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The labor theory of value maintains that work makes worth. The germ of this post comes from Jane Kamensky, The Exchange Artist (Penguin 2008) at 34. Karl Marx made this belief a pillar of his system but others have questioned (or rejected) the notion that the amount of time invested in a product or service has any essential or privileged bearing on its value.

Hourly billing by law firms borrows from the labor theory of value, someone might propose, because it assumes that the legal services provided are worth the amount of time put into them (multiplied by an hourly rate).

That proposition is false. It may be a workable expedient and a facile proxy for value, but it misjudges the basis for what creates and delivers value to a client (See my post of Oct. 31, 2011: value in use.).

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Richard Swenson, a medical doctor, popularized the concept of time margins in the mid-1990s. As described in Benny Tabalujan, ed. Leadership and Management Challenges of In-House Legal Counsel (LexisNexis Australia 2008) at 43, in-house lawyers would moderate some of the pressure on themselves, and be able to get some work done more effectively, if they purposefully created blocks of empty time in their calendars. Buffers of hours let you fit in unexpected calls, think through knotty problems, or simply change gears and recover a bit.

Deliberately unscheduled time, be it 30 minutes a day or a two-hour segment once a week, has benefits something like scheduling meetings for 50 minutes (See my post of Dec. 10, 2009: give yourself time between meetings.).

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A stark contrast appeared in a recent survey. Asked to rank five cost-reduction steps in order of importance, one quarter of a group of in-house respondents chose “Hiring freeze or reduction in legal department staff” while at the same time almost the same percentage chose “Hiring in-house counsel or temporary staff to reduce outside counsel.” The data comes from Major, Lindsey & Africa’s survey during the spring of 2011.

One could simplify these responses to highlight the opposing views: fire department lawyers versus hire more department lawyers. It is true that “reduction in staff” doesn’t necessarily mean lawyers and hiring “temporary staff” muddies the second choice. Still, the underlying basics, the steps that clash as opposites, are to skinny down or beef up. The report simply provides the metrics, it does not further elaborate on them. Sonya Olds Som, a lawyer and recruiter at MLA, will be please to send you the report if you write Som.

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An article in Sloan Management Review, Fall 2011 at 66, explains the term “value in use.”

The notion is a measure of “value in terms of how a given asset provides benefits to a specific owner under a specific use.” Assets themselves have no inherent value; they generate value only when they offer specific benefits to their users.

This speaks to the much-discussed topic of value delivered by law firms. Value in use instructs us that the value of what a law firm does depends completely on the particular company it counsels and the particular time and circumstances of that advice. Absolute value has no meaning; only circumstantial value.

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About a year ago I used the data from the 2010 General Counsel Metrics benchmark survey to calculate how 20 industries ranked against each other on four key metrics (See my post of Dec. 1, 2011: legal intensity; and Nov. 30, 2010: eight countries.). This year, at the 600 participant mark, I looked again at 17 of those industries (not having had Insurance last year and dropping Not for Profit). Note that about half the participating law departments are new to this year’s survey, which strengthens the conclusions because they greatly broaden the data set.

The fundamental finding involves stability: the first five industries retained exactly the same standings. The least legally intense industries, by which I mean they had overall the lowest lawyers and lowest staff per billion dollars of revenue and the lowest internal and lowest external spending per billion are Retail; Food & Beverage; Manufacturing (that is a surprise, with all the presumed litigation); Extractive, Mining and Chemicals; and Utilities (surprising, with all the regulation). They have 20-30 participants in each industry, although Manufacturing had more than 100.

As last year, the industries with the highest level of legal intensity included Business Services, Financial Services, and Technology. Only Business Services should raise an eyebrow among that group.

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A company that provides communications tools for major litigation. For the Defense, Aug. 2011 at 75, has an ad for TrialWorks. It promotes its case management software and promotes its connectivity services, including skype, iChat, video teleconferencing, instant message, text, email, webinar, fax, and phone. The site does not call out any law department clients, but they must exist.

Another way to cluster companies for benchmark comparisons. An article I just read used the four-digit GICS code “because it has been shown to explain many financial results better than SIC codes and NAICS codes” (See my post of Dec. 27, 2010: use codes to create finer distinctions than “industry”.).

It is not possible to define numbers formally. This axiom-based inability has no bearing on the importance of metrics, but it fascinates me that “providing a univocal formal definition of what we call numbers is essentially impossible: the concept of number is primitive and undefinable,” as explained more fully in Stanislas Dehaene, The Number Sense: how the mind creates mathematics (Oxford 2d ed. 2011) at 224-225 (emphasis in original). Fortunately, our calculating minds don’t rely on axiomatic definitions.

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The NY Times, Oct. 28, 2011 at B2, reports that in 2009 audit fees averaged $569,000 per billion dollars of revenue. For U.S. companies that year, what they spent on their law department and outside counsel averaged something like $5 million per billion of revenue – on the order of ten times more. I know nothing about the benefits to a company of audits of its books, but the legal value delivered seems much higher than that ratio.

The same item mentioned that in the years after Sarbanes-Oxley, a statute that many cite as the epitome of increased regulatory burden, audit fees starting trending down. Wouldn’t complexity, globalization, and technology – the trio of forces often cited as increasing demands on law departments – have increased demands for accounting services and therefore have stabilized or increased fees?

Finally, if you are in a U.S. law department of three or more lawyers, the odds are very high that one of only four accounting firms audit your company and assess your litigation reserves. Of American companies with revenues over $1 billion (and I used a typical ratio of three or so lawyers per billion), 98 percent have their books scoured by Deloitte & Touche, Ernst & Young, KPMG or PricewaterhouseCoopers.

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To proclaim changes in broad metrics, such as total legal spending from last year to this, a survey needs to have a fairly consistent core of respondents answering similar questions over the period of time. If there is churn – last year 100 took part but this year 50 of them along with 50 new ones – or if the questions and their definitions shift – last year asked about worldwide lawyers and this year about total or domestic lawyers – then year-over-year comparisons of the results are silly.

Hence, touted “continuity” of a benchmark survey may carry no water. Yes, 25 years ago Equitable’s legal department commissioned Price Waterhouse to do a consulting project, from which emerged the distant ancestor of one of today’s staffing and spending surveys. Later, the survey trundled over to Hildebrandt, continued when Thomson Reuters acquired it, and kept plugging away when BakerRobbins merged in. Now, a survey that places great stock in its lineage perches with a fourth company, the fledgling HBR Consulting (not to be confused with the Harvard Business Review – HBR). Continuity of a survey doesn’t matter; continuity of participants does, so findings ought to disclose turnover in the ranks.

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Each strata of a law department, from person to unit to the entire function, has its own regularities and concerns. A “lower level” won’t fully inform a “higher level.” Scientists have realized for years that an understanding of atomic interactions doesn’t encompass the larger sphere of molecules, nor does understanding molecular rules explain higher-level, complex organisms. Each rung of the hierarchy has its own properties, sometimes referred to as emergent characteristics, that depend on the former but are not defined by it nor fully elucidated by it. Components don’t explain the whole; the sum is greater than its parts.

So too, forces, incentives, and characteristics operate at the individual level in a law department, but when you “move up” to the practice group, new ones emerge. And then, multiple practice groups as part of a legal department introduce yet another set of considerations to be understood. Management concerns regarding a whole department are qualitatively different than those pertaining to a portion of it.

In the sciences this is called the problem of scale, as explained by Duncan J. Watts, Everything is Obvious: once you know the answer (Crown Business 2011) at 63. Moves up the scale present new problems and insights, emergent issues, with only partial overlap with other levels.

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Major, Lindsey & Africa surveyed inside counsel this spring and released the results in July. One question asked “What percentage of your legal department work is handled by outside counsel?” Almost six out of ten respondents selected “0% – 40%” while two-and-a-half out of ten chose “41% – 60%.”

It is not possible to dig more deeply into these broad bands and combine them, but we might not be far off to guess that something like 80 percent of these legal departments would have chosen 30-50 percent if that band had been available.

Did those surveyed think in terms of budget dollars? If 60 percent of the typical U.S. law department’s budget goes to external counsel, but their effective hourly cost is 50 percent higher than their inside-lawyer fully loaded cost, then the aggregated hours are about the same, inside to outside. Did respondents estimate hours worked on both sides? Did they take into account in any way differences in complexity of work done inside and outside? And, do they articulate or consider any differences in chargeable hour equivalents worked inside and out? Even self-respect might bias responses, since how many law department managers would want to admit that more work is done by those retained than by those hired?

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