Articles Posted in Benchmarks

The hard fact is that if a general counsel wants to materially dent the internal budget, you have to fire people. Upwards of 80 percent of that budget falls to compensation, benefits, and people-related overhead. To cut you must terminate. My latest column for InsideCounsel Exclusives probes this connection between metrics and management.

A press release by Thomson Reuters Hildebrandt BakerRobbins about its benchmark findings touts the first-ever decline in year over year total legal spending. In its words, “The 2010 survey showed a decrease in total legal spending – by 1 percent in the U.S. and by 2 percent worldwide – between 2008 and 2009. Over the previous nine survey years, total legal spending in the U.S. had increased by an average of 7 percent, with a range of 5 to 9 percent.” I have previously pointed out that the economic slump was a more likely cause of the dip than improved management (See my post of Oct. 21, 2010: it’s the economy, stupid.).

Based on figures from strategy+bus., Winter 2010 at 54, my point can be made even more forcefully. Among the 1,000 global companies that spent the most on R&D, their revenue plunged 11 percent from 2008 to 2009. This set of companies includes the largest companies in the world so its fortunes probably match the fortunes of the hundred or so companies in the Hildebrandt report. If corporate revenue dropped something like 10 percent but total legal spending only dropped two percent, then spending as a percentage of revenue actually climbed dramatically!

More specifically, but to the same point, the article adds that sales, general, and administrative expenses (SG&A) for the huge set of companies fell 5.4 percent. Legal spend falls into SG&A so, again, general counsel not only fought the currents of reduction but more than held their own.

National wealth and solid legal systems support each other, which also justifies management-savvy law departments. Or that is my take-away from a chart in strategy+bus., Winter 2010 at 17. The chart shows manufacturing as a percent of GDP for close to 100 countries. The “innovation-driven nations,” those 36 with per capita income over $17,000, account for a large share of the participant companies in my benchmark survey. Among that wealthy group, where manufacturing accounts for 10-20% of GDP, are the US (358 participants), Canada (60), UK (46), Netherlands (32), Australia (16), and Belgium (13). For two countries, manufacturing looms even larger: Germany (18 participants) and Singapore (15). The only country in this top nine of benchmark survey participants by number that has lower per capita income is the Russian Federation, with 15 participants.

In sum, these 573 participants (80% of the total 702) are headquartered almost completely in the wealthiest countries of the world. Their countries also have similar profiles in terms of the economic importance of manufacturing. Law departments depend on and help create national wealth. As to manufacturers in the General Counsel Metrics set, 16% (116) are manufacturers, which means my proportion fairly closely matches manufacturing’s proportion of GDP.

A patent is a patent is a patent. We wish, Gertrude.

It is comforting to assume that the building blocks of benchmarks, among others lawyers, paralegals, lawsuits, patents, have fairly consistent meanings among general counsel and around the world. For the most part, the operational definitions of these key quantities hold up well although they and other key terms have their soft spots (See my post of Sept. 22, 2009: difficulties with definition of “lawyer”; Feb. 10, 20010: variable definition of “paralegal”; March 26, 2008: “matter”; and May 16, 2006: “in-house chargeable hours”.). The coins are not shaved.

Turns out, we can’t trust some patent figures. The Economist, Nov. 13, 2010, at 96, notes that between 2003 and 2009 Chinese patent filings grew by 26% — far faster than in any other country. The article then bursts anyone’s bubble about the quantity and quality of Chinese patents. “Bureaucrats in Chinese patent offices are paid more if they approve more. As a result there is a mountain of Chinese patents of dubious quality.” That inflation of output cheapens quality and throws off benchmarks based on patents if Chinese companies’ figures are included.

The companies listed on the United States’ major stock exchanges number 4,048. Quite plausibly, each of them has at least one in-house lawyer, if only to deal with Sarbanes-Oxley, SEC filings, and exchange requirements. If I had data on the proportion of US companies over a given revenue or number of employees that are publicly traded, I could go farther in my estimates of the number of law departments in US companies.

In addition, reports the NY Times, Nov. 18, 2010, at B6, Chinese stock exchanges cover 3,019 companies. For both facts, the Times cites the World Federation of Exchanges. The WFE website, which draws on 52 exchanges, displays the total number of companies listed as 10,315 for the Americas; 20,954 for Asia/Pacific; and 13,790 for EMEA – a total of 45,059 traded companies (many may be listed on more than one exchange). Doesn’t that conservatively suggest at least 40,000 legal departments in the world?

For years I have blithely divided legal spend by company revenue and thought that did the right normalization. Then I read an academic’s research paper that divided a metric by “the average of normalized sales and assets.” Good grief!

A normalized number has been transformed into distances from the mid-point of a presumed bell curve (See my post of Sept. 30, 2010: normalized figures with 14 references.). That much I understand and use.

What threw me a curve was the combination of sales and assets. Perhaps that aggregate denominator makes more sense as a broader measure of company size. What do assets drive in terms of legal demands or complexity? Since I do not know, I will have to explore this new benchmark foundation with the 800+ law departments in the General Counsel Metrics survey.

The fourth release will go out this weekend. It clearly and comprehensively displays aggregate data from 702 law departments. Their companies are based in 46 countries – 51% US – and employ in total more than 20,000 lawyers. The 25 benchmark metrics come broken down by 19 of the countries, 20 industries, and 10 of 13 regions. The respondents spent a total of $6.9 billion inside, $11.9 billion outside and supported a mind-boggling $5 trillion in corporate revenue.

The final release will issue in late December and looks to have more than 800 law departments. If you want to submit your end-of-2009 staff counts and your internal and external legal spend for 2009 – all the five-minute survey asks for – click here or on the upper right notice on this blog site. If you would like to review a sampler, write or call me.

Some practice areas produce more metrics than others, with the counseling side of life being the most metrically-challenged. Litigation teems with numbers while those who primarily give legal guidance scramble for any metrics. I grappled with this imbalance in my most recent column for InsideCounsel. The torches of metrics shine into the darkness only so far.

Several years ago, an article in the Admin. Sciences Quarterly, June 2002 at 219, explored the diffusion of ISO 9000 Certificates throughout the world. What caught my eye was a chart that showed 34 countries and the amazing number of such Certificates in them as of the end of 1998: 271,847. In the lead were the UK with 58,963; the US had 24,987; Germany 24,055; Italy 19,095; and France and Australia had a few more than 14,000 each.

Given the investment of time and money required to obtain ISO certification, it seems plausible to me that many of the firms that obtained certificates would have at least one in-house lawyer. What I could not determine from the article is whether a company might obtain more than one ISO 9000 Certificate. Either way, we have another data point for estimating the number of legal departments worldwide.

With more than 700 participants in the General Counsel Metrics global benchmark survey of law departments, it’s bizarre that only five of them are from procurement or sourcing departments (See my post of May 26, 2010: notes early lack of procurement participation.). I had thought early on that many more procurement professionals would want to be able to compare the spending of their legal department to medians and quartiles of other companies in the same industry.

It isn’t as if I have not tried to attract procurement managers. Posts on a much-visited blog (Spend Matters), comments on two large LinkedIn groups, and emails to hundreds of procurement executives have yielded miniscule interest.

Maybe those who oversee corporate purchasing do not have access to data about legal spending. But that should motivate them even more to try to obtain or estimate it and learn the 25 benchmarks that are in the report. Perhaps they are deterred by the consequences of an angry general counsel accusing them of skullduggery and improper behavior? But then the general counsel should submit the requisite data and share the results. It may be that the law department’s expenditures have always been a tough nut to crack, so why bother. Or perhaps the company’s culture rejects metrics for management. More’s the pity.