Articles Posted in Benchmarks

Foolish me. Here I naively thought that excellent empirical data on what law firms charge for patent-related services would help inside IP lawyers. Wrong (See my post of Oct. 14, 2010: AIPLA’s historical data “gives legal departments an enormous advantage”.)!

Having singled out the AIPLA data I praised, the author of a piece in the ACC Docket, Oct. 2010 at 33 fulminates about its dark side. “From the client’s point of view, these statistics create a false floor for expense, because the price tag is based on what other firms have charged other clients.” The point, I believe, is that even lower charges can be had if the client isn’t hoodwinked by the “false floor” of the data. My point would be that a client doesn’t have to pay what the benchmark figures say, and clients are certainly much better off than negotiating in complete ignorance of market charges.

The scope of this topic extends far beyond this meager post, by any account. Still, having put together thoughts in various posts about how to squeeze insights from benchmark data it behooves me to assemble, them starting at my 5,000th post (See my post of Feb. 10, 2010: visual analytics; Feb. 17, 2010: cost per hour and lawyers per staff; April 2, 2010: skewness describes data; April 26, 2010: a formula to show similarity between departments; April 30, 2010: two-group mean-comparison; May 18, 2010: whether to segregate data from very small departments; May 24, 2010: normalize spend data for a country by its tort costs; June 13, 2010: stem and leaf display of data; June 16, 2010: correlations between inside and outside spending figures; July 28, 2010: currency effect and the Big Mac index; Aug. 16, 2010: Kolmogorov-Smirnov two-sample test for representativeness; Aug. 16, 2010: total factor productivity and technology; and Nov. 10, 2010: normalized assets and revenues.).

There is even a metaposts in the lot (See my post of Sept. 30, 2010: normalized figures with 14 references.).

Richard H. Weise, Representing the Corporate Client: Designs for Quality (Prentice Hall 1991), Chapter 3, describes a benchmark survey conducted in 1989 by Motorola. It gathered data from about 80 US companies. Quite interesting to me is its data on “Ratio of Total Legal Budget to Total Sales Amount.” One subset of law departments were very large — corporate revenue of $9 billion twenty years ago is likely to be more than $25 billion today. The figure given for those behemoths on 3-Ex-30 is 0.26 percent. The 63 companies participating so far in the General Counsel Metrics study that reported 2009 revenue of at least $20 billion have median total legal spending as a percentage of revenue of 0.22 percent.

In other words, during a tumultuous two decades, marked by enormous changes in laws and business practices, law departments tossed and turned and growing hugely in numbers of lawyers, globalization rampant and entire legal domains created (corporate social responsibility, environmental, employment discrimination, FCPA, to name a few), the share of company revenue consumed by legal services has barely budged.

Some fundamental benchmark ratios have stayed fairly stable for many years. Richard H. Weise, Representing the Corporate Client: Designs for Quality (Prentice Hall 1991), Chapter 3, describes a benchmark survey conducted in 1989 that gathered data from about 80 US companies. Roughly one-fifth of them had revenues greater than $9 billion and the same percentage had revenues of $100 million to $1 billion.

Twenty years ago, that survey by Motorola found the overall average ratio of paralegals to attorneys to be 0.20, one paralegal for every five attorneys (at 3-Ex-24). Two decades later, the median ratio from the 358 US law departments in the General Counsel Metrics survey was 0.29. Way back then, 75 percent of the lawyers in the participating companies reported solid line to the general counsel. Sixteen percent had a dotted authority line, two percent were dual reporting, and seven percent had no relationship to the general counsel. A similar distribution probably holds today. Consider lawyers per thousand employees (See my post of April 18, 2009: lawyers per 1,000 employees with 6 references.). Currently the ratio in the US is between 1.5 and 2.5; twenty years ago, the ratio was 1.365 in-house lawyers per thousand employees.

One other comparison. Weise’s survey found that inside spending accounted for 38 percent of the total legal budget and external spending for 62 percent. Nothing has changed! We still see the 40/60 split all the time (See my post of March 29, 2009: 40/60 ratio of inside-to-outside spend with 18 references.).

As I did with countries, so I analyzed 702 participants of 20 industries in the fourth release of General Counsel Metrics (See my post of Nov. 30, 2010: ranked 11 countries on four basic benchmarks.). On lawyers per billion dollars of revenue, legal staff per billion, internal spending as a percentage of revenue, and external spending as a percentage of revenue, I ranked all 20 industries by their median benchmarks. Each benchmark counted the same.

The most efficient, on this methodology, was the airline industry (14 companies) at a cumulative score of 7. The industry with the most participants, manufacturing (115 companies) fared well at 22. The industry with the highest cumulative ranking on the four benchmarks, at 74, were the 35 companies that make up “Business Services.” Overall, the rankings pretty well match our intuitive understanding of which industries face the most intense legal challenges.

If you would like to see all the industries ranked in a table, e-mail me at Rees(at)ReesMorrison(dot)com.

For this exercise, assume four benchmarks are key: lawyers per billion dollars of revenue, legal staff per billion, internal spending as a percentage of revenue, and external spending as a percentage of revenue. For each metric, I ranked all 48 countries that have participating law departments in the fourth release of General Counsel Metrics. Accordingly, the country whose median law department had the least lawyers per billion was ranked 1 for that metric; the country with the highest median ranked 48. I did the same for each country for each of the metrics. The total of the four ranks gave a cumulative country score that allowed me to sort and find the best and worst.

Number one, with a cumulative score of 62 (an average of a bit more than 15) was the Netherlands and its 32 departments. At the median was Belgium, with a cumulative score of 97 for its 13 companies. The USA trailed at number 7 with 106 (358 law departments) and Singapore’s 13 brought up the rear with 139. I could write pages about this first-ever effort to compare countries on their legal staff and spend, but I will defer.

My findings for this post focused on the 11 countries that had at least 10 departments. Together they have 590 departments, comprising 84% of the total benchmark group.

For this exercise, assume four benchmarks are key: lawyers per billion dollars of revenue, legal staff per billion, internal spending as a percentage of revenue, and external spending as a percentage of revenue. For each metric, I ranked all 48 countries that have participating law departments in the fourth release of General Counsel Metrics. Accordingly, the country whose median law department had the least lawyers per billion was ranked 1 for that metric; the country with the highest median ranked 48. I did the same for each country for each of the metrics. The total of the four ranks gave a cumulative country score that allowed me to sort and find the best and worst.

Number one, with a cumulative score of 62 (an average of a bit more than 15) was the Netherlands and its 32 departments. At the median was Belgium, with a cumulative score of 97 for its 13 companies. The USA trailed at number 7 with 106 (358 law departments) and Singapore’s 13 brought up the rear with 139. I could write pages about this first-ever effort to compare countries on their legal staff and spend, but I will defer.

My findings for this post focused on the 11 countries that had at least 10 departments. Together they have 590 departments, comprising 84% of the total benchmark group.

It probably happens all the time. Someone asks a lawyer for an estimate and the lawyer recalls a few instances but doesn’t look at any metrics. Say a client asks a lawyer to estimate the amount of damages or settlement the client might end up paying for a breach or some other legally aggressive action. The lawyer remembers the results of one or two high profile dispositions that resulted and gives an answer, but never looks at a broader set of data from a matter management system or another source of (See my post of March 13, 2006: verdict and settlement database; and April 23, 2006: metrics on claims that result in litigation.).

Decision researchers call this “base-rate neglect,” the tendency to slight statistical information from a large set of instances and to give excessive weight to memorable, case-specific information in making predictions. Statistical generalizations take time and effort to develop, but they avoid this fallacy of decision making based on selective information.

Two pieces in the most recent Economist made me aware of how much revenue many manufacturers bring in from their maintenance and support of their products. One article mentioned the leading elevator (lift) manufacturers: UTC’s Pratt & Whitney, Kone, a ThyssenKrupp division, and Schindler. They make elevators but they also keep them running and program them, which have become important and profitable services. Another article covered the famed Mittelstand of Germany. “Many of them get the bulk of their revenues from service rather than from products. Hako, which makes cleaning equipment, generates only 20% of its revenue from sales of its machines.”

The largest industry by far in my General Counsel Metrics global benchmark survey is manufacturing, with 116 participants. If there were data for many of them on the split between earnings from product as compared to services, we would understand legal staffing and spending more insightfully (See my post of March 2, 2010: industry benchmarks with 8 references.). Meanwhile the “industry” feels slippery.

If a metric is tracked and paid attention to, such as the number of cases closed during a quarter, you can be sure the litigation lawyers will figure out how to put themselves in the best light. Metrics are not Platonic essences, unchangeable, absolute, pristine. No, numbers are always spun or, worse, manipulated to the advantage of someone.

As a general counsel aware of number gaming, you might try these anti-gaming moves. Start with a clear definition of the thing to be counted: “a trademark clearance means X, Y and Z.”

Complementing definitions, request that the person who submits the number explain the methodology they used to arrive at them: “We looked at each bill of the XYZ firm paid during 2009 and added up the disbursements charged.”