Articles Posted in Benchmarks

An unpublished paper submitted by Michele DeStafano Beardslee and three co-authors to the Georgetown Conference on the Future of Law Firms at 3-4 laments benchmark surveys by trade groups and consulting firms. Aside from low response rates and an inability to compare respondents and non-respondents, she singles out a particular weakness: “most importantly, [the surveys] primarily study small or mid-sized privately held companies.”

The footnote to that quote explains that 46 percent of the respondents to Altman Weil’s 2006 survey had revenue of less than $1 billion and 60 percent were not public companies. In the ACC 2007 survey, 83 percent of the respondents had less than $2 billion in revenue, and roughly half were not public companies.

Nothing is wrong with benchmarking small law departments (five or fewer lawyers), since they make up by far the largest segment of all US legal departments. They are small because their companies have revenue to match (at an overall figure of about five lawyers per billion of revenue). With corporate clients on the smaller side, it follows that a significant portion have not gone public and taken on the additional expenses and scrutiny (See my post of March 29, 2010 #2: extra costs of being publicly traded; and Jan. 19, 2008: unknown metrics about non-publicly traded companies.).

The position “lawyer,” as in the key benchmark of lawyers per billion of revenue, treats each lawyer as an undifferentiated atomistic unit, but in fact individual lawyers consist of sub-atomic particles galore, so to speak. If we knew more precisely attributes of the constitutive lawyers in legal departments, we would move closer to understanding how those lawyers influence productivity and quality. Four such characteristics should clarify my point.

1. Tenure with department – generally, the longer a lawyer has belonged to a company’s legal department, the more effectively that lawyer will get work done and make decisions. Familiarity breeds contempt for time wasted and ignorance of how the company takes risks and makes money. Newcomers can’t quickly acquire that knowledge.

2. Total years in law practice – generally speaking, lawyers who have been longer in the saddle ride with better experience and judgment. They have seen the problem or something like it, can cut to the salient legal issue, and propose pragmatic solutions. More recently graduated lawyers lack that grizzled discernment.

“Everyone knows that the scientific revolution involved the replacement of an Aristotelian understanding of nature in terms of qualities by a new understanding, which prioritized quantities.” Although sadly not one of the “everyones,” I read that statement from the J. of the Historical Soc., March 2010 at 43, and it crystallized several of my thoughts.

The article traces how far the scientific world has come from Galileo’s century, when weights and time and volume were at best crude approximations, through Bacon’s turn to empiricism and increasingly precise measurements, to today’s unquestioned primacy of data and statistics. But those who manage legal departments must combine the qualitative assessments of Aristotle and quantitative tracking of Bacon.

How well an in-house lawyer serves the client simply can’t be reduced to numbers, not even sets of numbers. We do not know how to move from words to figures, from concepts to counts as it were, when we describe attributes such as practical knowledge of the law, trust and credibility, creativity and doggedness. We do know how to count many aspects of a law department’s operations and output, but the closer we get to the individual lawyer in a department, the less counting sheds light.

Corp. Counsel, March 2010 at 82-85, sets out the fundamental metrics of Dynegy, a $3.5 billion operator of electricity power plants. The legal department has 20 lawyers. Its spending on external counsel in 2009 was $5.1 million, of which only $1.9 million was for litigation. Six law firms accounted for roughly 80 percent of Dynegy’s outside counsel expenditures. So, what do these benchmarks say about Dynegy’s legal function and has disclosure disadvantaged it?

Dynegy’s almost six lawyers per billion of revenue is unexceptional in either direction, neither too many nor too few (See my post of Feb. 25, 2009: lawyers per billion with 22 references and one metapost.).

If inside spending per lawyer matches general norms in the United States (about $450,000 per), then its spend of $9 million is higher as a percentage of total legal spending ($5.1 million outside) than most legal departments (See my post of March 29, 2009: 40/60 ratio of inside-to-outside spend with 18 references.). To that point, the more legal departments clamp down on external spending, the more this ratio will shift from the current norm of 40 percent inside. Also, external spend includes more than just law firms.

If you have wondered whether to complete the benchmarking survey of General Counsel Metrics, wonder no more.

It is fast, easy and the participant group is already the largest ever! To find out some of the innovative techniques the report takes advantage of, click on the link that follows for a PDF of my article in Metropolitan Corporate Counsel, March 2010 at 13.

Learn from your industry’s benchmarks! Click the box upper right to take the six-minute, confidential online survey of your fundamental 2009 metrics (numbers of staff, inside and outside counsel spend and revenue) and get your full report at no charge in April.

With more than 300 respondents during February, the survey population has already reached impressive proportions. I thank all the pioneers who have helped launched such a successful effort.

As of a week or so ago, the companies in the survey who submitted full data reported 3,960 lawyers on their legal teams. Their total inside legal spend last year was $1.5 billion; total external spend was $2.6 billion. Total corporate revenue reported was a staggering $1.1 trillion (yes, trillion with a “T”).

Since this is a benchmarking survey, let’s state this progress report in terms of metrics. The participants analyzed as of that day had 3.6 lawyers for every billion dollars of revenue, which is a bit low because some of the participants are from subsidiaries that don’t maintain specialist lawyers. The group spent 0.37 percent of revenue on the legal costs they reported, which only includes outside counsel costs in the external spend. External legal spend other than on law firms might something like ten percent to that total, bringing it to around a quarter of a percent of revenue.

My a priori assumption is that legal departments are evenly distributed within industries by number and lawyer staff when you adjust for the size of the industry. If true, then roughly speaking, an industry that is twice as big as another in total revenue will have twice as many law departments and the largest ones will be proportionately bigger (I am not sure about double). Quite likely, however, stable and mature industries exhibit a different distribution of law departments than fast-growing, rapidly changing industries.

Not that “industry” is a clear and precise designation for a large company (See my post of Dec. 19, 2007: “industry” oversimplifies complicated companies; Nov. 25, 2006: industry segment benchmarks; April 16, 2007: use industry comparators, the basis for compensation studies; June 25, 2007: benchmark outside your industry to innovate; April 23, 2006: golden apples to apples; Aug. 28, 2008: how to correct TLS/Rev across industries; Sept. 26, 2009: differences between benchmark comparisons on industry, revenue, and number of lawyers per billion, Jan. 12, 2009 #3: divide a company’s metrics by the industry average.).

++++++++++++++++++++++++++++++

As part of my global benchmarking initiative, I learned from a participant that the National Association of Insurance Commissioners (NAIC) requires insurance companies to use something called “statutory accounting,” while GAAP accounting is the most common among non-insurance companies. One insurance company’s disclosure statement puts it this way: “These summary financial statements are derived from the company’s audited consolidated financial statements, which are prepared on the statutory basis of accounting. Insurance regulators require that financial statements be prepared on a statutory basis of accounting that differs materially from financial statements prepared in accordance with generally accepted accounting principles (GAAP).”

To the extent revenue reported for insurance companies “differs materially” in its presentation from revenue as reported by other companies, it makes cross-industry benchmarking that much more difficult. Even within the insurance industry, legal departments may vary on which accounting method they use for their revenue, which is a hitherto unknown source of variation on a key metric.

Privately held companies often keep to themselves the amount of their annual revenue. Unfortunately, if their legal department’s management has an interest in benchmarking but won’t disclose corporate revenue, many key metrics are eviscerated.

Notably, lawyers per billion of revenue and total legal spending as a percentage of revenue implode. Indeed, any normalization of a metric divided by revenue becomes impossible and the value of that company’s data shrinks considerably.

A more subtle effect also happens. If the data skews toward publicly traded companies, with under-representation by private firms, the data loses to that degree a comprehensive scope. Privately held companies may have lower legal costs and staff numbers because they have less securities work, which covers both registrations or filings and shareholder derivative or other securities-based litigation. So the published metrics are likely to be somewhat higher than actually prevails because the (lower) studies undercount the lower data of companies without securities traded on exchanges.

Do benchmark surveys get a normal and fair distribution of participants? All surveys contend with the methodological problem of self-selection. A portion – usually small – of the people invited to take a survey respond, many decline. The small percentage that elects to complete the survey may be unlike the larger group; it is always to some degree problematic in non-coercive surveys whether the responders are sufficiently representative of the entire population.

The global survey now underway by General Counsel Metrics, LLC, has garnered in its first month more than 225 respondents from a pool of thousands that have received email invitations or otherwise learned about the opportunity. In the reports that will be produced, as with all surveys, those who study them ought to bear in mind that the numbers may be skewed by non-representativeness.

The bias that results from self-selection can alter the results many ways. It might be that general counsel of relatively well-run legal departments disproportionately fill out benchmark surveys. After all, they know they run a tight ship, they are proud of it, and they welcome quantitative confirmation of their prowess. If respondents fall more into the well-managed camp, then benchmarks look tougher than they really are. It would be like measuring body mass indices only of people at gyms.