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Comparative data over four years on total legal spending as a percentage of revenue

Data published by Altman Weil in GC Mid-Atlantic, June 2008, at 30, compares metrics from the firm’s 2003 benchmark survey to metrics from their 2007 survey. The 2003 report includes data from 199 corporations “evenly distributed between companies with annual revenues of under $250 million to companies with over $5 billion.” Four years later, the 2007 report includes data from 144 companies “similarly distributed in size.”

For all the companies in the Altman Weil surveys, the average TLS as a percentage of revenue in 2003 was 0.4942 percent. In 2007, the average had risen to 0.5843 percent, an increase of 18 percent. In brief, legal costs consumed significantly more corporate funds.

Let’s take the increase as reliable, even though (1) the survey population dropped 28 percent between the two years, (2) the article from which this data appears, in GC Mid-Atlantic, June 2008 at 30, does not say how many companies took part in both the 2003 and the 2007 surveys, and (3) averages have more variability than medians (See my posts of July 27, 2007: changes in survey participation year to year; and March 28, 2005: averages compared to medians.).

Total legal spending as a percentage of revenue (TLS/Rev) leads the metrics pack in terms of importance (See my posts of Dec. 5, 2007: stability of the ratio over a decade.). Assuming the increase shown by these two surveys is statistically reliable, what it reflects is the well-known phenomenon that the costs of personal services steadily rises. Haircuts, college tuition, accounting services, and legal assistance are all provided by people and their costs steadily rise. In this situation, the increases have been at about the rate of inflation (See my post Nov. 26, 2006: Compound Annual Growth Rate.).

Second, those general counsel charged with holding absolute dollars constant in their total budget face extreme difficulties. If the TLS/Rev ratio stays constant and their company’s revenue presumably grows at least with inflation, the absolute dollar budget must take a major hit. It would be better to charge general counsel with holding TLS/Rev constant.