Articles Posted in Benchmarks

I saw this done in a presentation. It’s wrong.

Even if the inside lawyers supervising or working on a matter are as experienced as or more experienced than the law firm’s partners, the comparison ignores the firm’s leverage. Data I developed for a law department shows that roughly 40 percent of the hours billed by its law firms in a certain practice area were partners’ hours, with the remainder split relatively evenly among associates, paralegals, and other timekeepers.

The comparison also elides the higher cost per hour of more senior in-house lawyers or sometimes specialists. It stacks the deck to compare all inside lawyers to only outside partners.

With many metrics, you can test mathematically whether the difference from one year to the next or from one group of law departments to another is merely measurement error or meaningless random fluctuation within the bounds of normal, or whether the change is evidence of a definitive difference. Tests for what is called “statistical significance” determine for two sets of data the degree to which the difference between them is highly unlikely to have occurred by chance.

Take the difference in spending per lawyer between one industry and another. It’s a common benchmark number, but obviously there is some variation simply due to how you gathered the data. If the delta (amount of difference) between two industry’s metrics passes the statistical significance test, such as at what is commonly referred to as the 0.05% level, you can responsibly trust that something meaningful, not haphazard, accounts for the variance.

The calculation for statistical significance depends on the number of data points in the each set, the absolute size of the gap, and the level of certainty you want to test for. If there are 20 law departments in each industry group, and the aerospace industry shows $900,000 per lawyer as against the automotive industry’s $960,000 per lawyer, at a common level of 0.05% the difference may not statistically significant. Analysts and journalists should not make anything of the $60,000 swing, as it may be due to factors other than an underlying, reliable difference.

I have neither seen metrics on this ratio nor encountered them in my consulting practice. Even so, not one to be deterred by the lack of precedent, I advocate as a measure of effectiveness to track at how many claims – however they are defined – fester into litigation.

One trouble is that law departments often don’t handle claims, as they are the province of a claims management or customer satisfaction group. Only if a claim degenerates into litigation does the law department step in. Another problem is definitional: what constitutes a “claim?” A complaint letter from a customer? A report from a store manager after a customer slips and falls? A warranty card returned from a disgruntled owner?

Still, the more claims are resolved quickly and without litigation, the less the workload of the law department, so it behooves a department to work with others, if necessary, to decrease the percentage (as well as the absolute numbers).

This metric is not only not a main pole in the benchmarking tent, it shouldn’t even be a stake or a guy wire. I do not think this metric has value – save in the case of comparing HR/employment lawyers (See my post of July 20, 2005 on practice area benchmarks.) – because the number of employees in different corporations that have the same product and service mix can sway high and low. One company might use many offshore employees who are paid little, another may be capital but not labor intensive, another might have an active and skilled HR group, still another might use outside counsel extensively, and so on.

With so many variables, the lawyers-per-employee metric shrinks to uselessness (Yet see my post of Dec. 22, 2005 that refers to 2.55 lawyers per 1,000 US employees.). Perhaps total legal spend per 1,000 employees suffers from the same will-o-the-wisp variability.

An article in the Star-Telegram.com, May 14, 2006 (Barry Schlacter) quoted Brian Reuter of Guideline, Inc., a firm that supplies technology expert witnesses. All praise mystical metrics!

“In patent litigation, the average cost per side is $2 million. There [were] 2,814 patent litigation filings in 2003, which means about $11 billion. If just 1 percent was spent on expert witnesses, that’s more than $1 billion [sic] for patent cases alone.”

A) The average cost per case may have holes (See my posts of May 1, 2005 and links – especially since so many cases resolve before trial; May 4, 2005 estimating total patent litigation costs – in 1991 dollars – of about $1 billion, but March 25, 2005 giving a figure close to $2 million; Nov. 11, 2005 on Microsoft averaging about $3 million per patent lawsuit; and Nov. 30, 2005 on boutiques handling patent cases and a $2 million figure.).

Global Counsel, Sept. 2003 at 18 reports results from PLC’s Global Counsel 3000 Law Firm Partnering Survey of an unspecified number of European and US law departments,. The median respondent department, however, reported 10 lawyers.

How can it be, then, that “the median number of firms used in the home jurisdiction was four” while outside of the home jurisdiction the median number of firms used was ten? A ten-lawyer department in the US would probably retain at a minimum 30 law firms in the US. Since 18 percent of the respondents were US law departments, it defies sense that the median dropped to four.

The ratio between domestic and foreign firms – 4 to 10 – likewise furrows my brow. In the respondent group, 56 percent of the departments were UK, US or German, where large domestic markets make it most likely that domestic law firms would dominate the panels. For US departments, if you exclude foreign patent and trademark agent firms, the ratio probably tilts more to domestic firms than foreign firms.

At FMC Technologies, according to its general counsel, Jeffrey Carr, several management initiatives slashed the length of time its law suits typically last. According to CFO Mag., Oct. 1, 2005 (Russ Banham), FMC Technologies drastically cut the number of firms it paid most of its fees and set up for them an incentive-loaded payment structure.

Those steps, and probably other changes, cut cycle time by more than 75 percent. That would be an admirable achievement, so long as settlement dollars have no skyrocketed and the number of lawsuits have not increased dramatically.

One of the most common denominators in law department benchmarks is number of lawyers. Lawsuits divided by number of lawyers, patents divided by IP lawyers, paralegals per lawyer, and inside spend per lawyer are examples. That method of normalizing data across many law departments, unfortunately, disadvantages law departments on inside spend per lawyer if they have relatively more non-lawyer positions than other departments (See my post of May 14, 2006 on the deleterious effect on benchmarks of leverage.).

Fully-loaded cost per legal staff permits a more comprehensive view of a department’s performance. Just as total legal spending per billion of revenue precludes gaming the statistic by loading spending inside or outside, a full legal staff view – with lawyers, paralegals, secretaries, and all others included – precludes departments with an imbalance of lawyers from looking much better or worse.

Previous posts have addressed different aspects of the fully-loaded cost per hour of corporate counsel (See my post of Nov. 16, 2005 and links; Aug. 15, 2005 on facilities costs; and Dec. 16, 2005 on consequences of understating this metric.) What hasn’t been discussed is the invidious effect on it when a law department adds a paralegal or a non-lawyer specialist (See my post of Sept. 10, 2005 on the range of such roles.).

The costs of the new non-lawyer drive up the fully-loaded cost per lawyer hour. If that increase makes the law department look more expensive – or worse, inflates the hourly rate charged clients – it creates a conflict for the general counsel. To do the right thing, build leverage and skills, makes the legal function look more costly. One antidote is to show that total legal spending as a percent of revenue declines.

Far-sighted managers of law departments look at trends to gauge future spending, types of work anticipated, technology investments, and staffing needs. For example, as reported in Counsel to Counsel, May 2006 at 15, federal lawsuits filed under Nature of Suit 365, the designation for personal injury-products liability, show a dramatic rise and fall over six years.

Based on eyeballing the article’s chart, I estimate the number of these cases filed rose from 6,000 in 2001 to 13,000 in 2002, up to 17,000 in 2003 and peaked at 27,000 in 2004, before sliding to 24,000 last year. It may be, according to the article, that one or two massive families of suits, such as the thousands that alleged harms from Baycol, fen-phen, or Firestone tires, cause most of the bulges and shrinkages.