A quote in a recent article set me thinking. The writer was discussing the cost advantage larger departments have over smaller ones, in terms of lower total legal costs as a percentage of annual revenue. My thoughts on why total legal spending as a percentage of revenue (TLS/Rev) is negatively correlated with revenue appeared in Legal Times, Jan. 28, 2008. Download rees_morrison_three_key_benchmarks.pdf
Among the reasons adduced in the article is that “the companies are placing the appropriate legal work with the appropriate outside counsel.” That slippery phrase admits at least three interpretations.
It could be interpreted that larger departments keep more work inside, at a lower cost per hour than external counsel charge (See my post of Aug. 27, 2008: fully-loaded cost per attorney hour with 31 references.).
Or, the phrase could mean that larger departments are more likely to keep inside all the work the law department can reasonably handle and only placing with outside counsel what suits those external lawyers best. A statistically typical law department distributes its workload, when measured by amounts spent, more toward outside counsel than toward inside counsel (See my posts of June 28, 2005: usual 40 inside/60 outside ratio; March 19, 2006: ratio’s application to Canadian data; and May 26, 2007: Canadian data on shifting work inside to control costs.).
Under a third interpretation, the phrase could that larger departments are more skilled at aligning law firms by their expensiveness to the amount at risk in a matter (See my post of Sept. 5, 2005: compare defense costs to liabilities at risk; and Aug. 31, 2005: an “importance burn rate” for outside counsel spend.).