Articles Posted in Benchmarks

Interviews in the summer of 2005 with 97 “senior decision-makers who help choose outside counsel” were “done in conformance with generally accepted research principles set forth in CASRO and ESOMAR, [and] has a sampling error of +/- 10%.” (From Kirkpatrick & Lockhart Nicholson Graham’s Top of Mind 2005 survey) I commend the effort to legitimize results by applying a scrupulous methodology.

What undermines the methodological rigor is the high number of non-lawyers, or officers not in the law department, whose responses were included. The brochure says that the study interviewed “senior in-house counsel in FORTUNE 500 and 1000 companies,” which it did, but not only that group.

The people interviewed included at least 32 – one third of the sample – whose titles suggest that they are not in the law department, let alone lawyers. That third includes 20 CEOs, COOs, and Presidents; another 4 are VPs of Operations; 5 head functions such as HR, CFO; and 3 are “Executive Vice Presidents.”

Although legal-department benchmarking studies always compare inside spending, no one has definitively defined all its components. In a recent project, we encountered three problematic situations. One law department includes severance costs in its budget; many law departments never see them because HR picks up those costs. Some law departments are charged with the value of stock options and restricted stock grants they award; other departments never see those costs. Most law department budgets include the compensation of the general counsel; for other departments, that cost is carried on an executive officer budget.

Use benchmarking data as directionally correct, recognizing that departments differ at the margins in what they include in and exclude from their budget

A study of companies with U.S. revenues greater than $8 billion from the Hildebrandt 2005 U.S. Law Department Survey indicates a correlation between company revenues and number of attorneys. The median number of U.S. attorneys per 1,000 US employees is 1.5, but, more importantly, as revenue per employee increases, so does the number of attorneys per employee.

Cause and effect may be tangled. It could be that plentiful legal support helps everyone in the company produce more; it could be that busy, well-run companies, generating more revenue per employee than the norm, drive the need for more lawyers. It could be that employee revenue and lawyers per unit of revenue have no actual correlation, but some third factor (or factors) cause them to oscillate together.

Some surveys ask law departments to say how many lawsuits the departments had pending at the end of the year. That number, however, is fraught with problems. Principally, all lawsuits are not created equal. One class action can swallow more time and money than hundreds of slips and falls.

Even the case counts can be slippery. A company can overpay to settle cases or drag its feet or refuse to settle. In-house counsel may be lax in closing cases on the matter management system that tracks cases, especially if the lawyers look better because it shows they are handling lots of cases.

It’s not even clear how to define a case. Government investigations; workers comp; asbestos filings in the thousands; multi-district; mediations and arbitrations? Many cases fade into quiescence for long periods of time, so do you count active cases – whatever that means? Should law departments count lawsuits filed outside the US? When metrics of such slippery provenance are reported, one has to wonder at the usefulness of the data.

Some companies have within their ambit business operations that are widely dissimilar. Conglomerates do, as do others, such as Alcoa, Altria, and universal banks. It is impossible for their law departments to find enough other companies to benchmark against that have a similar mix of business segments. The solution is segment benchmarking.

For example, if you are a manufacturer with a major financing arm, you can invite law departments in companies of either of those segments to participate. You have to figure out how to allocate some of the shared services lawyers and costs, but you can at least develop some metrics that give directional guidance.

According to the Economist, Dec. 17, 2005 at 32, James Copland of the Centre for Legal Policy at the conservative Manhattan Institute recently studied “health-care litigation – including suits against doctors, drug firms, HMOs, nursing homes and so on.” Copland estimates that such litigation’s total costs, direct and indirect, “could be as much as $200 billion.”

The Economist wryly observes that “this figure involves some heroic extrapolations, but even half that sum would seem a lot to pay” for such a dysfunctional system. I wonder if half that sum is way too high. What is the total annual revenue of the health-care industry? Is total legal spending as much as 0.5 percent of that revenue?

According to the Economist, Dec. 17, 2005 at 57, “about $250 billion is spent on legal services world-wide, about two-thirds of it in America.” That means about $165 billion in the US, but one has to wonder whether that gross estimate includes the costs of inside lawyers. How could health-care litigation bulk so large?

Deryl Earson, Vice President Legal Services of Environmental Management Corp., part of the BOC Group, spoke at the ACC 2005 Annual Meeting about legal department benchmarks. One of his examples came from his department’s practice of tracking how many days it takes to negotiate and execute each major customer contract (“major’ excludes letters of intent, contract amendments, confidentiality agreements and other minor documents).

“Each month we determine the average for that month (the current average) and we determine a rolling average for all the contracts during the last 12 months.”

An excellent statistic, the rolling average. Every month, the rolling average is calculated from the most recent 12 months, which captures a moving picture of baseline performance. This method avoids having wide variations at the start of the year, when only one or a few months’ data is available. It gives a constant baseline to compare current performance. Graphing the moving average brings out underlying trends.

In the winter of 2002-2003, the American Prosecutor’s Research Institute (APRI) conducted a performance audit of the Pierce County (Washington) Prosecuting Attorney’s Office.

The report (at 9) included survey data collected nationally in 2001 by the US Dept. of Justice’ Burea of Justice Statistics. Nationally, the ratios of attorney to non-attorney staff were then:

o 3.6 attorneys to every 1 investigator

During the summer of 2005, 412 inside corporate counsel responded to an online survey sponsored by ACC and Corpedia, a provider of ethics and compliance training. Some 85 percent of those respondents were at US-based companies, and 60 percent were with publicly-traded companies.

The surveyors reported that “for organizations between 1,000 and 9,999 employees, 26 percent are spending more than $1 million annually on their compliance and ethics programs. The summary does not indicate whether that means spending both internally and externally, but assume it is a total figure.

If we take the mid-point of 5,000 employees, that size of company would have about 12 lawyers (using data from 123 companies in the Hildebrandt 2005 U.S. Law Department Survey, and 2.55 US lawyers per 1,000 U.S. employees at the median), and thus a total legal spending in the rough vicinity of $12 million (assuming about $400,000 inside and $600,000 outside spending per lawyer). The ratio of ethics and compliance spending to legal spending would then be less than 1 to 10.

The law department at BellSouth has prepared a manual to help its members understand, collect, and analyze operational metrics. The manual lays out uniform operating guidelines, for example, as well as “clear definitions of processes, metrics categories, and how financial information will be gathered. (From Jan. 2005 materials of ACC, at 7, provided at a conference organized by the ABA Section of Business Law and ACC, Nov. 2005)

If a law department has the time, interest and metrics to justify emulating this practice, it sounds like a useful exercise.