Articles Posted in Benchmarks

The seven mistakes law departments can make regarding performance metrics

In MIT Sloan Mgt. Rev., Vol. 48, Spring 2007 at 19, Michael Hammer brings down the tablets of the seven deadly sins of performance measurement. Let me translate the sins into law-departmentspeak.

1. Vanity: “to use measures that will inevitably make the [department], its people and especially its [general counsel] look good.” An example might be compliance by law firms with budgets, where those budgets are revised up until the last moment.

The ACC Docket, Vol. 25, June 2007, at 66, pours out a full measure of metrics concerning US IP litigation. For the benefit of law departments that have IP lawyers, I quote and comment on five of them, but omit their citations to four different original sources.

1. “In the past five years, patent litigation has risen 11 percent, trademark litigation has risen 15 percent, and copyright litigation has doubled.” Given that the economy has expanded during those five years at a rate of 2-3 percent annually, the increased numbers of patent and trademark lawsuits are right in line with that growth rate. Copyright litigation may reflect the new-found importance of the Internet as well as a relatively low base rate.

2. “In 2006, there were over 11,000 IP suits filed.”

A survey for law departments asks respondents to “rank from ‘1’ to ‘9’ in order of frequency of use the billing arrangements listed below.” A typical list follows, not in alphabetical order I note (See my post of Dec. 20, 2005 with methodological warnings.).

What I like was the survey’s recognition that not every law department has experience with every method, so they cannot meaningfully rank them all. To that point, the instructions say: “Note: if you do not employ some of the billing arrangements listed, please leave ranking blank. For example, if you only utilize four the items below, rank the four you to use from 1 to 4.”

Without this methodological improvement, some amount of the data will not be based on reality. Respondents will rank even those billing practices where they know nothing about effectiveness ((See my post of May 17, 2006 on the methodology of a survey on judicial hellholes.).

Those who analyze the comparative performances of different law departments could treat the benchmark metric of total legal spending (TLS) per unit of revenue as a productivity metric. Among a group of companies whose businesses are roughly comparable, the law department with a lower ratio of TLS to revenue is to that degree more productive.

The lower the ratio, the more revenue a given legal investment helps generate. One company with 0.35 percent of revenue spent on legal affairs delivers legal services more efficiently than a peer whose ratio is 0.45 percent. More precisely, the first company is about 30 percent more legally productive.

A publicly-traded company’s market cap is “perhaps the most important single measure of size and economic relevance. The market cap directly affects a company’s ability to control its own strategic destiny and is highly correlated with its total net income.” (Lowell Bryan in the McKinsey Quarterly, 2007, No. 1 at 63).

Bryan’s assertion makes me wonder why we do not calculate such benchmarks as lawyers per billion dollars of market capitalization or total legal spending as a percentage of market cap. Since the most-used denominator for non-financial company’s law department benchmarks is revenue, if revenue is closely correlated to market cap, perhaps we will not learn much more from the new metric.

Profit per in-house lawyer might be a useful metric on which to compare law departments, if one accepts the reasoning of Lowell Bryan in the McKinsey Quarterly, 2007 No. 1 at 57. That normalizing benchmarking, he would probably say, indicates with some significance legal productivity.

I am leery of this argument because I fear that the term “profit” has an elasticity that only the alchemy of accounting can fix (with a deliberate double entendre on “fix.”). Industries vary widely in their profit margins so there will be little comparability across industries. The numerator is accordingly suspect.

So is the denominator – lawyers – since companies can locate themselves on a spectrum from one in-house manager of outside counsel to virtually no reliance on outside counsel (See my post of Dec. 9, 2005 on the internal gatekeeper to outside counsel.).

A survey done in 2004 and the six-page report of its results, tells you almost everything you might want to know about the internal legal functions of two-year US colleges. It draws on the responses of 25 lawyers who replied out of the 42 that were identified. Three points deserve brief comments.

The report cites at least three earlier studies of collegiate law departments and no less than two books! I wish academics paid as much attention to corporate law departments (See my post of May 5, 2006 on a few who have an interest in the topic.).

The person doing the research, Michael W. Simpson, randomly selected 746 colleges from the 1,655 community colleges in the United States and took the extra step of using a “stratified sampling to insure each state representation.” Law departments that survey their clients should also understand and apply stratified sampling.

The Shaw Group, a $5 billion engineering and related services group, announces that its general counsel for the past eight years, Gary Graphia, has been promoted to “Chief Legal Officer and Corporate Secretary.” Shaw has brought on board a former law-firm partner, Cliff Rankin, to become the “General Counsel and Corporate Secretary.” That must give them enough corporate secretaries! Note also the elevation of chief legal officer over general counsel (See my post of March 22, 2006 as to the distinction.).

To the point of this post, however, the release emphasizes that during the promoted GCs time, the legal department has grown from 3 to 24 lawyers (with 18 other staff) and completed three major acquisitions “as well as numerous smaller transactions. “In addition, the Company has completed seven public capital markets transactions totaling over $2.7 billion, and three increases to its bank credit facilities, the most recent being to increase the facility to $850 million.”

Those metrics of accomplishment evidently count highly to senior executives of that company, and probably other companies, and yet the transactional ones are metrics that law departments do not track and compare for purposes of benchmarking.

By “dormancy months” I mean months where the amounts billed by law firms are much less than the average monthly billings over the lifetime of a case, such as 20 percent or less. For example, if a case lasts 36 months, and costs $3.6 million in legal fees and expenses, the average monthly burn rate is $100,000. A month where $20,000 or less is billed would be considered under this definition a quiet month, a dormant month.

If a law department calculates for each of its major lawsuits the percentage of dormant months, could useful conclusions to be drawn? Months of low activity might show that some courts are clogged, or that some plaintiff’s lawyers engage in spurts of activities. A high percentage might show that the in-house litigation manager is not being aggressive about resolving the case. Knowledge of patterns might help the in-house lawyer budget more precisely as the litigation struggle ebbs and flows. Even so, it is far from clear to me that the dormancy ratio has much to offer, unless a department could share comparable data with other law departments.

An article in the McKinsey Quarterly, 2007 No. 1 at 77, notes perceptively that “in a competitive market economy, performance is fundamentally relative, not absolute.” It’s about how your company stacks up against its competitors. That’s true likewise for general counsel as to their management efforts. Law departments compete with other law departments in their industry.

More generally, a law department ought to benchmark itself against similarly-situation departments, because comparing its performance only to itself is absolute, not relative. Your law department can improve like gangbusters, but if everyone else is improving faster, your relative standing has dropped.

Some company’s base bonuses of their top executives on how well the share price or market cap fares against those of comparator companies. A similar test, using key benchmarks over perhaps a two-year period, could apply to general counsel.