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More on correlations between leading metrics of law departments

A previous post explored the statistical relationships in large US law departments between both lawyers and total legal spending compared to market capitalization (See my post of July 1, 2007.). That data set, admittedly small with only 35 companies, enticed me into calculating some additional correlations.

The correlation between the number of lawyers in each of these law departments and their companies’ 2005 revenue was 0.600. The moderate relationship indicates in part the wide range of staffing models and ratios.

Turn then to three other, related, relationships. The correlation between lawyers and inside spending was very strong, at 0.915, because most internal spending is compensation and lawyers bulk largest in that cost. Hence, the link between more or fewer lawyers and higher or lower internal spending ought to be quite close.

By contrast, when you look at the number of lawyers and outside spending, the correlation drops to 0.757. The difference reflects, in part, the different views companies take between buying and making legal services. But still, in general it makes intuitive sense that companies confronted with more significant legal issues will support bigger law departments and also pay bigger legal tabs. As to the combined correlation, between total legal spending and internal lawyers, the figure drops even lower, to 0.650. A way to understand this is to realize that the variability between inside and outside spending is additive, so the overall correlation drops lower than either component on its own.

One more correlation is between revenue and total legal spending. That figure is 0.500, the weakest correlation of all these discussed. The explanation probably lies in the fact that the data set comprises large and small companies in many industries, so many other factors are at work and the statistical linkage is loose.

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