Articles Posted in Benchmarks

According to Researching Law, Spring 2010 at 9, “Until very recently, the bar passage rate in South Korea has been extremely low – even less than 5% — so that studying law in South Korea in preparation for a legal career was an extremely risky path for young people to take.” I should say!

If that few takers pass the bar, the legal departments of Korean companies must be much more sparsely populated with admitted lawyers than would be predicted by global benchmark metrics of lawyers per billion. In Korea, that ubiquitous metric loses significance if the definition of lawyer means “someone who has studied law and passed a bar examination” (See my post of Feb. 25, 2009: lawyers per billion with 22 references and one metapost.).

Other common benchmarks surrender all usefulness if the number of lawyers qua lawyers shrinks as much as it must in South Korea. Benchmark studies may need a broader definition of “lawyer” or some way to adjust for such low numbers of officially recognized legal counselors.

As particle physicists delve deeper into the atom, they find stranger and stranger properties at very small scales: anti-particles, quarks, uncertainty principles, strong and weak forces, flavors. Loosely analogously, as benchmarkers gather data from law departments of one or two lawyers, the standard metrics turn strange. Inside spend per lawyer swells because it is only the solo general counsel, for example. Lawyers per billion of revenue gyrates wildly since some lightweight companies include a lawyer employee. Outside counsel usage may soar in comparison to larger companies’ figures.

A counter-point is that most legal departments are small and like “Dartmouth is a small college but there are those who love it,” they too deserve the enlightenment of benchmark studies. To that point, in the benchmark survey by General Counsel Metrics, almost 30 percent of the 455 participants in the first report said they had three or fewer lawyers. Forty-seven had only a single lawyer.

The data from small departments may skew the overall benchmark figures, but they need to be included to give the full picture. A sophisticated analysis, however, segregates participants by number of lawyers.

Research will confirm, I predict, that the larger the profit margin of a company, the more it spends on legal services. Profit margin is net income divided by revenues, or net profits divided by sales: how much out of every dollar of income a company keeps in earnings. Fatter margins means either a company has lower costs compared to its competitors, which would point to lower total legal spending, or generates more revenue for the same costs, which is what I would predict for innovative, fast-growing, intellectual-property based companies. The latter carry more lawyers on their roster than other companies and invest more in the legal infrastructure that results in higher-than-normal margins.

Profit margins of companies intersects with all kinds of benchmark calculations (See my post of May 24, 2005: profit margin as a benchmark denominator; April 4, 2006 #1: “earn a dollar to pay a 3-cent bill of outside counsel”; May 23, 2007: profit per in-house lawyer; March 4, 2008: industry profitability may correlate with in-house compensation levels; March 6, 2009: margin should correlate to lawyers per billion and revenue per lawyer; and Feb. 15, 2010: $4,300 per hour in revenue typically needed to pay for one hour of outside counsel.).

I’ve been on a kick to figure out the number of law departments in this country. One method might be to count the number of companies in the United States that have publicly traded securities. Not all of them have an internal legal function, we can accept, but quite a large portion probably do, since they certainly have securities law issues and reporting, they have enough employees to sustain the company, and they have enough of a history and revenue to have launched an IPO or spin off (See my post of Feb. 23, 2010: dearth of data on privately held companies.).

Morningstar reports on over 7,500 publicly traded U.S. companies while “As of Dec. 31, 2008, NYSE Euronext ha[d] approximately 8,500 listed companies,” according to Answers.com. http://wiki.answers.com/Q/What_is_the_number_of_publicly_traded_companies_in_the_US

Perhaps 90 percent of them have at least one employed lawyer who practices law? And, is it plausible that as many more companies are privately held but also have a legal department? If so, a projection of something on the order of 14-17,000 legal departments in the United States corroborates previous estimates (See my post of April 30, 2010: three indicators point to around 20,000 departments, and James Merklinger’s comment in support of that estimate.).

Assume you have total legal spending as a percentage of revenue for hundreds of legal departments.

Assume further that you gather demographic and career data about the general counsel of those departments. Directories such as the Aspen Directory of Corporate Counsel will provide quite a bit of this background, supplemented by Martindale-Hubble, LinkedIn, and company websites.

With some digging, it would be possible to know the current general counsel’s age, whether they were promoted from within, formerly a partner at a law firm, or a general counsel previously as well as such data as their tenure as general counsel and in the law department and (perhaps) their gender.

We might be able to deduce the approximate number of legal departments in a country based on its Gross Domestic Product (GDP). Follow my reasoning from four examples.

Portugal’s organization for in-house lawyers has 1,200 members. If the typical law department employs three lawyers, that suggests something like 400 departments (I do not know that every Portuguese in-house counsel belongs.). The country’s GDP in 2008 was approximately $243 billion, which leaves 0.6 law departments per billion.

The United States, at $14.2 trillion in GDP and 20,000 or so law departments, supports around 0.71 departments per billion of GDP (See my post of April 30, 2010: three indicators to around 20,000 departments, and James Merklinger’s comment in support.).

To a fair degree, a sizeable benchmarking study can isolate law departments that have all or nearly all their lawyers in one country. Once you recognize, however, that foreign companies may also have groups of lawyers in that country it becomes murkier to produce data “on a country.”

An example of this difficulty is the report released recently by LexisNexis Martindale-Hubble, in conjunction with the Forbes Institute, based on data from legal departments in Russia. Note that the description is not “Russian legal departments,” since of the 65 respondents “more than half of these companies (57%) were global multinationals.” (See my post of April 21, 2101: subsidiaries in benchmark studies of legal departments.).

French companies with lawyers only in France may operate quite differently than – and display a pattern of benchmark metrics quite different from – British companies with some of their lawyers based in a branch of the department in France.

More than a hundred members of Connected registered for the hour-long webinar on May 6th. Three panelists, including this blogger, explained the benchmark study of General Counsel Metrics, which had 362 participants in the preliminary data presented.

The first part of the session explained the study and the benefits from benchmark metrics. The bulk of the session, however, concentrated on 16 benchmarks arrayed under the four key characteristics of departments: industry, country, company revenue, and number of lawyers. During that part the panelists spoke about the figures, regional differences, definitional issues, and how to interpret the benchmark metrics.

The webinar closed with some perceptive thoughts on benchmarks in the future for legal departments.

With the data from the ongoing survey of General Counsel Metrics, it will be possible to tell whether departments in the UK, for example, differ in their fundamental metrics from departments in France. Certainly the metrics will differ, such as internal spend as a percentage of all legal spend. But how can we know if the difference is big enough to deserve commentary? Might it simply be an artifact of the particular participants or random fluctuation in values?

A statistical test called the two-group mean-comparison can look at the average of both countries and calculate the standard deviation of the metric in both. It then calculates the 95 percent confidence interval, which means the likelihood that 95 times out of a hundred the difference is real. This final step calculates that so-called p-value. The lower the p-value, the more likely the difference is significant from the statistical standpoint. Whether the difference is meaningful in the real world is an entirely different question.

The coefficient of variation is the ratio of the standard deviation of a set of numbers to the average value of the numbers. The lower the coefficient the tighter the data set. For example, using more than 350 law departments that have participated in the General Counsel Metrics survey of Global Benchmarks, the standard deviation of the number of lawyers was 70.4, the average was 32.8 and therefore the coefficient of variation was 2.15. In comparison, for paralegals the standard deviation was 14.1, the average 7.96, and the coefficient of variation 1.78. Finally, for all other legal staff those figures were 38.6, 16.3, and a coefficient of 2.2.4.

Cross-tabulation analysis can tell whether there are significant differences between respondents and non-respondents on industry, size, location and other characteristics.

Third, analysts can scrutinize respondents to a survey for non-response bias. A Kolmogorov-Smirnove test indicates whether there are significant differences between respondents and non-respondents on such factors as geographic location, industry distribution, age, size or performance.” But you must know your survey group’s demographics. If a trade group invites its members to take part in a study, this statistical tool for benchmarking comes in handy.