How to correct total legal spending as a percentage of revenue across industries

For all kinds of reasons, the gold standard of law department metrics – total legal spending as a percentage of revenue (TLS/Rev) — varies significantly by industry. If you have enough companies in each industry so that you have a reliable median figure for TLS/Rev in each industry, the figure can range from 0.7 percent of revenue at the high end for technology and financial services to 0.2 percent at the low end for commodity manufacturers (See my post of Dec. 19, 2007: squishiness of any “industry” label.).

To say that general counsel in lower-TLS/Rev industries manage their company’s legal costs better than counterparts in highly regulated, patent intensive, higher-TLS/Rev industry is wrong. Each general counsel faces a different set of industry-related cost drivers.

The way to compare benchmark performance across industries is to calculate the industry median and then match each company’s performance within the industry against that median. A law department that is 25 percent higher than median can be thought of as equivalent – in terms of management against TLS/Rev – as another department in a completely different industry where that law department is also 25 percent higher than its industry median (See my post of Nov. 30, 2005: the meaning of the statistical term, “median”.).

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