Articles Posted in Benchmarks

Musing about a will-o-the-wisp metric of “lawyers per initiative” in legal departments I conclude that the quest is futile. Even if we define an initiative as a formal management effort and can reliably count them – license a new software system, change the mentoring program, set up a pro bono undertaking – the ratio of such initiatives to lawyers in the department likely produces a spurious mathematical artifact.

But then, perhaps something on the order of approximately one initiative underway for every other direct report to the general counsel might be more easily defended. After all, some grooming of possible successors takes place (and managerial abilities need practice and testing) and senior lawyers are most likely to be placed in charge of a change effort. Perhaps as a rough rule of thumb for how much change your department can absorb, you might think in terms of a ratio such as this. Each year, focus on an important shift in behavior – a managerial initiative in the department – for every two or three direct reports to the top lawyer.

The metaphorical difference between a thermometer, which gives you a figure but doesn’t tell you what to do about it, and a thermostat, which gives you a figure and then adjusts the heating or cooling appropriately, applies to benchmark figures. It’s a thermometer to know that most law departments in the United States have three lawyers per paralegal. That factoid gives little guidance.

It’s a thermostat if the data shows for every 20 percent increase in the ratio of lawyers to paralegals, total legal expenses as a percentage of revenue drops 10 percent. It that finding were true – and I suspect some kind of correlation like that but lack sufficient data to confirm or reject it – you would have a clear direction to follow, at least to some point.

Some general counsel hold their cards close to their vests; they hide their staff numbers, how much they spend on outside counsel, the litigation load they face, locations of lawyers, everything. Yet mighty United Technologies didn’t mind sharing detailed benchmark metrics about its number of lawyers, caseload, spend on external counsel, and distribution of cases by type. All of them I have written about, and gratefully, because we have such spotty information publicly available (See my post of Dec. 22, 2009: offices and countries with lawyers; Dec. 23, 2009: distribution of lawsuits; and Dec. 27, 2009: three metrics, including law firms retained per billion.).

What can a competitor do if it knows how many lawyers you have or what you spend on the legal function? Nothing. Nor can plaintiff’s attorneys.

I have the sneaking suspicion that general counsel favor secrecy and opacity mostly so that their own CFO and other internal executives are kept in the dark. Keep every figure under wraps and no one can attack you or your budget with any specificity.

A chart in a presentation recently about the legal function at United Technologies gives the numbers of firms the manufacturing giant retains in the US and outside the US. If we take the most recent year’s total (418 firms in 2008) and the UTC revenue given in the presentation ($58.4 billion), the company retained just a bit more than seven law firms for every billion dollars of its revenue.

During the four years starting in 2005, the total number of law firms retain stayed between 401 and 421. During that time, US law firms accounted for about 40 percent of the firms retained.

Another slide shows that in 2008 about 56 firms accounted for $125 million of the company’s total spend, which was 75 percent of the total spend. Therefore, about 13 percent of the firms commanded three quarters of the spend. In 2007, about 46 firms accounted for $137 million of spend, again being 75 percent of the spend, so a somewhat lower percentage of the firms.

A fascinating conference presentation on outside counsel costs, by AGCl Chester Paul Beach at United Technologies, suggests a possible benchmark. The potential metric derives from a chart of Beach’s that shows the distribution of civil litigation involving UTC by seven types.

My estimates from the chart are that almost 30 percent of the total caseload consists of product liability cases; 25 percent employment cases; and 18 percent commercial contracts.

What interests me from a law department management standpoint is whether most manufacturing companies, as a very rough approximation, might have a similar distribution of those three types of suits. Is it plausible that product torts, employment claims, and contract disputes each account for roughly 30 percent of the total litigation?

Let’s suppose that five law departments lauded everywhere boast total legal spending in terms of revenue less than the median for their respective industries and each of them uses electronic billing software. In other words, 100 percent of those fiscal wizards receive bills electronically.

What are the odds, however, that if your department uses electronic billing software you will have lower-than-average legal spend? Nothing like 100 percent; indeed, a radically lower probability. That condition (the practice of e-billing) may or may not affect the probability of lower total expenses. We would have to compare total legal spending and revenue from all legal departments that have installed such software.

Obviously, I chose e-billing software simply to make a point: if a high proportion of a group of law departments that follow any particular practice show strong results, the conditional probability of similar results will be much lower if we look at all law departments that follow that practice and see their results in metrics.

The more members there are in a network, the greater its value. Think of Facebook and LinkedIn. This intuitive appreciation of why more participants in a benchmark study means more reliable and valued results was recognized and quantified by Robert Metcalf, the creator of Ethernet. As the Economist Tech. Quarterly, Dec. 12, 2009 at 24, expressed it, “he quantified a network’s value as roughly proportional to the square of its number of users.”

If 200 companies contribute data to a benchmark study, that network of information has much more value than if 100 companies take part. Metcalf’s Law says that doubling the number of respondents quadruples the network’s informational “value” (since the square of 200 to the square of 100 is four times as much). You can slice and dice the data much more finely and usefully.

Every benchmark metric about staff ought to concern itself with full-time equivalents (FTE). The number appears to be plain vanilla, but reality serves tutti-fruity. It is not as simple as the normal adjustments for those who start and leave during the year. What about contract employees or temps; how do you factor in long-term consultants; and what about staff dedicated to you by other functions such as IT and HR? Do flex-time arrangements alter the calculation of full-time equivalents? Should you figure out maternity leaves and extended medical absences?

I won’t even mention open positions and funded slots. What if a person is assigned to a company-wide project; how can you integrate interns and secondees?

No, full-time equivalent can be a full-time headache (See my post of Oct. 18, 2005: FTE and internal cost ratios; May 2, 2007: common uses of full-time equivalent; June 28, 2006: full-time-equivalents of lawyers among non-lawyers; Dec. 9, 2008: “contract services law firms” instead of FTE; Dec. 31, 2008: support personnel at vendors; and Nov. 8, 2009: thousand trademarks per FTE trademark lawyer.).

Hildebrandt, a business within Thomson Reuters, shared some data on cost control strategies from its 2009 Law Department Survey. It laid out a slew of metrics, but it is hard to know how real they are or what a general counsel can rely on.

For example, “55% of the companies reporting indicated that they have implemented or will implement the use of alternative fee arrangements (non-hourly) with their outside counsel. 27% are considering alternative fee arrangements. Only 18% have no plans to use alternative fee arrangements.” The numbers are plentiful but what is the change in these percentages from pre-recession times? Does “use of” mean a significant implementation or a token? Have the law departments done something specifically in response to the slowdown or are these Brownian motion changes, normal fluctuations of interest. Can we rely on the subjective “will implement” as a dependable indicator?

The same questions apply to another set of metrics about rate freezes: “64% of the companies reporting indicated that they have implemented or will implement rate freezes with their outside counsel. 23% are considering rate freezes. Only 14% have no plans for rate freezes.” And there is a third set with the same frailties: “46% of the companies reporting indicated that they have implemented or will implement rate reductions with their outside counsel. 26% are considering rate reductions. 29% have no plans to negotiate rate reductions.”