Articles Posted in Benchmarks

In 2004, ACC posted a web survey and e-mailed invitations to 33,468 in-house counsel. A summary reported the results from the 1,814 responses.

The median number of US-based attorneys was “slightly over 6” while non-US-based attorneys were “less than one.” Corresponding medians for paralegals (3.0) and other legal support staff (3.3) was greater than for non-US based support staff (“less than one”). Taken together, the median total law department reported 13-14 total employees.

Here is the oddity. “The median legal budget for the entire company, including personnel, operations, administration, occupancy expenses and outside counsel fees is $1.8 million.” The median outside counsel fees were $960,000 of that total expenditure. That leaves just under $900,000 for the total of 13-14 employees, which at about $150,000 per lawyer is much too low. Other surveys show that inside spending per lawyer runs at $300,000 or more, not half that figure as reported by ACC.

With an increase from the comparable 2001 census of 10.2 percent, the US non-governmental in-house counsel population has grown steadily. (See my post of Sept. 10, 2005 regarding comparative growth rates of the 200 largest law firms and law departments.)

The average of 3.05 lawyers per corporation stands higher, I am sure, than the median number, but the executive summary I read did not provide that latter figure. As for other demographics, survey respondents had held their position as in-house counsel for an average of 11 years and had worked in other legal positions an average of 6 years before going in-house. (See my post of Sept. 4, 2005 about demographics of law departments.)

This was the result of a study at a bank’s law department. At a consumer goods company, the ratio came in around that figure. At an aerospace company, the number came in about five percent of total outside spend (not including patent and trademark filing and annuity expenses).

The vendors typically include forensic experts, litigation support providers, temporary staff agencies, executive search firms, transcript reporters, expert witnesses, and copy services.

A reader commented on my post of August 31st about comparing litigation fee burn rates and probabilistic amount at risk. “This is a standard risk management approach when examining potential liability in contract and has considerable merit. But I wonder what you think the ‘cut off’ point is – i.e. when you should stop spending defense dollars and just settle. Arguably, if you are spending $1 in legal costs and have $1.01 at risk, you should keep defending.”

I appreciate this, and all comments. Here, I was really driving at a way of comparing investments in defense across many cases. The formula gives litigation managers or business managers (See my post of Aug. 21, 2005 about not hiring litigation managers.) a standard scale for assessing defense costs and amounts likely at risk. It is not a calculus for deciding when to settle, although the calculation might have a role in that decision.

The most telling and honest benchmark metric for a law department is its total legal spending – its inside budget plus what it spends on outside vendors – divided by its company’s revenue for the year. TLS/Revenue.

I set aside the fact that financial companies often use assets instead of revenue. Continuing, it’s only too true that perfect accuracy of TLS/Revenue cannot be had, as is attested anytime several law departments submit the metric. Many methodological slippages have been previously discussed. (See, for example, my post of May 30 about including judgments, settlements, and fines; and July 18, 2005 on internal, non-lawyer time spent on litigation.)

One advantage of TLS / Revenue is that compared to other legal department metrics it’s less susceptible to gaining. The law department with few in-house staff may well spend more outside, the parsimonious budget may be matched by low corporate revenue. The uber-metric is favored also because it is a ratio so all companies can be compared on it, regardless of size; revenue must be reported publicly (at least for stock exchange companies); and the ratio can be tracked by a law department over a period of years even without having any external benchmark comparisons. It also makes sense to senior executives and can be compared to the same ratios for other staff groups. (See my post of April 9, 2005 with data about other staff group ratios.)

A recent study found several law department respondents asserting that litigation is becoming more complex. I poked around at this common view in a previous post (May 15, 2005) but thought again about it again, and here will go beyond that post’s indicators.

If someone would take 20 cases in two or three areas of law (discrimination, breach of contract, product liability, for example) each of 20 major companies resolved in 1994 – 400 cases closed – and would match them against a similar set from 2004, how might you measure if there were an increase in complexity?

Compare the number of months the cases lasted. Count the number of co-defendants and cross claims and counter claims. Count the number of statutes cited and the number of cases cited in briefs. Count the number of hearings per case. These measures, and others I am sure, might combine into a complexity index, if they were given different weights. (See my posts on April 3 regarding an Energy index and Aug. 14, 2005 on a trademark index.)

In the ACCA/Serengeti 2004 survey, the sub-report for one industry that I studied showed data for 30 respondents on total legal spending. Of them, a dozen companies had sales of $100 million or less. Two of the dozen had itty bitty total legal spending, one was typical (around 0.2-3% of sales), while nine were between a percent and six percent of sales! Proof of economies of size. (See my post of May 4, 2005 on TLS as a percentage of revenue declining as revenue increases and Aug. 5, 2005 about quality of firms by size of company.)

A second point comes from this data. Even companies with little revenue – here seven companies with less than $10 million in annual revenue had at least one inside lawyer! – can spend like the proverbial besotted swabbie.

Lawyers in some countries cost less than U.S. paralegals. I have seen compensation figures for Latin American lawyers, local lawyers not expats, that range around the $50-75,000 mark. In parts of Asia, the figures are comparable, or lower.

Because lawyers are not everywhere as expensive, it is better for general counsel to talk about costs than about heads. A global department can accomplish something like offshoring within its own ranks, simply by hiring more lawyers in lower-cost areas and having them take on more work.

Despite the over-exposure of convergence, most law departments continue to retain a significant number of law firms. Data from Hildebrandt’s recent law department survey, for law departments with more than $20 billion in revenue, found the first quartile department reported 200 law firms, the median was 301 firms, and the third quartile was 457.

In several circumstances, a law department must necessarily hire many law firms. If the company maintains trademarks in 100+ jurisdictions, it has foreign trademark agents in most of those jurisdictions. Query, do you count each of them as outside counsel? A company that has dozens of superfund sites may well have local counsel for each of those sights, and properly. A company that is sued in every state probably has scores of local counsel. If a law department counts all the collection lawyers that its company uses, the absolute number of law firms retained swells.

What the industry needs is a standard definition of significant outside counsel, those who are retained not for a completely specialized, legally required, or local need but for a wider swath of higher-level legal services. The absolute number of these legitimate standardized-definition law firms, or even better the ratio of them to revenue, that would distinguish whether you’re converged or not. (See my posts of March 24, 2005 concerning concentration over convergence and August 3, 2005 regarding Merrill Lynch.)

More than 248,000 new applications for trademarks were filed with the U.S. Patent and Trademark Office last year, a 9 percent increase from 2003. (27 Natl. L.J. May 9, 2005 at S1).

Aside from the sheer intoxication of this metric, it more usefully serves as an index to the productivity of a trademark department. An index figure places other numbers in context; here, if every company is trying to protect more marks, a law department ought to report its own trademark activity in light of overall trends. A trademark group could crow about applying for 10 percent more marks in 2004 than in 2003, but compared to the index, the increase would be only one percent more than the national norm. Just as we index prices for the effects of inflation, we can index law department performance against a national norm or level.

[On a separate note, how accurate are trademark and patent filing figures as leading indicators of future performance of the economy?]