Currency inflation and how legal departments should adjust financial metrics from the past

Various posts on this blog discuss metrics and take inflation into account (See my post of April 27, 2006: effective hourly rates of the plaintiffs’ bar; May 31, 2005: growth of civil legal spending by Canadian businesses; Dec. 5, 2007: median revenue of a survey population 15 years later; April 1, 2009: median damages in patent litigation; June 24, 2009: the money illusion; and Sept. 28, 2009: legal fees and inflation over time.).

Almost always, when general counsel present figures that are more than a few years old, they should adjust those historical figures for the distortions of inflation (See my post of Dec. 31, 2006: adjust figures for inflation; and March 12, 2006: nominal and inflation-adjusted figures.). Otherwise, to say something like “we paid rates to our best law firm of $200 an hour in 1995” misleads the casual listener or reader unless you add “which in 2009 dollars is $310 [or whatever the inflation-adjustment says].” Benchmark surveys should also normalize past financial figures to current inflation-adjusted amounts.

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