Articles Posted in Benchmarks

An earlier post delved into patent filings as benchmarkable numbers that can lose reliability (See my post of Nov. 22, 2010: degradation of inflated patent metrics.). If a general counsel wants to compare performances, all comes undone if the basis for comparison collapses.

The point comes through even more clearly from an article in the NY Times, Jan. 2, 2011 at BU 3. China’s announced goal for annual patent filings by 2015 is two million, both utility and invention patents. The article suggests that invention patents, the only kind in the American system, might account for roughly half that ambitious number (See my post of Oct. 3, 2010: estimate of 300,000 applications in China in 2009.). Even so, that would be twice the number in the United States. During the US government’s fiscal year 2009, patent filings in the US totaled slightly more than 480,000. I do not know whether the patent filings in the US include everyone who files, or whether the Chinese goal covers only patents filed by Chinese inventors.

To boost the number of patents, China announced in a government policy document that it intends to roughly double its number of patent examiners by 2015, to 9,000. (The US has 6,300 examiners.). Further, the Chinese government will award cash bonuses, better housing for individual filers and tax breaks for prolific companies (See my post of Dec. 13, 2010: Chinese inventors eligible by law for compensation.).

Previous posts a month ago explained my ranking of eight countries and 20 industries by “legal intensity.” The ranking accumulated the relative standing of each country’s or industry’s median for four key metrics of staffing and spending (See my post of Nov. 30, 2010: USA in the middle of the pack; and Dec. 1, 2010: industry ranking.). The indices may be crude, a first attempt at a methodology, but they point toward substantial differences in the factors that drive headcount and budgets.

My next investigation will be to explore whether the relative number of participants in the General Counsel Metrics global benchmark survey – with 806 participants – correlates to legal intensity. It seems quite plausible to me that general counsel in countries or industries that are buffeted by more legal issues – as reflected in their personnel rolls and total legal expenditures – feel compelled to pay more attention to management benchmarks.

This year, with my burrowing into benchmark metrics for law departments, I have unearthed a number of clues to the total number of law departments around the world (See my post of Feb. 8, 2010: UK had approximately 130,000 lawyers; Commerce & Industry has 11,000 members; Feb. 16, 2010 #2: extrapolation from Belgian figures; Feb. 17, 2010: possibly 10,000 law departments in Europe; Feb. 19, 2010: some data on the number of in-house counsel; March 2, 2010: presumed even distribution of number of departments across industries after adjusting for size of industry; April 30, 2010: Bureau of Labor Statistics data; May 10, 2010: estimates based on GDP calculations; May 12, 2010: traded companies and tax returns; June 18, 2010: some numbers from the UK; Oct. 7, 2010 #1: US has 30,000 companies with 100+ employees; Oct. 14, 2010: 70,000 transnational companies in the world; Oct. 20, 2010: estimates based on lawyers per thousand employees; Oct. 22, 2010: state-level data; Oct. 31, 2010: ISO 9000 certificate awards; and Nov. 19, 2010: 45,000 publicly traded companies worldwide.).

Before the surge in 2010 I had accumulated a number of other references to the law department population of countries or the world (See my post of Sept. 25, 2005: ACCA estimate of 71,000 non-governmental in-house lawyers; Oct. 19, 2005 #2: in-house lawyers in China; April 13, 2006: estimates in the UK of 14.5% inside solicitors; Aug. 26, 2006 on large law departments in France; Dec. 3, 2006: possible Fortune 500 staff figures; Dec. 11, 2006: ratios in the State of New Jersey; May 13, 2007: mid-size companies in Europe with law departments; Feb. 9, 2008: 60% of legal departments in the US have fewer than 5 lawyers; Dec. 31, 2008: oblique data suggests about 21% in-house; March 9, 2009: ABA data and 8%; April 2, 2009 #2: data from 1961 to 1991; and June 15, 2009: almost one out of five lawyers in a large survey had gone in-house by their seventh year of practice.).

Here I will light two more dim candles in the dark. First, subscribers to legal department trade journals. Corp Counsel, Nov. 2009 stated in its Statement of Ownership that its average number of paid/and or requested subscriptions during the preceding 12 months was 25,919. A year later, in the Nov. 2010 issue at 94, the corresponding number had dropped about 5 percent to 24,627. Would those subscribers be 60-70 percent law department lawyers, like the readership of my blog?

The best known type of correlation is known as Pearson’s correlation, which tells how much one series of numbers varies as another series varies (See my post of Nov. 9, 2009 #3: varieties of correlation tests for various circumstances.). For example, a general counsel could calculate the correlation between months elapsed of lawsuits and total payments to law firms.

Another situation where correlations can be useful is if two or more people rank something and you want to assess the degree of correlation. For that, the Spearman correlation can treat the ordered data. As explained in Tony Cilly’s book, 50 mathematical ideas you really need to know (Quercus 2007) at 144, if several lawyers rank order a group of law firms that have submitted proposals, Spearman’s correlation coefficient describes the level of agreement among the lawyers.

Let’s say there are six lawyers and seven proposals. Each lawyer gives a 1 to the best proposal on down to a seven for the worst. Email me if you would like the formula. Meanwhile, I will walk you through it.

Three times I have referred to a statistical function called a Poisson distribution, yet I have never explained the actual computation (See my post of Jan. 20, 2006: one of many kinds of distributions of numbers; Aug. 16, 2006: predicts likelihood of event during a given time period; and June 15, 2009: relation to queuing theory.). Nor did I mention that it is important to understand that a Poisson distribution implies randomness in the underlying events.

Here is what I learned from StatTrek http://stattrek.com/Lesson2/Poisson.aspx. I will apply it to a hypothetical, EEOC charges filed against your company each quarter. Let’s say over the past few years on average the company has prevailed in 6 of them per quarter. Further, assume that dismissal of the charge is a success and anything else is not a success and that you want to know the likelihood that in the coming quarter you will succeed on 7 charges. (Perhaps your performance bonus depends on that?)

The forbidding equation for a Poisson distribution to calculate a probability is P(x; μ) = (e-μ) (μx) / x!. In the EEOC scenario described above you would read it as “The probability that exactly 7 charges are dismissed during the next quarter where the average has been 6 per quarter is equal to 2.71828 (e is the base of the natural logarithm system, and if that is unclear to you, ignore the explanation but use the approximate value, which is raised to the negative power of 6), multiplied by 6 raised to the 7th power (the average number of dismissals per quarter multiplied by itself seven times) divided by 7 factorial (7 times 6 times 5 times 4 times 3 times 2).

For lack of enough participants, small benchmark surveys can only produce data by broad industries: manufacturing, healthcare, technology, etc. With hundreds or thousands of participants, like the benchmark survey of General Counsel Metrics, the more valuable analysis will go deeper than industries, to what are often called sectors.

For example, within the extremely wide industry called “technology” there exist sectors of biotechnology, communications, consumer electronics, computer systems, e-commerce, medical devices, semiconductors, and software. SIC codes would detail the competitive niche even more finely but many people who complete surveys do not know those codes. Sector analysis will let general counsel see how they match again closer comparables (See my post of March 2, 2010: industry benchmarks with 8 references.).

A survey of law departments in the technology industry last year reported revenue supported by each dollar of legal spend. The report provided averages and medians for that figure by three categories of corporate revenue. For companies with less than $100 million of revenues, the average ratio was $33 and the median was $38; for $100-999 million the average was $74 and the median was $56; while for companies with more than a billion dollars of revenue, the average was one dollar of legal spend supporting $342 or revenue with a median of $111.

Turned around to the more familiar benchmark metric of total legal spend expressed as a percentage of revenue, the median figures from this technology group were 2.63 percent for the sub-$100 million companies, 1.78 percent for companies larger than that up to $1 billion; and 0.90 percent above $1 billion.

As these figures show, this industry ranks near or at the top in terms of its legal intensity, primarily because of the pivotal role and expense of intellectual property. As always, too, increasing revenue size correlates with decreasing legal expenditures as a portion of that revenue.

Robert McNamara, a man criticized for worshipping numbers, spoke at a college commencement about the limits and powers of quantification. “To argue that some phenomena transcend precise measurement – which is true enough – is no excuse for neglecting the arduous task of carefully analyzing what can be measured.” The McNamara quote comes from the Harvard Bus. Rev., Dec. 2010 at 91.

Quality, risk avoided, judgment, alignment with client, and other foundational aspects of a good law department elude precise measurement, we all can agree. That agreed, some elements of law department operations do produce sufficiently solid and reasonably insightful metrics. General counsel know staff, spending, clients, technology, and structure numbers, to name a but a few. These countable inputs, outputs or activities tell us something useful about better or worse management. We “know” numbers about many phenomenon if by the term “know” we mean we can usefully count, compare, and analyze them over time or against other law departments’ equivalent numbers.

Morrison on Metrics, my column published on Dec. 20, 2010, covers a set of descriptive metrics that are less frequently developed in benchmark reports: inter-quartile ranges, modes, and ranges. To many general counsel this topic may bring back uncomfortable memories of high school statistics, but to others, these indicators of dispersion in and between sets of numbers provide insights.

To read the full column with its examples on descriptive metrics, follow this URL to the InsideCounsel column.

The final release of the General Counsel Metrics global benchmark survey will have more than 810 participants. The 105 or so new participants since the last release report a total of 1,920 lawyers, 260 paralegals, and 450 other staff. Inside plus outside legal spending for the new participants in the largest benchmark survey – four times the size of the next largest – exceed $680 million and the combined additional revenue amounts to $280 billion.

If your law department submitted 2009 fiscal year data for another benchmark survey, or even if benchmarking is new for you, it is very easy to obtain the full report from General Counsel Metrics. Follow the link by double clicking here and fill in the easily-available information on your staffing and spending.