Articles Posted in Benchmarks

The well-done General Counsel Benchmarking Report for 2009 of Otto Henning & Co. at 64 provides data on the number of lawyers (Rechtsanwälte weltweit) worldwide its benchmark survey participants reported. From the 56 companies in the survey, all from the German Fortune 150, the overall average was 3.5 lawyers per billion Euros of revenue. That would be 2.3 lawyers per US billions of revenue at an exchange rate of $1.5 per Euro, which compares favorably to the medians for large US law departments: in the range of 3-to-5 lawyers per billion. The five industries for which detail is given vary considerably – from 5.5 to 1.3 lawyers per billion Euros.

As to lawyers per thousand employees (Beschäftigte), the Henning report states an average of 2.4. The industries do not vary as much on this benchmark: 2.5 to 1.1. In the US a typical figure for large companies would be quite similar.

A report based on 2008 data from 56 of the 150 largest German companies produced benchmark averages for paralegals (Rechtsanwaltsgehilfen) and admins (Sekretariatskräfte und weiter Assistenzkräfte) per in-house lawyer. Those departments averaged 0.2 paralegals per lawyer, i.e., five lawyers for every paralegal. US law departments show more leverage, on the order of three-to-four lawyers per paralegal. Admins and other staff ran in the German companies at about 0.3 per lawyer, which converts to three lawyer for each.

Combined, the personnel distribution in German law departments of large enterprises comes to the common ratio in the United States of about one non-lawyer for every lawyer. This benchmark data comes from the General Counsel Benchmarking Report for 2009 of Otto Henning & Co. at 66, based on lawyers worldwide (Rechtsanwälte weltweit) that its participants reported. Michael.Henning@oh-c.com

An earlier post referred to defense costs paid on behalf of an in-house counsel (See my post of Jan. 18, 2011: GlaxoSmithkline lawyer’s defense paid for.). What are the odds that legal defense costs on behalf of an employee lawyer make their way into calculations of fully loaded costs per lawyer hour?

The same situation might cause the Board of Directors to retain independent counsel to look into the situation. Fees for that retention, likewise, are not in the calculated cost of the law department and might not even hit the legal budget at all.

As a third instance, does the budget of a law department include the costs of commuting and accommodation for its chief legal officer who chooses to live in a distant city (See my post of Jan. 12, 2011: Arizona to Nevada weekly commute.)? Herewith another expense item that probably finds no place in calculations of fully loaded costs per attorney hour.

Earlier I explained how to calculate and use statistical variance (See my post of Feb. 18, 2011: variance in statistics.). I used as an example patent applications handled by a group of law firms. To solve the problem that variance figures aren’t natural, they are squared, statisticians compute the square root of the figure, easily done on a spreadsheet, which translates it back to the everyday unit: patents prosecuted. In statistical-speak the standard deviation, as it is called, is simply the square root of the variance.

Standard deviation is the most common statistic to describe how spread out are the values in a data set. Assuming a normal distribution of patents worked on, 68.2% of the firms will lie within one standard deviation on either side of the average number handled. One more standard deviation on either side accounts for 27.2 percent more of the firms; thus, 95.4 percent of all the firms will be between two standard deviations on either side of the average amount. With only ten firms, the distribution may be lumpy but if you were to imagine data on 100 patent firms, the familiar bell curve would start to be distinguishable.

Among other uses, as we shall see in a later post, standard deviations allow a general counsel to compare the degree of dispersion among two sets of unrelated members. For example, how do you compare the distribution of a law department’s patent firm output to the amounts of invoices received from those firms?

If you are from a Fortune 500-size company (more than $4 billion in revenue) and you complete the current survey through the notice top right on this blog or use this URL, I will send you the full analysis of the 95 law departments from Fortune 500 companies last year. That group of elite companies is fully as large as some entire benchmark surveys and much larger than even the biggest survey can muster in that huge-revenue bracket.

The demographics of the 95 Fortune 500’s are striking. The group averaged 80 lawyers (median 50) and total legal spend of $103 million, with a median of $51 million. As to their revenue, at a total of $2 trillion they averaged $21 billion and a median of $12 billion.

Meanwhile, for all readers here are some findings from my analysis of this group against all 813 participants last year. As compared to the total legal spending as a percentage of revenue of all the participants in the fifth release of the GCM report, the Fortune 500 set was 10 percent higher. This is surprising to me since economies of scale are well known.

Beyond averages and medians, general counsel should understand statistical ways to describe the variability and distribution of data. One uses the statistical term called variance.

Let’s say you use ten law firms to prepare and prosecute patents. You know how many patent applications they each handled during 2010. It’s easy to calculate the average production for the firms – divide the total by ten. Next, subtract each firm’s production from the average (a difference also called the deviation) and square that number – multiply the deviation by itself. Thus if the average is 17 and Firm Rees handled 20, the deviation of three squared equals nine The sum of all ten squared deviations is then divided by 10 (the number of data points). That number is the variance.

The larger the variance the wider the range of applications. Note that variance gives more weight to extreme scores because you are squaring them. The problem with the variance figure is that the units, in this example patents prosecuted, is squared. General counsel and chief IP lawyers don’t readily think in terms of a law firm working on 21 applications multiplied by 21 applications! For that reason, another statistical tool stands ready to turn variance into a more easily understood statistical descriptor of variability: standard deviation.

Consulting to a law department that does not know how much business units spend on outside counsel or how many lawyers practice law inside the company – both afflictions due to the decentralized operating style of the company, I realized that the available benchmarks for legal departments may be slightly low.

More than a few general counsel preside over a loose confederation of staffing and spending, without visibility into the full numbers. Some, in truth, may not want to know lest they be held accountable for what is not manageable. To the extent of the omitted figures, available benchmarks such as lawyers per billion of revenue undershoot to some unknown degree.

Revenue figures have solidity, as they are audited by external accountants and reported to the SEC and other government entities. The total number of people providing legal advice and the cost of both them and the external counsel they hire, by contrast, lacks such solidity for some companies. For that reason, a benchmark figure such as legal spending as a percentage of revenue stands a bit lower than reality to the degree that full numbers don’t come to light.

Everyone is comfortable with the trade’s definitions of broad industries: manufacturing, insurance, aerospace and the like. All well and good for many purposes, not so good for legal department comprehension. We may need a breakdown of companies that reflects more accurately the intensity of their legal exposure.

For example, if you sell to consumers a product that can hurt them, your risks dwarf those of companies that provide online services to businesses. If your company operates a common carrier (See my post of Feb. 14, 2011: law departments of common carriers develop different legal structures.), you face a range of legal issues different from those faced by relatively unregulated companies. It may be that wide differences in a company’s mix of domestic and international revenue accounts for equally large differences in the workings of its legal department. The division between create-and-use-IP companies and not-much-in-the-way-of-protected intellectual capital certainly looms large.

My point is that if we rely on the traditional industry breakdowns applied by financial analysts and the press we may be missing telling indicators of legal staffing and spending. Different categories of companies may reveal much more about variations on legal structure and operations.

Starting with data from 39 large US and Canadian manufacturing companies that participated in the General Counsel Metrics benchmark survey in 2010, I took their market capitalization and divided it by their number of in-house lawyers. At the median, those companies had about one-quarter billion dollars of market cap per lawyer (the average was $346 million).

The correlation between market value per lawyer and total legal spend as a percentage of revenue was a modest 0.39, which suggests softly that the higher the market values a company’s shares outstanding the more the company spends on internal and external legal costs. This finding belies my constant reference to economies of scale.

A negative correlation results between market cap per lawyer and lawyers per billion of revenue. That correlation was a very slight -.13: as market cap rises, in-house lawyer numbers decline a bit. Companies well regarded by the stock market do not scale up their lawyer ranks as their market cap swells – in fact, they need slightly fewer lawyers to support their increasing revenue.

A recent study presents data on the distribution of companies by industry in the Fortune 200. It is the Litigation Cost Survey of Major Companies, presented at the Searle Center on Law, Regulation, and Economic Growth, (Northwestern School of Law, May 10-11, 2010) at 7.

For this post, I organized those Fortune industries into 15 in decreasing order of their representation in that select group. Matched against my counterparts in the General Counsel Metrics survey, each “industry” has a parenthetical that tells the number of worldwide companies in it from the GCM survey and their percentage of the GCM total. Sometimes I combined industries from either the Fortune 200 list or my list. Admittedly the fits are approximate.

1. Industrial Goods & Services 12.5% (Aero/Defense 12 plus Manufacturing 132 17.7%)