Articles Posted in Benchmarks

In a recent consulting project, we gathered benchmark data from leading companies on their in-house counsel in several substantive specialties: corporate, litigation, intellectual property, and compliance, were included. We normalized those figures against the companies’ revenue, such as IP lawyers per billion of revenue. Even though comparable law departments can have reasonably similar ratios of total lawyers per billion dollars of revenue, their practice area metrics can diverge significantly.

Pursue benchmark metrics deeper than aggregate lawyers per unit of revenue. One approach is to look at the distribution of your lawyers by substantive practice area.

Reading Freakonomics, the entertaining book by Steven Levitt and Stephen Dubner, it struck me that I have never seen the total cost of the legal function – inside plus outside spending – expressed in terms of a company’s profit margin. To know that in a low margin business like grocery stores, the chain must sell $1 billion worth of groceries to pay for its total legal costs, while a software company enjoying high profit margins with the same legal costs need sell only $240 million creates a new benchmark.

Stated differently and holding revenue constant, the same total legal spending drags down a lower margin company more than it does a higher margin company.

The Office of the General Counsel for the National Labor Relations Board spends much of its time handling charges of unfair labor practices (ULPs). An excellent report in 1999 by the General Counsel, Fred Feinstein, helps us think about quantifying legal complexity. [www.lawmemo.com/nlrb/gchighlights.htm]

ULP determinations had become more complex. The report explains: “This is demonstrated by the fact that, since 1991, the average length of the transcript of a ULP hearing has increased 30 percent, from 473 pages to 616 pages.”

What sparks fly from striking that average? (1) We need numbers collected consistently over time to have any chance at putting a numeric face to legal complexity. (2) We need to consider exogenous forces that might have driven the numbers, other than our conclusion. For example, did procedural rules for hearings change, did the ULP bar move to larger law firms, were court reporters compensated by the page instead of flat fee or were they changing page margins? (3) We need confidence that the average of pages more accurately represented hearing length than the median. Suppose each year one monster hearing drove up the average, but the quotidian transcript didn’t budge. (4) We need to accept that page length signals complexity (not mere prolixity).

Are your department’s vital statistics as shapely as those of competitors? Gathering those comparative metrics, such as lawyers per billion dollars of revenue, means one kind of benchmarking. Studying how other law departments handle a practice, such as document discovery, means another kind of benchmarking.

With practices benchmarking, a general counsel can gather descriptions of how other departments handle a process through a trade association, informal chats, or by hiring a consulting firm to serve as the confidential intermediary. A variation on practices benchmarking finds a department inviting two or three other departments to spend time collectively studying their practices in detail.

Finally, a combination – get numbers and ask about practices – produces the best understanding of both.

Ever since publishing my book on law department benchmarks, and despite consulting mostly to law departments of large companies, I am still mystified why total legal spending declines (as a percentage of revenue) as company revenue rises.

A research paper, however, perplexed me further.  It cited a 1990 survey of 376 firms that found that “small firms believed their patents were infringed more frequently [than the patents of larger firms], but were considerably less likely to litigate these infringements.” [Koen, 1992, cited by Josh Lerner of Harvard Business School in 1995 at www.people.hbs.edu/jlerner/Patintro.html.  If larger firms are more trigger-happy on patent litigation, wouldn’t their total legal spending shoot up?

US general counsel deserve some sympathy for being bombarded with surveys.  Recently, a vendor, Serengeti, mailed a questionnaire to 6,600 ACC members, with at least one questionnaire to each law department that had an ACC member.  In addition, ACC e-mailed the questionnaire to its list of in-house counsel, so presumably many members received two invitations to participate. 

From that barrage, 239 members sent back completed questionnaires (about 75% were general counsel).  The participation rate? A mere 3.6 percent of the mailed group, and a lower rate if you were to add in the e-mailed invitees.

Very low participation rates raise two methodological concerns.  The first worries that your respondent population might not be representative of the much larger pool.  Statistics can quell that doubt.  The second point, which seems similar but has a twist, frets that those relatively few who chose to complete the questionnaire might be more interested in management issues and might, therefore, manage somewhat better.

Have you ever seen a comparison of spending by the major staff groups, each groups spending as a percentage of the company’s revenue?  I have not seen multi-company data on spending per billion dollars of revenue for Information Systems or Finance or Human Resources, but I have seen figures from one global behemoth: the ratios stood at approximately 0.8 percent of revenue for the Finance function’s spend, 0.6 percent of revenue for Human Resources’, and 0.4 percent for Legal’s.

The ratios progress neatly, but might there be a rule of thumb that at least ranks the three staff groups in this order?  Might the highest account for twice the spend of the lowest?  Where would systems support stand in such a ranking?

If law department managers had such a metrics framework, holding their spending ratio  up against comparable ratios of other staff groups, they could benchmark internally.  “Relative to our sister functions, we are more or less cost effective.”   

I recommend that lawyers set annual objectives, and some of those objectives lend themselves to measurement.  Close four bond issuances; file 18 patents, resolve two-thirds of the EEOC charges within six months, and the like. Measurement, however, runs amok if management forces staff lawyers to conjure up too many goals that are Specific, Measurable, Achievable, Realistic, and Timely (SMART). 

SMART goals entice lawyers to manufacture numbers at the expense of quality and homing in on what ought to be done.  “I need to close 31 leases this year, so I’ll shortchange scrutiny on a few, favor some easy (but less profitable) ones, and send the time-consuming strategic one to outside counsel.” 

This makes me think of the Stephen Covey distinction between the urgent and the important.  If metrics-based performance is urgent, because a bonus depends on it, those tasks will squeeze out the important ones that can’t be quantified.

Three hundred companies provided data for Fulbright & Jaworski’s 2004 Litigation Trends Survey.  According to it, for the hundred companies with more than $1 billion in revenues, the median company faced 86.2 pending cases in litigation. 

The summary I read gave no further breakdown of this number so the 86 may include small collection matters on up to massive class actions.  The summary did say that manufacturers (22% of the companies) had a median of 33 cases pending while energy (11% of the companies) and financial (9%) had 17 cases, so this trio of industries – comprising 42% of the companies – would have probably had a the median number of cases pending in the low 20’s.  It seems the litigation load, to be fair, only modestly presses on these companies.

Other data shows that about 5 lawyers per billion in revenue commonly applies, and about one out of ten in-house lawyers are dedicated to litigation.  That leaves roughly half a litigator per billion of revenue, and therefore something like 50 pending cases per litigator for the three industries cited above. 

Three presenters at ACC’s 2004 Annual Meeting, from ConocoPhilips, duPont, and BellSouth, discussed six metrics under this heading.  All I have are the overheads. 

The six metrics and their sub-metrics: (1) case inventory; (2) total cost to resolve (TCR+); and (3) dispute cycle time – each of those three having sub-metrics by type and business unit.  Further, (4) outside counsel fees, both actual and budget; (5) early case assessment; and (6) after action reviews – with the last two having sub-metrics of use and effectiveness.

TCR+ captures the usual costs of litigation, plus both inside staff time and client time value as well as expenses.  The presenters propose using TCR+ to calculate such dispute metrics as total resolution costs as a percentage of it, and total outside counsel fees, expenses and costs as a percentage of it.