My supposition, before I began General Counsel Metrics and its global benchmark survey, was that most general counsel would want comparative metrics on staffing and spending in the months just before their budget was due. I thought of that as August and September, mostly. In fact, I have come to learn, participation was highest in the spring.

One reason for the lack of seasonality is that corporate fiscal years are not all calendar nor are budgeting cycles so synchronized. The impetus to find benchmark metrics might be a question from the Board of Directors. It might be the invasion of consultants group hired to slash G&A overhead or perhaps the trigger is an objective a general counsel agreed to with the CEO. Sometimes general counsel want benchmarks to support a management or structure change. A few like to set a context at an all-lawyer’s conference or a planning session. For all these reasons, benchmark metrics are in fashion all year long.

Wherever there are metrics for managers of law departments, there will be discontent. Someone looks bad if performances or results are compared to others’ and the natural reaction is to discredit the unfavorable numbers.

My column for InsideCounsel, Morrison on Metrics, earlier this month draws on my consulting experience where at times I have to explain and defend and justify unflattering metrics. Click here for my column on six questions to answer if the numbers leave you looking bad.

Many invitations to complete surveys appear in the e-mail boxes of general counsel. Probably scores of them every year for U.S. departments and they seek all kinds of information. It is an incessant badgering, but how else can interested parties learn about what is going on out there more precisely and reliably than from anecdotes, the press, and subjective impressions?

Since I am one of those people who surveys and since this blog battens on survey data about law department operations, I thought to summarize the styles of questions that present themselves to general counsel.

Some gather opinions: “Has ADR made a difference in how you resolve disputes?”

Some gather numbers: “Do you use a document management system?” (See my post of Oct. 25, 2006: Corpedia survey on the number of departments that do various risk management practices.).

Some gather characteristics: “Is your department’s organization (a) centralized, (b) decentralized, or (c) a hybrid mix?”

Some gather rankings: “What do you perceive as your greatest legal risk – please rank the following from 1 to 7?” (See my post of April 13, 2006: ranking of management priorities by UK general counsel.).

A benchmark that shows up from surveys of law departments is the external spending per in-house lawyer. According to this year’s General Counsel Metrics benchmark survey, for more than 400 departments in the United States, that figure runs around $500,000 per attorney. Stated differently, for the median department, if each lawyer were equally responsible for managing outside counsel, they would be approving about $10,000 of invoices each week. (Just stating that colossal amount belies claims of effective bill review.).

Several factors influence spending per lawyer for any specific legal department. The most significant is the number of in-house counsel. If the department is “lawyer heavy” it will have a lower figure, since it has relatively more lawyers than peers. Ironically, more lawyers on staff may lead to them generating more need for outside counsel.

The figure also depends on the industry of the department, since industries differ considerably in the intensity of litigation faced by their members. Litigation accounts for the largest share of external spend, but not all of it.

Also, the general expectation is that a capable matter management system will help to moderate or reduce the figure, all other things being equal. Likewise, measures aimed at external cost control should bring it down, such as fixed-fee arrangements or panels.

The benchmark of external spending per lawyer should not relate to the number of law firms managed by a lawyer. If anything, the more firms retained, the lower the figure if the firms are better matched by their cost to the importance of matters.

Total shareholder return (TSR) is a widely used measure of company market performance. Over a period of time, it suggests how analysts and investors value the achievements of a company. Perhaps total legal spending in relation to a rolling three-year TSR makes sense as a benchmark metric (See my post of Jan. 7, 2009: total shareholder return and market cap growth as possible benchmark metrics.). Effective deployment of legal resources should be a part, even if small, in overall returns to shareholders.

One disadvantage immediately apparent is that considerably less than 10,000 U.S. companies are publicly traded and therefore report their revenue and have share prices that permit TSR calculations. For the much, much larger number of privately held companies, this benchmark denominator is not available. Also, it would be important to correct for a given company’s TSR the industry-wide change in that figure (See my post of Dec. 14, 2011 #1: splines.).

A new report from Rand, “Innovations in the Provision of Legal Services in the United States,” puts the range of U.S. attorneys at 760,000 to 1,100,000. It cites Harvard Law School Program on the Legal Profession for estimates that in 2007, lawyers in the United States included 120,000 in government (16% of the total attorney population) and 65,000 in “business.” The split of government lawyers is roughly equal between federal, state, and local government. If my often-used rough estimate holds of three lawyers per law department, the total government headcount suggests they constitute a whopping 40,000 law departments!

Further, the Rand report says 3,300 lawyers were employed by interest groups and 2,400 by “public interest organizations.” The report led me to High Beam, which states in a 2011 study that “A survey of ABA membership indicated that 4 out of 5 (80 percent) attorneys worked in private practice with law firms and another 10 percent worked in corporate law departments.” The ABA has about 440,000 members, but if we take the mid-point of the ranged cited above from Rand, that would place in-side counsel at about 90,000. On the assumptions I have used previously, that converts to 30,000 law departments or so in corporate America.

Courtesy of a recent Rand report, we have the number of attorneys for five European Union countries, according to the Council of Bars and Law Societies of Europe in 2008: UK (155,323 for 62 million population), Germany (146,910 for 82 million), France (47,765 for 62 million, The Netherlands (14,882 for 17 million), and Sweden (4,503 for 9 million). The data comes from page 7 of Rand’s “Innovations in the Provision of Legal Services in the United States.

Previous posts have taken up estimates for the number of legal departments in the UK and France. Based on these number, if on average one out of ten lawyers practices in-house and there are three lawyers per department, then Germany supports nearly 5,000 legal departments (See my post of Dec. 31, 2010: estimates of total number of worldwide law departments with 9 references from 2010; and April 30, 2011: since concentration of companies is not increasing, the number of law departments is not decreasing.). We need better data than crude derivatives from total lawyer populations.

The general counsel of Alfa Laval co-authored a solid article in the ACC Docket, Nov. 2011 at 39. The authors discuss a common method to describe possible outcomes: expected value. Each outcome that has a monetary result is expressed as the percentage of the particular outcome multiplied by the money.

Try this technique on the odds you estimate that a regulatory agency will impose a fine. A 50 percent chance of paying a $1 million fine has an expected value of $500,000; a 30 percent chance of a $2 million fine has a value of $600,000; a 20 percent chance of a $3 million fine has a value of $600,000. Together, the overall expected value of a penalty is $1.7 million, the total of each of the three odds-adjusted outcomes. It is all the results weighted by their likelihoods (See my post of July 15, 2005: three ways to reach expected value more realistically.).

Beware, caution the authors, that you don’t just tell clients the overall number. You need to convey the range of outcomes-with-likelihoods that constitute it.

“[M]aking a prediction in terms of probability simply does not fit well with predicting an event that will happen only once.” A lawyer who tries to give a client the likelihood as to whether something will happen – for example, the odds that the Department of Justice will oppose a proposed merger – by stating a percentage (“75% chance this will get by”) is really saying that if this identical deal happened 100 times, for 25 of them the DOJ would step in and stop it. A good article in the ACC Docket, Nov. 2011 at 40, makes this point.

The authors recommend that lawyers use “natural frequencies” to express probabilities, such as “in 25 out of a 100 instances like this, anti-trust objections will kill the deal” (See my post of May 5, 2011: natural frequencies compared to percentages or decimals.). Otherwise, if the likelihood given the client is more than 50 percent, the client tends to remember that as a prediction that this time it will happen.

An interview published this month of John Oviatt, chief legal officer of the Mayo Clinic, who oversees 35 lawyers and 45 other legal staff, covered his views of the importance of various benchmark numbers.

Oviatt’s view is that “the second most important of all metrics is the metric of leverage, the ratio of nonlawyers to lawyers, and particularly paralegals and contract managers.” He uses that benchmark “in demonstrating value to the C-suite that the legal department is focused on delegation of work to the least expensive competent level, and that implies increased utilization of paralegals and increased use of contract managers. We've actually decreased our total lawyer head count, but we've transferred some of those saved dollars into increased legal assistants and contract managers in our department.”

The GC Metrics benchmark survey found this year that for 303 North American law departments, the median ratio was slightly more than one lawyer for every non-lawyer (55% of total legal staff were lawyers) (See my post of Oct. 27, 2009: one-to-one ratio of lawyers to support staff with 9 references.). http://www.lawdepartmentmanagementblog.com/law_department_management/2009/10/metrics-are-just-numbers-benchmarks-are-metrics-that-compare-you-and-inform-you.html