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Economists often refer to changes that are cyclical, meaning that there is some regularity in the pattern of change and reversion, and changes that are structural. Structural changes are permanent, profound, often take effect gradually, and are sometimes hard to identify at the time. For example the demographic change of an aging population appears to be a structural shift, one that is much more permanent and deep than a cyclical swing.

For law departments, some management ideas are cyclical. I suspect that decentralization of reporting ebbs and flows in popularity. Convergence may be a cyclical swing of the pendulum as might partnering and a strong focus on cost control.

Structural changes that will affect law departments may include a shift in power and influence away from law firms. Over a number of years, off shoring may prove to be another structural change as well as unbundling services and third-party investments in law firms. Perhaps US style litigation is a structural change that will ripple out from our shores. Some people forecast that technology will transform the practice of law (See my post of Sept. 25, 2008: Cisco’s Mark Chandler with 30 references.).

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To lessen the influence of outliers, a set of numbers can be Winsorized. Named after Charles Winsor, to Winsorize data, tail values at the extremes are set equal to some specified percentile of the data, such as plus and minus four standard deviations. Here’s how it’s done. For a 90 percent Winsorization, the bottom 5 percent of the values are set equal to the value corresponding to the 5th percentile while the upper 5 percent of the values are set equal to the value corresponding to the 95th percentile. This adjustment is not equivalent to throwing some of the extreme data away, which happens with trimmed means (See my post of May 28, 2007: five percent trimmed mean.). Once you Winsorize your data, your medians will not change but your average will.

Using the data from the 652 participants so far in the GC Metrics benchmark survey, I Winsorized the data for number of lawyers. Using a 90 percent process, at the small end meant changing 9 of them to 1 lawyer, which was the 5th percentile value from the bottom (the other 23 were already 1). At the high end, I changed the 32 with the most lawyers to the 95th percentile figure, 110 lawyers. After Winsorization, the median of 6 lawyers stayed the same but the average dropped from 25.96 lawyers to 18.03 – a decline of 30 percent because several very large law departments were drastically Winsorized.

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Chaos theory studies phenomenon where small changes in the initial conditions result in major changes in consequences (a butterfly flapping its wings in Brazil famously results in a hurricane off Bermuda). As used for physical systems, chaos events are non-linear: they are not wildly unpredictable and mysterious – the popular notion of chaos – but they have emergent properties much different than our minds easily grasp. Feedback loops account for some of the unexpected outcomes and unpredictable.

A word of advice from an in-house lawyer early in the deliberations over a pricing decision could have massive consequences years later (antitrust investigation avoided; millions in profits rightfully earned). A well-timed settlement offer takes the company down one path; botched, the bills and vexations pile up for years. If we borrow the metaphor of non-linear systems and apply them to legal teams, we risk mis-applying it, which is the lesson of Stephen E. Kellert, Borrowed Knowledge: Chaos theory and the challenge of learning across disciplines (Univ. Chic. 2008). Even so, such a power idea, caught as a conceptual metaphor, can help us understand and describe some things that happen to law departments.

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Economists would distill the corporate legal market into the DEMAND by corporations for legal services and the SUPPLY of those services.

Demand, what drives legal services, has been a topic returned to more than a few time on this blog (See my post of July 2, 2007: what drives a company to hire its first in-house lawyer; and Dec. 7, 2010: six primary drivers of total legal spending. Many topics reflect changes in demand for the advice of lawyers: global spread of business, regulatory requirements, complexity, intellectual property’s ascendance.

Supply, what meets the demand for legal services, has many forms. Foremost for organizations with a legal team of employees are inside lawyers followed by external counsel. Recently, LPOs have muscled in, along with educated clients who practice self-serve. Increasingly, online resources will be available to dispense legal guidance and documents (See my post of Oct. 31, 2005: online legal resources; Nov. 15, 2005: online resources; Jan. 10, 2006: lawyers and research online; Jan. 13, 2006: free online information; March 9, 2007: the price of legal information is being driven to zero; April 27, 2007: the internet and four generations of resources; Jan. 25, 2008: Martindale-Hubble and shared evaluations of law firms; Sept. 9, 2008: economics of information; and Jan. 11, 2010: Ning with 600+ IP blogs.).

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Many posts on this blog have dipped into the well of the annual Fulbright & Jaworski surveys of litigation data. Each year the firm polls a few more than 400 law departments in the United States and the United Kingdom.

If the responding group year after year remains significantly similar might not the results reflect some degree of self-reference? If one year’s results show a decline in international arbitrations, to imagine one possibility, might the respondents read that and be influenced in their behavior during the following year, or just in how they remember and answer the next year? They hear the echo of their own voices and answer questions to some degree influenced by their own reported behavior.

My question ranges more broadly than F&J’s admirable investigations. We could surmise the same reverberation and influence from the annual ACC/Serengeti surveys. The echo chamber should have little effect on quantities that are easily counted, such as budget figures or staffing numbers. Its risk rises substantially on qualitative assessments, such as regarding the perceived effectiveness of alternative billing arrangements. When respondents have heard their own, collective assessments one year, the bandwagon effect the next year may reinforce beliefs and thus answers in the same direction.

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Scientists call artifacts “observations in their research that are produced entirely by some aspect of the method of research,” as explained by Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux 2011) at 110. Artifacts, weeds in the gardens of benchmarks, crop up when how the data is collected or prepared for analysis distorts the findings in some way. This risk of skewed irregularity goes to methodology, not to sample size or analysis (See my post of Feb. 19, 2010: representativeness of survey respondents; May 20, 2010: four methodological bumps; May 25, 2010: effective response rates; and June 13, 2010: example of well-described methodology.).

Many artifacts lurk around benchmark surveys of law departments:

Delivery: it might make a difference whether the survey was mailed, available only online, or asked by telephone or in person (See my post of Feb. 12, 2009: included telephone solicitation.).

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In addition to General Counsel Metrics (GC Metrics), three U.S. organizations collect data from law departments and produce benchmark metrics for all to purchase. ACC/Empsight, American Lawyer Media (ALM), and HBR Consulting set submission deadlines in the late summer and produce their reports a month or two later. On that schedule data will not be included during the last quarter of each calendar year.

Perhaps that limited window for data collection skews the results they publish. Does the truncated season of the other three make a material difference in the benchmark numbers they produce? By contrast, GC Metrics welcomes participation into early January of the following year.

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Bob Santamaria is profiled in Asia-MENA Counsel, Vol. 9, Issue 7 at 40, Santamaria being the Group General Counsel of ANZ Bank, the third largest in Australia. He estimates that ANZ now has around forty-five lawyers across some thirty jurisdictions who work alongside the remainder of the team back home. Those outposts include Hong Kong Singapore, Vietnam, China, and Taiwan.

Let me soar far above this one instance of geographic distribution and offer a hypothesis. The smaller a country is by GDP, the higher the percentage of its major-company in-house lawyers are based outside the country. My reasoning is that companies that compete globally from a small starting country have to expand into bigger markets, and to help do so they post their lawyers in those remote locations. Thus, U.S. companies may be quite large but have only ten percent of their legal team overseas; a Belgian company that reaches billions of Euros in revenue probably has well more than half its lawyers elsewhere.

Back to Santamaria. He notes that organic growth of the bank’s legal infrastructure has been bolstered by opportunistic M&A. “For example, we picked up around fifteen lawyers with the acquisition of the Asian operations of the Royal Bank of Scotland.” Not a merger, true, but a significant corporate acquisition brought with it a large infusion of lawyers.

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Jeff Schuett, the VP and GM of LexisNexis CounselLink, contributed an article to Met. Corp. Counsel, Nov. 2011 at 30. He writes “Corporate litigation costs have grown 75 percent over the past ten years – even at a time when overall costs rose just 20 percent.” Schuett doesn’t give the source of that growth figure so, because the figure seems odd, I asked him about it. He replied by email that “my views come from reviewing data and information from several sources, including the Hildebrandt Client Advisory; Inside Counsel Law Department Survey, LexisNexis Estimates and “The Tipping Point for the ACC Value Challenge”, Discovery Resources 2009.”

Those sources don’t convince me. My premise is that during the decade he refers to, presumably 2000 to 2010, total legal spending by U.S. law departments has more or less kept pace with revenue growth. In Schuett’s terms, overall legal costs rose just 20 percent and that seems roughly in line with corporate revenue during a tough decade.

If so, the dramatic spike in litigation costs would have had to crowd out some other legal spend. By most accounts, law departments typically spend more than half of their total budget on external counsel and more than half of that disappears down the litigation hole. Granting those benchmark metrics, litigation consumes something like a third of the budget (60% and 50% of it). General counsel are not likely to be able to absorb a 75% increase in litigation – where they spend one out of three of their dollars – yet hold the budget in line with corporate revenue that grows much more slowly. They would have to starve out all other spending on outside counsel and even reduce the internal headcount. I see no signs of those drastic alterations to cope with litigation costs, and so wonder about the validity of the number cited by Schuett.