Written by Rees W. Morrison, Esq.
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Many CEOs and CFOs know no clear way to tell whether their general counsel manages legal headcount, outside law firms, and budgets efficiently. Rather than anecdotes and assertions, senior executives would like answers based on objective numbers.
Reliable benchmark metrics are a great aid to both the general counsel and other senior executives.
If they conclude, for example, that they have to cut costs, metrics tell what expense level for legal is plausible. Or if it seems more legal staff or spending is needed, they suggest what level is typical.
Good metrics provide shared, fact-based terminology to plan, budget, and discuss staffing, spending, and expectations for the in-house legal function.
Fortunately, it’s straightforward to benchmark any legal department in the manufacturing industry against peer legal departments. General Counsel Metrics, LLC offers far more law department benchmarks and participants (more than 1,000) than any other survey. And, its five releases a year cost nothing.
In 2011 the GC Metrics final release had 54 manufacturing companies from the US or Canada whose combined revenue was $123 billion. That large set of departments employed a total of 1,234 in-house lawyers. This article draws on that data.
What’s an example of an important law-department benchmark?
If your company has two lawyers and your revenue is around $750 million, dividing 2 [lawyers] by 0.75 [billion dollars] gives 2.7 in-house lawyers for every billion of revenue. Lawyers per billion is one fundamental benchmark for law department managers since it gives a clear comparison with other companies on the revenue supported by your staff lawyers.
Typically, companies in manufacturing report close to 2.5 lawyers per billion, so your department looks about normal. Assuming you are in decent shape legally – nothing ugly and expensive like class actions, governmental investigations, or patent fights, for instance – your company’s management of internal attorney headcount looks about right.
For someone to appreciate benchmarks they should feel comfortable with three important concepts: normalised figures, medians, and representativeness:
Good benchmark reports produce normalised results, usually as ratios. They don’t disclose absolute numbers. A normalised result divides one number (say, total law department employees) by a second (say, company revenue).
This calculation puts all the companies on the same footing; companies with billions of revenue have scores of people in the legal department; smaller companies may have only one lawyer and a part-time executive assistant.
But when you normalise their numbers, they can appear just the same on that ratio. For example, GC Metrics tells us that the manufacturing median is 4.8 total law department staff (lawyers plus non-lawyers) for every billion dollars of corporate revenue.
When a group of figures is sorted high to low, the median is the middle figure. If Lawyers per billion of a group of nine law departments is 1, 3, 4, 5, 7, 7, 8, 9, and 19, the median is 7. (Note that the average of those numbers, 9, is much higher than the median because it is skewed by the outlier department with 19 lawyers). Medians are more reliable than averages because they aren’t biased by one or two extremely high or low values.
According to GC Metrics, the median is 2.5lawyers for every billion dollars of revenue among North American manufacturing companies. The ratio of support staff in the legal department to practicing lawyers is incidentally around one lawyer for every one support staff, i.e. secretaries and paralegals.
The companies that are the source of the metrics need to be numerous enough and similar enough to your company for the benchmark results to be convincing. Without a plausible comparator group, sceptics will dismiss comparisons.
In addition, similarity of the companies makes the findings more applicable, defensible, and accurate. Industry-based benchmarks provide much more insight than benchmarks based on other characteristics, such as company revenue, employee numbers, or lawyer count. Those in the same industry face generally similar legal challenges and so require comparable legal activity.