Articles Posted in Benchmarks

Volumes have been written on DuPont’s management initiatives to improve its law department’s effectiveness (See my post of June 30, 2006 on the marketing of law departments and four references to DuPont.) Hence, it caught my attention where a piece in Corp. Counsel, Vol.15, Jan. 2008, at 111, states that DuPont’s “legal team has an annual global legal budget of around $230 million.” I used that figure to benchmark two important measures of any law department: spend and staffing to revenue.

According to the latest Hildebrandt benchmarking survey (Executive Summary, pg. 3) “median total legal spending as a percent of U.S. revenues is 0.44% among all participants.” Of its worldwide revenue of approximately $28 billion, something like 40 percent of that was generated in the United States, which means approximately $11 billion. Therefore, DuPont’s total global legal spending would be a touch above two percent of its US revenue.

If worldwide revenue is made the denominator, DuPont’s legal spending as a percentage of that revenue is 0.79 percent, double the Hildebrandt median. And DuPont, with its enormous size, might be expected to produce a better-than-average cost/revenue profile (See my posts of May 4, 2005: total legal spending as a percentage of revenue declining as revenue increases; and Dec. 3, 2007: possible explanations.).

We lack reliable benchmark metrics for practice areas of law departments (See my posts of July 20, 2005 and May 28, 2005 on this missing set of metrics.). A few, though, have appeared on this blog.

Contracts (See my post of Jan. 6, 2006: contracts handled per commercial lawyer.);

Corporate secretary (See my post of Feb. 4, 2008: cost per entity maintained.);

It is a powerful tool to quantify how some amount changes when another number changes, such as to understand how the number of independent claims in a litigated patent influences total outside counsel fees — to calculate the correlation between one set of numbers and the other (See my post of Jan. 14, 2007: variance in an independent variable explained by correlation.).

Many correlations have been mentioned on this blog (See my posts of April 5, 2005: innovation and law department size; May 10, 2005, Sept. 10, 2005 and Jan. 3, 2007: effective billing rates and law firm size; Sept. 10, 2005: law firm size and rank on league tables; March 10, 2005: stakes in patent litigation and representation costs; Nov. 20, 2006: size of law department and number of law firms retained; Oct. 23, 2005: law firm size and overhead costs; July 2, 2007 (two posts): market capitalization and both number of in-house lawyers and total legal spend; June 9, 2007: department size and size of law firms it retains; and Nov. 28, 2007: average years of lawyer experience and total legal spending.).

Wherever there are benchmarks there could be correlations, although usually the analysts fail to push that far (See my post of Feb. 12, 2008.). Unfortunately, mathematical correlation does not prove causation (See my posts of Jan. 27, 2006: cause and effect; July 4, 2006: empirical studies of law departments are needed.).

Too many “analyses” of survey data do no more than regurgitate the findings. “Twenty percent of all the law departments have receptionists.” That style of factoid reporting has a bit of value, but an analysis that matches the data against another set of meaningful data is far more useful. That process is called correlation (See my posts of April 5, 2005 and May 10, 2005 on correlation.). “The more they spend on receptionists, the higher a law department’s retention rate.” Even better than a statement of linkage is a finding such as “For every $10,000 spent on receptionists, a law department increases its retention rate by 10 percent.)

Another example might start with a bare metric: “The average law department in this survey had three locations.” A linkage correlation would be along the lines of, “Law departments with more offices tend to have lower inside costs per billion dollars of revenue.” A specific quantification would show that “Every three additional locations drops inside legal costs per unit of revenue by eleven percent.”

In November of last year, I published an article in Legal Times about the three most important benchmarks for law departments: total legal spending as a percentage of revenue, the fully-loaded cost of inside counsel, and total legal staff per billion of revenue.

Since the article came out, I have added more posts about benchmark data (See my posts of Dec. 5, 2007 – two of them – on how little the fundamental benchmarks have changed over 14 years; Jan. 13, 2008 on benchmarking bad practices; Jan. 19, 2008 on unknown metrics about non-publicly traded companies; and Nov. 28, 2007 on years-of-experience data.). Would that we had more, and better, metrics!

When I was an in-house consultant for Merck’s law department, GE Medical Systems invited us to take part in a benchmarking exercise. What was unusual about the effort was that GE Medical sent four of its lawyers to spend a full day at Merck. During that day, their lawyers met with Merck counterparts in different practices and dug in, deeply, about how their practices operated. They learned about training, systems, technology, skill sets, use of outside counsel, and more. Both sides were able to learn abundantly.

If your law department cares about how to improve its procedures, not just about accumulating comparative metrics, visit law departments that have similar practices (See my post of May 14, 2005 about three ways to benchmark.). Often the qualitative sides of management are more useful than bushels of numbers.

For those who care about law department benchmarks, there is a gap in the metrics that we ought to have. Data is scarce about the difference it makes in law department staffing and spending if a company is not publicly traded or if it is a US subsidiary of a foreign corporation. In either situation, there is little need for the legal department to have in-house securities lawyers or corporate governance lawyers – nor the legal spending on outside counsel related to those areas.

Amidst all the commotion about Sarbanes-Oxley, for example, who has calculated the internal and external legal cost differences that law makes for public and private companies (See my post of Nov. 24, 2005 #2 about DuPont not adding staff.)? One would expect fewer lawyers per billion dollars of revenue and lower total legal spending if those two drivers of legal cost are missing. The trouble is, the data to prove or disprove those hypotheses are also missing.

Total revenue of the Fortune 500 companies in 2005 was $9.1 trillion (See my posts of Dec. 3, 2006 for this figure; and Sept. 10, 2005 on the 100 largest corporate law departments.). Since total legal spending as a percentage of revenue stands at something like 0.4 percent of revenue, those 500 companies spent $360 billion or so on inside and outside legal resources – excluding fines, settlements and judgments.

For a typical US law department, outside counsel expenditures make up about 60 percent of its total budget, so that would suggest expenditures by those 500 companies of about $200 billion on outside law firms. Many companies other than those in the Fortune 500 hire external lawyers. Still, at this level of back-of-the-envelope calculations, the $200 billion figure seems plausible in light of a recent comment: “The legal industry today is over $200 billion ….” Bus. Law Today, Vol. 17, Nov./Dec. 2007 at 63.

Other numbers don’t jibe. Another standard benchmark is the figure of about five lawyers for every billion dollars of revenue. Based on that Fortune 500 revenue, we might expect something like 45-50,000 lawyers employed by their law departments. Since $500,000 per lawyer covers the typical inside budget and there are an estimated 50,000 lawyers who work for the Fortune 500 (See my posts of Dec. 3, 2006 on this rough measure), that means $25 billion or thereabouts spent inside – nowhere close to the $160 billion predicted by the figures in the first paragraph.

Everyone thinks you benchmark to find other law departments’ best practices. The goal is to copy or adopt successes. But the pratfalls of others have instructional value as much can be gleaned from those stumbles. Benchmarking “worst practices” may not occur to general counsel yet it would enable them to learn from others’ shortfalls. The distinction first came to my attention in A New Way to Think: The Best of Rotman Magazine, Vol. 2, at 35.

It is hard to find out management disasters. Whether this be the poor choice of a firm, a flawed legal strategy for an acquisition, a benighted promotion, a churlish style, or bungled technology implementation, people cover up their mistakes. Sometimes, asking about lessons learned coaxes out the missteps.

Total legal spending as a percentage of revenue stands out as the pre-eminent benchmark. It varies, however, according to size (See my post of May 4, 2005 on TLS as a percentage of revenue declining as revenue increases; and Dec. 3, 2007 for some possible explanations.) and within an industry.

The variability by industry merits a word. The chink in the armor is that we think of multi-billion dollar, global companies with tens of thousands of employees as a member of a single “industry.” To assign a large company to an “industry” is reductionist. It’s a crude label, although the best we have. All companies vary amongst each other in an infinite number of ways. A maker of tanks is not like a maker of toasters although both might be slotted into “manufacturing.”

Don’t misconstrue my point. Our industry needs reliable benchmark data, collected over time, and “industry” has become one of the standard cuts of such data. It is the best we can do, but we should not forget the squishiness of stirring into one pot a huge range of ingredients and calling it a certain soup.