Those who invest in mutual funds are familiar with beta (the systematic return delivered by the market) and alpha (the extra return obtained because of a fund manager’s skill). The beta tide raises all boats, but some alpha captains still get into or out of the harbor faster than others.
If the law department industry had reliable, comprehensive data on the increase year-over-year in outside counsel effective rates (See my post of June 13, 2006 on effective rates.), we could call that the beta rate increase. Then, every general counsel could collect the same data for his or her department and determine the specific law department’s alpha cost. Ideally, for a general counsel ahead of the wave, alpha would be lower than beta; when better managed, a law department accedes to rate increases that are less than the industry average.
Bonuses of senior lawyers and benchmark standings could turn on the size of that negative difference between systemic, market-wide increases and particularized, departmental increases.