Articles Posted in Benchmarks

ALM Legal Intelligence obtained 2009 data from 116 law departments. Findings from that survey appear in Corp. Counsel, Dec. 2010 at 85, including total law department fees/expenses (inside and outside) per lawyer. Each of five columns represents a group of participating law departments with different numbers of lawyers. For example, 2-to-3 lawyers was $623,634, the lowest figure; 4-to-10 lawyers was the highest at $901,065. For departments with a single lawyer, 11-25 lawyers, or more than 26 lawyers, the total legal spend per lawyer was around $700,000.

These benchmark findings surprise me as too low. We are not told how many departments fell into each size category, but nearly all the participants are US law departments so I compared the same benchmark metric from my General Counsel Metrics survey. GCM has 358 participants from the USA, of which at least 22 took part in the ALM survey. Yet, total legal spending per lawyer was much higher than the ALM figures. My figure is $914,290. I do not understand the huge gap, on the order of $200,000 per lawyer or 30 percent higher, between the two surveys.

Infographics specialists focus on how to present information visually and effectively. The images used, the headlines written, the fonts chosen and arrangements designed, these combine with narrative to help people absorb what is most compelling about a set of numbers. To admire a slew of examples, visit Randy Krum’s blog, Cool Infographics, or marvel at the books of Edward Tufte.

Going beyond dashboards that tend to fall into rigid patterns of dials, traditional formats, and compression of data, an infographic applies insights from cognitive research and visual design to interest and educate viewers. I have tried my hand at an infographic that describes – what else? – the 700+ participants in the General Counsel Metrics benchmark survey.

Wired, Jan. 2011 at 92, describes a stock trader who identified seven key factors, such as revenue and earnings growth, most predictive of a stock’s performance. He then used a publicly available program from UC Berkeley called the differential evolution optimizer to wade through huge amounts of data on these factors about the best performing stocks at a given time. The program looked at historical data to see how well the weights it was testing predicted the stock’s actual performance. The program kept picking stocks, checking weightings, and testing predictions until it had generated thousands of such weightings. From that set the analyst selected the 10 best-performing weightings.

“The optimizer then mated those weightings – combining them to create 100 or so offspring weightings.” It kept at that process of mating and testing, mating and testing for dozens of iterations until the analyst had a set of weightings to screen stocks.

This approach and software might eventually sort out which law department benchmarks tell us the most about good performance. At some point, if we take lower-than-normal total legal spending as a share of revenue as the measure of good performance (analogous to share price appreciation), with data over a period of years and within an industry or even narrower sector, it sounds like this software could churn through and weight the various benchmark metrics in regard to how well they predict total legal spend.

One venerable source for benchmarks about the in-house legal community started years ago at PriceWaterhouseCoopers and made its way about six years back to what is now Thomson Reuters HildebrandtBakerRobbins. I have commented on results from that series, including particularly its compensation and personnel data (See my post of Nov. 6, 2007: incentive compensation; March 13, 2008: compensation data; March 16, 2008 #3: proportion of women in-house lawyers; April 24, 2009: compensation figures and Dec. 17, 2009: temps and contract lawyers.).

Other points I have extracted from the Hildebrandt benchmark survey vary widely (See my post of Dec. 5, 2007: data comparisons over 14 years; March 1, 2008: median total legal spending; Sept. 3, 2008: reporting lines of general counsel; April 13, 2009: matters and law firms retained; Dec. 3, 2009: cost control findings; Dec. 7, 2009: putative data on cost control efforts; Dec. 17, 2009: trivial cost control efforts; July 1, 2010: internal and external costs per hour; Oct. 20, 2010: 10% increase in participants; and Oct. 21, 2010: proclaimed drop in legal spending.).

Data from the General Counsel Metrics (GCM) global benchmark survey, with more than 700 law departments and still collecting data, gives a much more nuanced view of total legal spending.

The 63 participating companies with 2009 revenue of at least $20 billion had median total legal spending as a percentage of revenue of 0.22 percent. The 62 departments with revenue less than $20 billion but more than $10 billion had a median of 0.31 percent, while the 56 below $10 billion but greater than $4.16 billion (the smallest Fortune 500 company) had a median of 0.30 percent.

Overall for these giant companies, median total legal spending – inside spend plus external counsel spend – was 0.29 percent. That figure is much smaller than the 0.40 percent touted by the Thomson HildebrandtBaker Robbins survey – admittedly much smaller than General Counsel Metrics’– because larger companies exhibit economies of scale in terms of legal expenditures.

Historical benchmark figures catch my eye, and so did an Of Counsel, Feb. 17, 1997 at 2, article. It cites the 1997 Law Department Functions and Expenditures Survey, co-published by ACC’s predecessor and Altman Weil Pensa. Since then, ACC has teamed with Empsight for benchmark and compensation data and Altman Weil sold its benchmark study a few years ago to American Lawyer Media (ALM).

In any event, the survey gathered 1996 data from 189 law departments. Outside lawyers cost on average $376,162 per inside lawyer; internal departmental spend was $268,280 per lawyer, which spend included both salary and operating costs. Thirteen years later, data from General Counsel Metrics for 358 US legal departments showed 2009 outside spend per lawyer rose 40 percent, to $500,000 (a median figure but given the large number of participants, the median and the average are probably close). The median inside costs per lawyer climbed to $346,000, closer to a 30 percent increase. Inflation alone would account for much of the nominal difference in both figures.

Once conclusion, to no one’s surprise, is that external costs have risen faster than internal costs over the past decade or so.

Was there a drop in corporate spending on internal legal departments and outside counsel during 2009? Folks at Thomson Reuters HildebrandtBakerRobbins think so and credit general counsel’s management nous (See my post of Oct. 21, 2010: median total legal spending dropped due to management discipline.). I disagreed with the reason attributed to the drop, and later offered data that suggests legal spending in fact rose as a percentage of revenue (See my post of Nov. 23, 2010: using data from R&D spending and G&A at large companies.).

Now, another blow to the “astute management” theory. “The average percentage of company revenues spent on outside counsel was .33% in 2009, comparable to the past two years (.32% in 2008 and .35% in 2007), and in line with prior years.” The ratio rose in 2009. That finding comes from the 2010 ACC/Serengeti Managing Outside Counsel Survey. Someone facile with figures could point out that if company revenues dropped in 2009, legal spending would also have dropped, but my point is that absolute dollars are not the measure, but dollars as a share of company revenue.

Counter-intuitively, it may be that US law departments staffed around the world spend less on internal and external costs, in terms of revenue, than geographically centralized departments. The fundamental reason could be that the revenue their companies enjoy from operations in foreign countries outstrips what is made by US-bound companies. The ratio of that larger revenue, therefore, devoted to legal expenses falls.

Another reason could be that lawyers cost less per hour in non-US locations, so the general counsel gets more legal punch for the pennies than does a US-staffed general counsel. Labor cost arbitrage works its magic. Third, litigation expenses tower in the United States but are much lower elsewhere so the litigation tax on doing business falls across the borders.

Possibly, too, those companies that can handle significant international trade and do business around the world have generally learned to manage better than US-only companies. Global companies are larger, more mature, and settled in their procedures. The honed talent and systems carries through to fewer legal messes and costs. It may also be that the differing regulations and legal systems of the 50 States of America challenge companies as much or more than counterpart laws in countries.

As an avid benchmarker and advocate of measurement, I still thought it fair to discuss the gaming of numbers. Once a general counsel announces that something has to be counted, those who count will figure out how to count most advantageously. Thumbs go on the scale or under the scale. General counsel should carefully define important metrics to guard against “creative” counting.

My InsideCounsel column, published on Dec. 6, 2010, delves into metrics and manipulation, all of which is available by clicking where indicated.