Articles Posted in Benchmarks

Wonk that I am, to find a different approach to gather and present data gives me a glow. So, when I dug into the PwC Annual Corporate Directors Survey, I glowed. I fastened onto its methodology for the question on topics board members would like to devote more time to (See my post of May 8, 2011: Corp. Bd. Mbr., First Quarter 2011 at 10.).

For each of the topics the survey gave five choices (at 10 of the report): (1) yes, much more time and focus than in the past; (2) yes, but not a great increase from the past; (3) no change, it’s already a major focus; (4) no, I don’t expect any change; and (5) no, we will decrease our time and focus. The report combined the first two and in a previous post I remarked on the ranking of “Compliance and regulatory” as eighth out of nine.

But when you look at the data, three out of four respondents sought no increased focus on this because it is already a major focus. In fact, “Compliance and regulation” is next to the top in terms of current focus. Thus, aware now of the methodology, the negative implication I drew previously was wrong: directors feel they spend ample time on compliance and regulatory issues.

“Consulting companies that study information consumption routinely find that more than half of all standard reports aren’t being used by anyone anymore.” This damning statement comes from MIT Sloan Mgt. Rev., Spring 2011 at 57. Most law departments of much size spawn reports on such things as monthly spending, headcount, budget to actual, CLE hours, and more. If they were to take a critical look at the outpouring, they might find that many of them have outlived their purpose.

Try this: make an estimate of the time it takes to prepare each report and make an estimate of the relative value of each report. Stop preparing the lowest ranked report, the one with the worst combination high cost and low value.

My latest InsideCounsel column, which went up on May 2, 2011, talks about a congenial way to explain portions of wholes, such as how many lawsuits out of all our lawsuits cost more than $100,00 to defend last year. So-called natural frequencies are less off-putting than percentages or decimals. The column offers an explanation for this conclusion from evolutionary cognitive science and gives some related examples of ways to discuss metrics that keep your listeners from tuning out or passing out.

I like numbers; I like observations about numbers; so I like these quotes and the ideas they stimulated. Let’s hope you like my aphoristic style.

“Not everything that can be counted counts, and not everything that counts can be counted.” Albert Einstein

(1) More value generated by a law departments results from unmeasurable decisions than in countable actions.

General Counsel Metrics, LLC, has prepared Release 1.0 of its report on law department spending and staffing metrics. The 245 law departments reported 6,527 lawyers at the end of 201, with a median of 8. The legal staff in those departments, which includes paralegals and all others, totaled 5,574, with a median of 5. The averages for both figures are much higher than the medians. Note that this first set has one and almost a tenth more lawyers than non-lawyers unlike the typical one-to-one ratio.

With the four best-represented noted in parentheses, the 21 countries with respondents so far are Argentina, Australia, Belgium, Brazil (20), Canada (25), China, Finland, Germany, Ireland, Italy, Japan, Kuwait, Lebanon, Netherlands, Puerto Rico, Singapore, Spain, Switzerland, UAE, UK (9) and USA (143).

Spending in 2010 a total of $6.2 billion internally and externally, the participants reported in the online free survey a median of $5 million. These law departments helped their respective clients account for nearly $2.6 trillion of revenue (an average of $10 billion and a median of $1.5 billion). That works out to about $400 million in revenue for each lawyer, albeit with extremes at both ends.

Even with large numbers of participants, such as 1,000 in the General Counsel Metrics law department survey, benchmark metrics probably reflect more centralized law departments than decentralized. Not just more of them, because centralized reporting departments – where all practicing lawyers report ultimately to the general counsel – greatly outnumber decentralized ones – where some practicing lawyers report to a business unit manager.

More than even when you account for that imbalance, since it seems logical that decentralized departments don’t make up a similar percentage in survey results. To explain, assume 90 percent of all law departments are centralized. If 95 percent of all benchmark respondents are too, my surmise would be supported – relatively greater representation. The reason I would put forward is that general counsel who don’t know the full headcount of their company’s legal staff, or the spending on them, let alone the company’s outside counsel spend, more frequently pass than their centralized peers on invitations to take part in benchmark surveys. If they know their key figures are incomplete, why bother?

Covering 240 participants or so to this point, the 2010 data on key benchmark metrics will be quite rich. Lumen Legal is hosting a webinar for me to explain the findings and discuss law department benchmark metrics more generally. If you would like to sign up to dial in, at 2PM Eastern, please click on the Lumen link here. I hope you will participate and spread the word.

While you’re at it, click on the link upper right and take the survey for your law department!

The Center for Studies on Economic and Social Law (CEDES), a Brazilian think tank, has sponsored a competition. “[T]he winners will be granted access to the litigation portfolios of five global companies with presence in Brazil, the United States and Europe. Winners will assess and compare the causes for litigation in these jurisdictions and will create a proposal, which CEDES will publish, for improving the Brazilian scenario.”

Fascinating, that description from the ACC Docket, April 2011, Supp. 2, and it intrigues me. That five large law departments open up the litigation kimono is impressive; that data might be produced that gives glimpses of costs and management is to be hoped; that law department responses to litigation has its own competition and awards thrills me.

If members of a law department vote choose contending law firms, vendors, software packages, offsite choices, or anything else, they ought to bear in mind that the winning outcome could be within a range of random statistical error. In other words, if the vote were held repeatedly, without any of the voters remembering how they had cast their ballot before, the outcomes would vary around some typical result point. The square root of all the votes cast by the team gives the swing either way that could happen simply from random fluctuations.

So, if ten team members vote on ten choices, and they can put all their votes on one or distribute them, you would have 100 total votes. The square root of 100 is 10, so if the two finalists are 10 or fewer votes apart, in the eyes of a statistician they got the same number of votes. With such closeness, a statistical dead heat, it would be wise to talk some more, re-vote, or drop the lowest vote ranked choices so that the votes are rejuggled. John D. Barrow, 100 Essential Things You Didn’t Know You Didn’t Know: Math Explains Your World (Norton 2008) at 161, discusses this.

If you calculate the average billing rate increase of the two law firms you paid the most during 2009 and 2010, and then divide the total of those increases by two, you have the arithmetic mean of those increases. So, Firm A increased 4 percent and firm B increased 6 percent. The arithmetic mean was 5 percent, (4+6)/2.

The geometric mean is more appropriate than the arithmetic mean for describing proportional growth; in business the geometric mean of growth rates is known as the compound annual growth rate (CAGR). The geometric mean of the increases requires a different calculation. In the example, the geometric mean is the square root of each firm’s change multiplied together.

The geometric mean, however, is 4 times 6 raised to the ½ power (since you have two numbers and the exponent is 1/n), which is 4.9 percent (it is always less than the arithmetic mean). In the US the Labor Bureau calculates the Consumer Price Index with geometric means. More generally, the geometric mean of n quantities is the nth root of their product, according to John D. Barrow, 100 Essential Things You Didn’t Know You Didn’t Know: Math Explains Your World (Norton 2008) at 236. So, if you had changes in billing rates for five law firms, you would multiply all five of their percentage changes and raise it to the 1/5 (.2) power (the fifth root).