Articles Posted in Benchmarks

As part of a recent project, three law departments stated the amounts they had paid in settlements during the previous three years. Taking their 2004 revenue as revenue for 2003 and 2002 (which is approximately on the mark), the three paid .08%, .09% and .12% of that three-year revenue in settlements.

Stated differently, for every dollar they paid outside counsel in 2004, they paid about two dollars in settlements during 2002-2004. That means in a given year, for every dollar paid law firms, these departments paid plaintiffs about 75 cents.

Law firms paid more than $100,000 in a year usually are key firms for a law department. As such, they are also the most likely candidates for alternative billing arrangements and other management initiatives.

Based on some recent benchmarking, for firms paid more then $100,000 in 2004 per billion dollars of 2004 revenue, the range was .4 to 4.8, with the average being 1.8 (median 1.5). Thus, a rule of thumb could be 1 to 2 “major law firms” – paid more than $100,000 – per billion of revenue.

My post of April 9, 2005 discussed IT, HR, and Finance benchmarks as polestars for legal benchmarks. A book I reviewed recently The Professional Services Firm Bible, John Baschab and John Piot, Eds.offered two benchmarks on Finance. With the first, the book showed Finance headcount as a percentage of business unit headcount (it was not clear whether the denominator was only business unit headcount or all headcount). I have not seen data of legal staff as a percentage of all employees.

The same piece stated that “in a mid-size firm, IT costs should range from 1 percent to 3 percent of revenue.” That range is too broad to have much punch, but it corroborates that Finance is likely to be from twice legal to six times legal in expenditure.

A 2005 study by Laurence Simons [www.laurencesimons.com] draws on compensation data from 9,000 legal professionals and more than 50 multinationals in 16 countries.

The executive search firm published base salary data in U.S. dollars for six Asian countries. The only size category with full data consisted of departments with 1-5 lawyers. Note the astonishing inequality, based on the mid-point of the base salary ranges given.

Hong Kong $255,000

An audit report on a city’s Law Department (Austin, Texas) collected several useful performance measures for litigation group. [http://www.ci.austin.tx.us/auditor] I have slightly modified the various listings.

Number of claims received

Number of lawsuits received

In 2003, the City Auditor reviewed Austin’s Law Department [http://www.ci.austin.tx.us/auditor]. The Auditor’s 73-page report showed law department budgets – nationwide averages, Texas city averages, and Austin – per resident. The number of residents serves as the normalizing denominator, in the same way that revenue normalizes law department budgets of for-profit corporations.

Normalizing means that large and small participants can be compared to each other, because the common, primary metric – here, municipal law department budget – is divided by a common denominator – here, residents. Since the metrics correlate – the larger the budget the more residents – the resulting ratios stand every participant on the same scale. Lawyers per billion dollars of revenue describes another common, normalized ratio.

For political geographies such as states, provinces, counties, and cities, the fundamental normalizer should be residents.

Benchmark surveys include the operational costs of law departments (mostly compensation, but also facilities, T&E, training, IT and other internal costs) and departments’ payments to vendors (mostly law firms). They rarely include other law-related payments, such as fines, judgments and settlements.

Legal departments do not provide the elusive data because they (1) do not track it; (2) do not convert all lawsuit resolutions into money – some involve licensing a patent, agreeing to new procedures, continuing a disputed arrangement and other non-cash solutions; (3) do not want to disclose sensitive, confidential settlements or patterns of settlement; (4) have insurance coverage for some expenditures; and (5) they react to the infrequency and size of the few payments they make by saying “this was an anomalous year”.

For all these reasons, benchmark total legal spending (TLS) is not total.

A LegalMetric study of more than 200,000 federal civil cases terminated during fiscal year 2004, was reported in The Capital Times on May 24, 2005. The study showed the Western District of Wisconsin tied for first place with the Eastern District of Pennsylvania as the courts with the fastest filing-to-termination average cycle time.

The speedy courts’ average was 5.34 months; the median cycle time for all district courts was more than twice as long. Even so, if district courts on average resolve cases in less than a year, that strikes me as impressively fast.

If you are a law department trying to measure your own cycle time for disposition of lawsuits, you now have a stopwatch, at least for federal district court cases, against which to time yourself.

A recent study by the National Center for State Courts compared a large set of jury verdicts in 2001 to the published data from those cases by 20 reporting services. Disturbingly, the NCSC found twice as many jury verdicts as the services reported. (27 Nat. L.J. 11 (May 23, 2005)

Other troubling differences in the data showed up. Compare the NCSC data to the reporting services’ data: plaintiff win rate of 51.2% vs. 60.1%; median compensatory damages of $40,271 vs. $66,548; mean compensatory awards of $680,551 vs. $1.247 million.

If reporters inflate the plaintiffs’ odds and amounts of awards, law departments are more likely to agree to settle and for higher amounts.