Articles Posted in Benchmarks

Of the 455 legal departments in the first release of the General Counsel Metrics LLC study, 41 are based in France, Germany, Italy, or the United Kingdom. The total internal plus external legal expenses reported by those companies divided by their reported revenue equals 0.49 percent. If we arrange each company’s calculation of total legal spending as a percentage of revenue and sort them from high to low, the middle metric, the median, is much less, at 0.30 percent. Clearly, some large companies have much higher ratios than the overall mix.

Of the four countries, the lowest medians are for Germany and Italy and they are quite close to each other. On the other end of the scale, the median figures for the French and UK participants are also quite close to each other but are more than twice as high as the figures for Germany and Italy. More on this topic appears in the most recent issue of the European GC. Click here to read.

Until the study accumulates more law departments from those countries – and other countries for additional comparisons – we can’t draw definitive conclusions about why legal costs differ so markedly among the four countries. With the data refined, we can start to dig into what might account for the differences.

It would not surprise me that for many US companies, revenue plummeted during 2009 at a faster rate than total legal spending. Customers can decide not to buy faster than general counsel can terminate staff or reduce outside counsel spend. It true, the leading benchmark metric, total legal spend as a percentage of revenue, might have ticked up or jumped during 2009.

To illustrate, if a $4 billion company’s revenue fell 25 percent but its legal spend fell from $20 million (0.5% of revenue) to $18 million (a 10% fall), then its benchmark metric jumped a dramatic 20 percent (to 0.6%).

Coming out of the recession, revenue may recover healthily while legal spend remains somewhat subdued – because of cost-cutting measures taken last year. General counsel will look great when measured against their department’s drop in total legal spend as a percentage of revenue. The corrective is to calculate that nominal improvement after normalizing it by industry-wide changes. If everyone improves, only a relative improvement against peers should count.

It would not surprise me that for many US companies, revenue plummeted during 2009 at a faster rate than total legal spending. Customers can decide not to buy faster than general counsel can terminate staff or reduce outside counsel spend. It true, the leading benchmark metric, total legal spend as a percentage of revenue, might have ticked up or jumped during 2009.

To illustrate, if a $4 billion company’s revenue fell 25 percent but its legal spend fell from $20 million (0.5% of revenue) to $18 million (a 10% fall), then its benchmark metric jumped a dramatic 20 percent (to 0.6%).

Coming out of the recession, revenue may recover healthily while legal spend remains somewhat subdued – because of cost-cutting measures taken last year. General counsel will look great when measured against their department’s drop in total legal spend as a percentage of revenue. The corrective is to calculate that nominal improvement after normalizing it by industry-wide changes. If everyone improves, only a relative improvement against peers should count.

On a panel at the SuperConference, Steve Williams of the General Counsel Roundtable shared the results of a survey of its members regarding “why law departments shy away from data.” More precisely, why they don’t do as much as they might with matter and invoice data. Here are the responses, with my estimates of percentages from the slides.

“Lack of good technology to track the data” was selected by 68 percent of the respondents. Hard to believe, for me, with the plethora of matter management and e-billing packages available for license. “Lack of time or staff” was selected by 58 percent, a mysterious “lawyers dislike the process” by 48 percent, and “no team or staff to create reports at 38 percent. Presuming this was a multiple choice question, the results are only as good as the choices.

Other choices could have been “Don’t see the value in collecting or analyzing the data” or “Can get the data I need from accounts payable.”

Of the 564 people who submitted data for the largest benchmarking survey ever, almost two thirds of them (63%) are general counsel. The next largest group of respondents is lawyers who report directly to the general counsel (16%). The third most frequent are law department managers (Chief Operating Officers, 8%).

Among the remainder are lawyers who do not report directly to the general counsel (4%), others in the legal department (paralegals, admins 6%), and a scattering from each of Finance (2%), Procurement (1%), Compliance, Marketing & Communications, and Human Resources.

This data from May 23rd makes several points.

A survey has a response rate, which is the percentage of surveys returned or taken out of the total population invited to respond. Let’s say a trade group sent a survey to 200 general counsel and 80 took the survey. That is a 40 percent response rate.

That survey has an effective response rate, however, because some of the respondents did not provide complete data. Perhaps of the 80 surveys returned, 10 had material data omissions, which then means the effective response rate was 35 percent.

Finally, a few surveys further reduce the respondent numbers because their data, although complete, is on its face wrong. Minus those, you have an accurate effective rate. If a general counsel said the legal department has two lawyers and an internal budget of $20 million, something is wrong with one of those two numbers (or both). In the survey sent to 200, the accurate effective rate drops a half percent for every reply that has facially inaccurate data.

“In 2003 tort costs were equivalent to 2.2% of American GDP, compared with 1.7% in Italy, 1.1% in Germany and less than 1% in Japan, France and Britain.” The article in the Economist, May 22, 2010, at 68, doesn’t explain those figures but goes on to point out that the “share of American GDP represented by such litigation costs fell in each of the following five years, thanks in part to restrictions in the Class Action Fairness Act of 2005.”

If the figures are reliable, and if litigation costs represent something on the order of 20-40 percent of total legal spending by legal departments, it would be methodologically legitimate to normalize such spend numbers for departments in those six major countries. In other words, for example, if US legal department were being compared to French legal departments on relative spend management, it might be informative to adjust the US departments’ spend in line with the baseline difference between the two country’s tort costs. This would be analogous to showing market-adjusted changes in share prices or salaries in different countries adjusted for purchasing power parity.

A second observation based on the similarity of these tort cost findings would be that the costs of legal departments across major countries are to some degree converging, aside from labor costs.

For purposes of surveys, it is helpful to define the terms “anonymous” and “confidential.” Anonymous means not identified by name. Confidential means private, secret, not universally available or known only to a select few.

With a benchmark survey, for example, a general counsel may request that her company name not be listed as a participant. That means anonymity. It is assumed that the specific data about the law department, such as how much her department spent on external counsel in 2009, will not be disclosed. That means confidentiality. All benchmark surveys should preserve confidentiality of data; a few participants want to remain anonymous.

You can get your first edition of the 60-page global benchmarking report from General Counsel Metrics, LLC, if you click here to submit your data or click on the display in the upper right corner.

The first release – followed by new ones monthly during the summer and fall as more law departments take part – covers 455 law departments from 35 countries and across 19 industries. Those departments had at the end of 2009 an average of 27.9 lawyers and 21.5 other legal staff. In total, they had 12,700 lawyers and 9,800 other legal staff. The smallest quarter of the group, roughly 110 departments, reported from 1 to 3 lawyers. The next larger quarter reported more than 3 lawyers but less than 8. The next quarter had 8-25 lawyers while the largest had from 26 lawyers to well more than 500.

The participants’ total legal spend in 2009 was an astounding $11.8 billion in support of their aggregate corporate revenue of $3.0 trillion.

Modestly I consider myself an expert on law department benchmarking and benchmark metrics. With that experience, moreover, comes an acute appreciation for methodological morasses, those difficulties that cause data to be less precise or accurate than we wish.

I wrote at length about four challenges in a recent article. Click here for a
of my article from Legal Week, May 13, 2010. It describes (1) data differences between subsidiary and parent law departments, (2) incomplete revenue data from privately-held companies, (3) undercount of total legal spend, and (4) the crudeness of “industry” as a descriptor of large companies.