Articles Posted in Benchmarks

My global benchmarking uncovers nuances. Here is one that a thoughtful participant wrote about.

“I wanted to get your thoughts on a specific question of current interest (with respect to benchmarking). For global corporations such as ours, would you consider European ‘Patent Attorneys’ (resident in Europe) as Lawyers or Non-Lawyer/Other (say, in calculating ‘Lawyers per Billion of Revenue’)? These practitioners are not really ‘lawyers’ in the classical sense, but rather perform specific functions as it relates to the patent process, and aren’t licensed to perform other legal services. But as their title indicates, they may consider themselves attorneys.”

I told the person who emailed me not to consider the European Patent Attorneys as attorneys for purposes of the benchmark study. They are more like US-trained patent agents, I believe (See my post of March 2, 2010: patent agents and other almost-lawyers.).

It is beyond cavil that over time, total legal spending expressed as a percentage of a company’s revenue (turnover), tells the most about comparative legal department performance (See my post of Nov. 15, 2009: poll results put ratio as most important; and Aug. 21, 2008: total legal spend as percent of revenue with 9 references and one metapost.).

The grandee of metrics – total legal spend as a percentage of revenue

Many things influence that fundamental benchmark, including especially the revenue of the company (See my post of April 16, 2010: TLS and revenue with 9 references.).

Size matters, and the size of a company as measured by revenue affects its ratio of total legal spending to that revenue. That key ratio, total legal spending (TLS), made up of inside law-department spend plus the department’s external spend – declines the bigger companies become. Why?

An article of mine several years ago proposed a number of reasons for this phenomenon, and I published a metapost about total legal spending (See my post of Aug. 27, 2008: why TLS declines with size; March 22, 2010: odd trend, because bigger companies use bigger law firms; and Aug. 21, 2008: total legal spend as percent of revenue with 9 references and one metapost.).

Even so, quite a few posts since then have proposed other possible explanations. Here they are with their propositions (See my post of; Sept. 1, 2008: greater expertise; Jan. 8, 2009: global spread of legal talent; Feb. 25, 2009: lower attrition rates of lawyers; March 8, 2009: network externalities; March 9, 2009: availability of discretionary funds; June 4, 2009: legal knowledge codifies with industry maturity; Sept. 26, 2009: all-star lawyers congregate.).

Heads of the legal function should control all spending on external counsel. Should, but don’t.

Many general counsel oversee only certain expenditures by their company on external counsel. Finance may retain tax advisors; human resources turns to some partners (including non-law firms) for specialized advice on pensions; the general manager in a large company spends money from his or her budget on local law firms for local legal issues. General counsel whose companies have significant operations around the globe may be the main victims of incomplete spend control and data. Sometimes the CEO reserves the right to hire a firm unilaterally, or the head of strategic planning, and the Board of Directors may do the same.

For benchmarking studies, all that general can do is provide the data they know. The remaining spend is obscured. Benchmark reports, therefore, inevitably to some smallish degree understate the total legal spending of a company. The more accurate term would be “known total legal spend” (See my post of Aug. 21, 2008: total legal spend as percent of revenue with 9 references and one metapost.).

Less than three months underway, but already one-third of the way to 1,000 law departments, the largest study of benchmark metrics ever assembled has a geographic distribution that is a function of several factors. First, though, let me share the headquarters locations of those legal departments that have been quality checked (another 85-100 are in process):

Asia/India 15 (4.5%); Canada 37 (11.2%), CEE/Russia 25 (7.6%), Europe 59 (17.8%), Latin and South America 9 (2.7%); Middle East/Africa 4 (1.2%), UK 17 (5.1%); and USA 165 (49.8%). A total of 32 countries have at least one law department headquartered in it that has taken part.

English-speaking countries predominate, which means language may have been a barrier to participation, even though the survey is available in French, Italian, Chinese, and Portuguese. Another factor is that access to general counsel in many parts of the world is difficult to obtain. Even when general counsel learn about the survey, those in some parts of the world may be less familiar or comfortable with the benefits of benchmarking or the confidential protections of the basic data they provide. The geographic distribution also reflects the size of legal departments around the world. In general, the larger the department the more likely its managers will want some quantification of performance.

My fascination with figures doesn’t blind me, I hope, to misuses of metrics. One potential distortion occurs when a survey reports that “one-third of all respondents think hourly billing is doomed” to support their view that massive change is underway. Perhaps the billing rapture is upon us, but if one third also said “hourly billing will outlast landfill plastic” and one third come down firmly and absolutely on the side of having no clue, the heralded finding loses credibility (See my post of Sept. 9, 2009: one-third splits are predictable on many survey questions.).

For example, CPA’s State of the IP Industry Survey www.ipreview.com last year concluded that law firms need to educate their clients about the value of their IP assets because IP budgets were under pressure. “This approach seems sensible given than more than one third (37%) of the in-house professionals surveyed said that they plan to spend less in 2009 on protecting their IP assets than they did in the previous year.”

Did an equal (or perhaps even larger) percentage intend to spend more? Did one out of three or so forecast a steady expenditure despite the downturn?

General counsel, or at least a number of vocal ones, lambaste hourly-based billing by the firms they retain. “It’s not the time spent that matters,” they thunder, “it’s the value of that time!” Heads everywhere nod in agreement, although feet stay planted.

At the same time, general counsel, or at least those quantitatively inclined, pore over benchmark reports that show fully loaded costs per in-house lawyer hour. Some care if their troops march at $221 an hour and the median in their peer group stands lower at $208. Some of them in large departments even track internal time and charge clients for it.

For both internal and external counsel, the better measurement would be value delivered. Hang the hours – with both meanings of hang implied – and look to productivity. That is what makes it ironic to criticize hours outside as a measure of worth, but to attend closely to cost per hour inside as an indicator of comparative performance.

My publisher has reverted to me copyright on my book, Law Department Benchmarks: Myths, Metrics and Management (Glasser LegalWorks, 2nd ed. 2001). The second edition may be nine years old but it is full of metrics and discussion that are still valid. So, I scanned the entire book by chapter. Unfortunately, because there are 450 charts in the book, the chapters are very large, on the order of 7 to 14 MB each even when compressed with WinZip.

Therefore, I broke the 15MB chapter on outside counsel into 3MB chunks. If anyone emails me, I will send you a chunk and you can decide whether you would like more.

As of today, more than 430 legal departments have submitted data (you can click on the upper right hand ad to do so at no charge). Of them, 314 have provided complete data, so I thought I would share some totals to date.

This early set of participants reported 9,887 lawyers and 7,410 other legal staff, so lawyers make up about 57 percent of their total legal staff. The median department had nine lawyers. The total internal spend last year of these departments exceeded $3.3 billion, which was less than what they spent on external counsel, $5.8 billion. The staggering revenue total was $2.3 trillion dollars.

As to some other measures, 155 of the departments (49%) reported internal budgets of more than $2 million, 149 reported external spend of more than $3 million, and a whopping 96 of them are as large as or larger than the smallest Fortune 500 company ($4.6 billion). With the largest industry (23%) being manufacturers, slightly more than half of all the companies are headquartered outside the United States.

We all understand averages, and many of us understand medians, but few of us understand another descriptive statistic for numbers: skewness (See my post of June 30, 2006: skewness; and March 23, 2007: third central moment.).

Imagine a bell curve distribution of the bills your legal department received during the past five years, depicted from low on the left to high on the right by the amount of the bill. If the average of the bills is to the left of the bell’s top, the median, relatively more smaller than larger bills in other words, the distribution has “negative skewness”; if the average is to the right of the median, it has “positive skewness.” Skewness describes the degree to which a distribution of numbers tips to the right or the left of the central point.

In a recent survey of 139 large legal departments, the average size of the departments – expressed as numbers of lawyers – was 69, more than double the median of 35. The skewness score was very high at a positive 6.5. A different group of 43 law departments interviewed for the same study was more normally distributed with a skewness of 1.4. This data comes from a paper discussed by Prof. Michele Beardslee at the Georgetown Conference on the Future of Law Firms at 19-20.