known table of probabilities. For example, the digit 1 should occur 30.1 percent of the time as the right-most digit, the digit 2 should appear 17.7 percent of the time, 3 at 12.5 percent, and so on in declining frequency. This précis of the law comes from Len Fisher, The Perfect Swarm: The science of complexity in everyday life (Basic Books 2009) at 161.

Benford’s law underpins some forensic accounting, since fraudsters try to randomize numbers, but those faked patterns violate Benford’s law. What I would like to see is an analysis of time records from law firms. If the chargeable time was created long after the work was done and the person simply plugged in approximate numbers, the first digits will not conform to the normal and expected distribution (See my post of July 12, 2010: 60% of law firms reported reconstructive time tracking.).

The ubiquitous David Cambria said this during a SuperConference panel and I got to thinking what he means. Partly he means that if you look back at numbers, that is more limiting than when you project numbers forward. But projection (modeling) does rely on historical numbers. The distinction blurs to the degree your past metrics were necessary to enable you to calculate the formulas and identify the future trends that the model does (See my post of Jan. 19, 2011: clarify patterns and formulas from data with the spreadsheet function of trend lines.). The assumptions the modeler builds in makes all the difference in the accuracy of a model, so to that extent you are swapping one form of uncertainty (future data) for another (premises of the model).

Some models used by law departments include Monte Carlo simulations (See my post of May 15, 2005: Monte Carlo simulations as computational models; and June 26, 2009: simulations and models.) and litigation risk analysis (See my post of June 17, 2009: decision tree software with 6 references.).

A handicap for many managers of in-house legal teams, when they want to make sense out of a mass of data, is that they do not understand statistical tools well enough. Aside from learning them on their own, they might look around their corporation to find someone who already knows statistics. My “Morrison on Metrics” column of June 13th, offers five suggestions for where you might find quantitative analysts internally.

Two previous posts have shared analyses of the matter management systems of participants in this year’s General Counsel Metrics survey (See my post of June 13, 2011: leading systems by number of departmental users; and June 14, 2011: comparison of leading systems to non-users on total legal spending.). The 142 law departments that did not answer about their matter management system or who responded “none” might have a different profile in terms of total legal spend as a percentage of revenue.

Not so. The average total legal spend of that group was 0.77 percent of revenue and the median was 0.41. As compared to users of matter management systems, the average was slightly lower and the median slightly higher. What confounds these very preliminary findings is that some of the non-respondents might have declined to identify their department’s matter management system. They might not have known the name, they might not have wanted to disclose the information, or they might simply not have cared enough to bother.