Compound annual growth rates (CAGR) as applied to legal spending

CAGR is an imaginary number that describes the rate at which an investment or expenditure, such as outside counsel payments, would have grown if it grew during a period of time at a steady rate. Thus, if a legal department paid of $10 million to outside counsel in 2005 and five years later paid $20 million, then its spending grew 100 percent. True, but what was the smoothed-out rate of increase each year?
Here’s the answer, courtesy of the general formula for calculating CAGR:

CAGR = (ending amount / beginning amount) (1 / # of years) – 1

Thus (20/10) times raised to the power of 1/5 (.2) and subtract from 1 leaves the CAGR. In Excel the cell that calculates this contains =((20000000/10000000)^.2)-1, where the caret (^) is the POWER function. The compound annual growth rate was 14.9 percent. In other words, if the department had paid a steady 14.9 percent more each year during the five years, the $10 million would have swollen to $20 million.

General counsel who comfortably understand and use CAGR to describe their spending not only have a more nuanced understanding of run rates but also speak the language of their fellow business executives.

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