Articles Posted in Benchmarks

To find out whether lawyers per thousand employees makes any difference in total legal spending. I took data from 39 US and Canadian manufacturing companies that participated in the General Counsel Metrics benchmark survey last year. For each I calculated the number of lawyers they had per thousand employees – a median of exactly one. Thus, a manufacturer with 1,000 employees if typical for this group had one in-house lawyer. The average stood higher, at 2.4 lawyers per 1,000 employees.

Then I calculated total legal spend as a percentage of revenue. The median for the group was 0.41% while the average was 0.52%.

The correlation between the two metrics was very slightly negative at -.04, which suggest very slightly but not very reliably that the more lawyers as a percentage of employees the less the company spends on legal. In-sourcing makes economic sense.

The Litigation Cost Survey of Major Companies, presented at the Searle Center on Law, Regulation, and Economic Growth, (Northwestern Univ. School of Law, May 10-11, 2010), can tutor all of us who do surveys of law departments. Several of the steps it took conform to what I believe are solid methodologies for surveys.

They drew on survey expertise. “AustinTrends, a consulting firm specializing in survey administration, assisted in the design of the online survey instrument and administration of the survey.”

They tested the survey before they unleashed it. “The survey was beta tested with four companies that provided feedback on potential ambiguity in questions and likely availability of data, as well as potential unanticipated barriers or excessive costs that might be incurred in attempting to respond to the survey.”

Normal bell-curve distributions of data produce a skewness statistic – the left or right spread of the data – of about zero. The more skewness is positive the more the data bunches toward the low end of the range, the more negative if it bunches at the higher end. Values of two standard errors of skewness (ses) or more are skewed significantly.

The standard error can be estimated roughly using the square root of 6 divided by the number of data points. I tested this by the distribution of law departments in the General Counsel Metrics benchmark survey by number of lawyers. The standard error of skewness is therefore the square root of six divided by 813 – the number of law departments. Since two times the standard error of skewness (0.085907356 as calculated by Excel) is 0.17, the survey’s distribution of lawyers is significantly skewed. Being positive at 5.95, it means lots of departments are at the small end, which is true.

Now shift visually from left-or-right spread to kurtosis, which describes up-and-down, squashed or stretched bell shapes. Normal distributions produce a kurtosis statistic of about zero. A positive value indicates a leptokurtic distribution (taller than normal), the opposite of a platykurtic distribution (flatter). Values of two standard errors of kurtosis (sek) or more differ from mesokurtic – normal appearance – to a significant degree.

A report entitled the Litigation Cost Survey of Major Companies, presented at the Searle Center on Law, Regulation, and Economic Growth, (Northwestern Univ. School of Law, May 10-11, 2010) at 7, gives data on expenses of about 48 major law departments. The report includes a graph that shows “Average US In-house Costs” during the nine years 2000 to 2008. With almost no fluctuations, the average stayed near $17.9 million.

It just doesn’t seem plausible that for nine years, years with likely growth in departmental headcount for these large departments, years with compensation rising with the cost of living, years with global dispersion of lawyers and often to expensive locations, years with technology investments, years of stock price appreciation and therefore the value of equity grants soaring, that the inside spend amounts would remain flat.

A footnote to the graph adds a possible statistical explanation: “To account for the unbalanced nature of the response rate over time, a regression with a time trend and company fixed-effects was run.” I think that means because the respondents did not all provide expense information for each year, the analysts “filled in” the missing data by these techniques and adjustments. Perhaps a bit of the anomalous finding is owed to statistical smoothing.

Mathematics does so much, yet on this blog the total number of actual equations cited has so far only reached eight. Since we all count on equations for insights with metrics, I have collected them.

Here is the list of my blog posts with equations (See my post of Nov. 26, 2006: compound annual growth rate, CAGR = (ending amount / beginning amount) (1 / # of years) – 1; Oct. 31, 2007: margin of error, n = 2 * z2 and D2; June 16, 2007: Bayesian statistics, p(sΙ+) = p(+׀s) X p(s)/ p(+); Feb. 7, 2008: margin of error of a group, yl√n = 4xl√16 = x; Feb. 9, 2010 #4: linear trend lines, e.g., y = 0.2703x – 10363; Oct. 29, 2009: evenness of distributions, 1-[Σ(1/n-Si)2 ]*n/(n-1); Nov. 17, 2010: signal to noise ratio, S/N = 20 log10(Vs/Vn); and Dec. 28, 2010: Poisson distribution, P(x; μ) = (e-μ) (μx) / x.). On the mid-term you will be tested on these!

I have been thinking about indices, by which term I mean collections of metrics that combine to form a single measure. Everyone knows the Consumer Price Index: the aggregated and weighted prices of a basket of common goods and services (See my post of Sept. 10, 2005: indices generally; Nov. 22, 2006: two meanings of index: a combination of factors or a normalizing technique; and Jan. 11, 2011: synthetic and natural indices as benchmark tool.). This blog is littered with posts about various indices other than references to the CPI, so I collected them.

Several concern talent in legal departments (See my post of April 3, 2005: energy and engagement of employees; April 16, 2007: talent; April 16, 2009: Corporate Equality Index; and Oct. 19, 2009: collegiality and camaraderie in a legal department.).

Others discuss indices related to what in-house lawyers practice (See my post of Aug. 14, 2005: trademarks; Sept. 10, 2005: overall law department performance; Aug. 27, 2005: complexity; May 16, 2007: changes in practice areas; June 25, 2007: contract complexity; and Feb. 2, 2010: prose readability.).

Of the first 70 participants in this year’s General Counsel Metrics benchmark survey, which opened in late January, slightly more than half of them are return respondents from last year. That means the others are new to the world’s largest benchmark study.

I like to think that word is spreading about the ease of the survey, the quickness with which you get your report, and the tremendous depth of industry comparisons. Then too, it costs nothing. If GCM can sustain that ratio during the year of old to new participants, the full set will easily exceed 1,000 legal departments.

Submit your data before the end of March and, as a bonus, receive the first release of the report in early May, my Analysis Report for 2010, a comparison of 2009 to 2010 data, and a significant discount on custom reports. Click here to take the GCM benchmark study.

“As the cost of outside counsel has risen, businesses have brought an increasing amount of work in-house.” With that declaration, Mark Roellig, the General Counsel of Massachusetts Mutual Life Insurance Company, kicks off a thoughtful article in the Am. Lawyer, Jan. 2011 at 39. The article makes excellent points even if is start is perhaps more rhetorical than empirical.

If benchmark metrics from a similar set of law departments shows that the long-standing ratio of 40 percent inside and 60 percent outside legal spend has shifted significantly toward inside, then we have evidence of work migrating in-house.

There is no published data on same-company changes in internal spending as a percentage of revenue, but one survey does show that for about 150 law departments the median did not change at all from 2008 to 2009; it increased barely one percent from 2009 to 2010. Even if the companies were similar year over year in that benchmark study – which they were not because of significant turnover – the increase of a percent hardly supports Roellig’s broad claim.

A general formula for calculating heterogeneity in a group is 1-Σi2 where i is the proportion of members in the ith category. What does that mean in English? Let’s apply it to law firms retained by a department.

Let’s say a law department retained a group of 100 law firms in 2010 and for this calculation placed each firm in one of five size categories according to its number of lawyers. A category might be law firms of 1-5 lawyers, 6-15 lawyers, 16-30 lawyers, 31-99, and 100+ lawyers. It would be easy to calculate the percentage of all the 100 firms in each category. If the department retained 6 percent of its firms that were in the smallest, first category, the formula would include 6 percent squared (.0036). The next smallest category of firms (6-15 lawyers) might have, say, 7 percent so the sum would include .07 squared (.0049). You keep adding the squared percentage for each category until done, which is the meaning of the Greek letter sigma (Σ), and then subtract the total of all those category-percentages squared from 1.

If all the rest of the firms used by this department were in the fifth, largest category of firm size, there would be 87 percent in that category. Squared, 87 percent equals .7568 so the sum for each of the three categories is .765 and the difference between that sum and 1 is .235.

Don’t congratulate yourself and stop once you have gathered and confirmed the total amount your law department spends. Stopping there is a risk, as Ron Pol sees it, because “measuring total legal costs reinforces perceiving legal as a cost-center drain on resources.” He points this out in ACC Docket, Dec. 2010 at 20. Better to state legal costs as a percentage of corporate revenue, “a more strategic viewpoint [that] links legal directly with core organizational goals.”

Pol is right. Costs of support groups tax the bottom line, so a good strategy for a company is to moderate those costs, including legal costs, while still attentive to quality and coverage. A general counsel who thinks in terms of legal costs expressed as the share of revenue devoted to them will be closer to the client’s strategic heart beat.