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Each year the Economist uses the cost of a Big Mac in various countries to compare the official exchange rate to that cost. The magazine uses a standard Big Mac in the US ($3.73) as the index and ranks countries according to whether the same order costs above or below that amount. If the price is above, the currency is deemed over-valued by the calculated percentage. For example, what someone pays in Euros for the ubiquitous hamburger is equivalent to $4.33, so the Euro is overvalued by 16 percent. By the same methodology Asian currencies are generally undervalued. All this is laid out in the Economist, July 24, 2010, at 72.

To the extent the Euro is overvalued, law departments that convert their 2009 spend and revenue into dollars for benchmark purposes over-state those figures (See my post of July 7, 2010: regional gap on total legal spend as a percentage of revenue.). Spending metrics that use revenue as a denominator to internal or external spending will not be affected by the imputed conversion rate (since the numerator and denominator are equally affected), but metrics like internal spend per lawyer in US dollars will look higher if the currency is over-valued.

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The September release of the General Counsel Metrics benchmark survey will have more than 600 law departments in it. No wonder, since there are at least a dozen good reasons to submit your department’s data:

  1. Find out how you compare against peers by industry, country, revenue and number-of-lawyers
  2. Speak the language of CFOs and CEOs: metrics
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Many relationships between metrics are not linear – there is not constant change in one in step with changes in another. In addition, to note a few, there are exponential functions, power-law functions, and U-shaped functions. As an example of a U-function, law departments with few lawyers per billion probably have high total legal spending as a percentage of revenue (the top left of the U) but that as departments bulk up internally their spending ratio declines (slides down the U). At some point, however, with more and more internal lawyers per unit of revenue, efficiency lags and the spending ratio starts to climb (back up to the top of the other side of the U shape). Whew! A graph is worth a thousand words.

As it turns out, I have often referred to linear functions, but never to those that are curvilinear (See my post of March 10, 2005: patent litigation costs may rise linearly, but certainly not exponentially; Dec. 22, 2005: M&A staffing does not change linearly; Nov. 20, 2006: linear decrease in spending ratios with increasing departmental size; Jan. 3, 2007: linear compared to exponential; Dec. 26, 2007: people demands rise faster than linearly as departments grow in size; Aug. 4, 2008: client satisfaction scores are nonlinear; Feb. 24, 2009: power law distributions on a log-log scale are linear; May 6, 2009: costs do not rise linearly as a case nears trial; June 14, 2009: staff does not grow linearly, but as a step function; Aug. 25, 2009 #4: legal departments as complex, nonlinear, adaptive systems; and Dec. 30, 2009: the longer the litigation, the higher the fees – but not a linear function.).

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If your legal department has scores of lawyers and your company bestrides the commercial world like a colossus – you are on some Fortune list – you find comparable benchmarks hard to find. So, it might pique your interest to learn that the General Counsel Metrics global benchmark, release two, has at least 44 of the Fortune Global 500.

At the other end of the scale, the same release (sent out this week) has in it 126 companies with revenue that ranges from nothing (some not-for-profits) to $180 million. The revenue range covered by the 501 departments in this second release is enormous. And that’s the large and the small of it.

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This blogger has questioned extranets offered by law firms for their clients on the grounds that law department staff do not want to learn many different systems (See my post of April 8, 2008: extranets with 13 references.). But that view may be misguided. Few law departments have enough uses for an extranet to run one well and require multiple outside firms to learn it. For that reason, law firms provide extranets. Provide them, indeed!

According to KMWorld, July/Aug. 2010 at 14, technology-savvy Fenwick & West deploys SharePoint extranets prodigiously. “It hosts 15,000 to 20,000 client-based extranets.” The mind boggles. If that many clients – not all of them have legal departments I have to assume and perhaps there are many extranets for some clients – make use of a single law firm’s extranets, I have to rethink my position. As part of that rethink, I wish I understood the astonishing number of extranets claimed.

Since the last metapost I have added more commentary on extranets (See my post of Aug. 15, 2008: ranking of extranets supplied by law firms; Jan. 21, 2009: e-rooms are cousins of extranets; Oct. 21, 2009: an extranet that goes beyond what a matter management system typically shows; Aug. 20, 2009: Baker Botts extranet for patents; Sept. 22, 2009: Belgian Post’s client extranet; Oct. 21, 2009: Malleson’s extranet for major clients; and Jan. 21, 2010: UK group of law departments share an extranet.).

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One of the speakers at the SuperConference was from Motorola’s law department. She described the structure of the department, which has two unusual features. Overall, there are four clusters of lawyers dedicated to business units, with regional lawyers reporting up to the heads of them. What is unusual is In the seven practice areas, one of which is Ethics and Compliance. It is the first time I have seen a legal department have an officially named, joint Ethics & Compliance group and the head of it a reports directly to the general counsel. (See my post of Dec. 31, 2006: ethics and compliance reports to general counsel of Raytheon; Dec. 22, 2005: law department relationship to ethics and compliance heads; and April 15, 2007: compliance/ethics officers and reporting lines.).

Also unusual is that one of the Motorola practice areas is Licensing. Unlike in most legal departments the licensing function does not fall under Intellectual Property, a separate practice area at Motorola (See my post of Dec. 31, 2007: intellectual property licensing with 12 references.).

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One of the speakers at the SuperConference was the general counsel of LG Electronics (US), a $6 billion dollar manufacturer that has only five in-house lawyers. Among their efforts to cope with the flood of work was to set clear boundaries between purchase orders (POs) and contracts. The speaker said that the legal department reviewed approximately 1,200 contracts in 2009, so this was no trivial exercise. POs stay with clients; contracts require some legal time.

It is a good example of a law department that (1) sets its boundaries, (2) helps clients proceed on their own much of the time, (3) tracks metrics, and (4) focuses on the highest legal risks (See my post of Dec. 2, 2007: purchase orders.).

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Data from the 500-plus legal departments in General Counsel Metrics benchmark survey highlights how the costs of legal services swing widely in different parts of the world. One example is the subject of my latest Morrison on Metrics column for InsideCounsel: total legal spending – inside budget plus fees paid external counsel – expressed as a percentage of revenue.

I compared 201 legal departments whose companies are from the United States to 72 legal departments based in western continental Europe. On total legal spending (TLS) as a percentage of revenue, the US was twice as high (See my post of May 24, 2010: normalize spend data for a country by its tort costs.). See the column for a discussion of reasons and consequences of this huge difference.

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Will you take a few minutes to complete the General Counsel Metrics survey? Will you take another minute and email this post to a general counsel you know who might welcome benchmarking data?

Since the release of the first benchmark report on May 31st with its 453 legal departments, another 50 or so have joined. They swelled the ranks of in-house lawyers covered in the upcoming July 15th release from 12,000 to more than 15,000 (an increase of 25%) and the total revenue of companies by an astonishing $350 billion (about 15%)!

The July release will include for the first time regional analyses so that for all 25 benchmark metrics you can compare yourself to departments in eight regions. The report has also added tables with quartile data and made several other other improvements. There is still no charge for the 65-page report.

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The question posed by the header has some easy answers. Much truth lies in the commonplace notion that you can manage something better if you have numbers to back you up. If you know what your average effective rate is for your law firms, you have a full step advantage over a lawyer who doesn’t know cost differences.

Second, in the world of law department management, maps show dragonlike creatures in the far corners. Much is subjective, anecdotal folklore. Until we understand whether leverage in a department, or any number of other practices, actually brings down total legal costs – and by how much – we are sailing blindly.

Third, I have been engrossed for more than a year in the world’s largest benchmarking study of legal departments. It has been fascinating to create and nurture this capability and to push it so that our industry can understand its metrics better. As my thoughts rarely stray from General Counsel Metrics, LLC, .my blog posts reflect points that interest me. Sixteen of the 120 fell into this category.

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