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The economic clout of major US companies’ law departments – but perplexing metrics

Total revenue of the Fortune 500 companies in 2005 was $9.1 trillion (See my posts of Dec. 3, 2006 for this figure; and Sept. 10, 2005 on the 100 largest corporate law departments.). Since total legal spending as a percentage of revenue stands at something like 0.4 percent of revenue, those 500 companies spent $360 billion or so on inside and outside legal resources – excluding fines, settlements and judgments.

For a typical US law department, outside counsel expenditures make up about 60 percent of its total budget, so that would suggest expenditures by those 500 companies of about $200 billion on outside law firms. Many companies other than those in the Fortune 500 hire external lawyers. Still, at this level of back-of-the-envelope calculations, the $200 billion figure seems plausible in light of a recent comment: “The legal industry today is over $200 billion ….” Bus. Law Today, Vol. 17, Nov./Dec. 2007 at 63.

Other numbers don’t jibe. Another standard benchmark is the figure of about five lawyers for every billion dollars of revenue. Based on that Fortune 500 revenue, we might expect something like 45-50,000 lawyers employed by their law departments. Since $500,000 per lawyer covers the typical inside budget and there are an estimated 50,000 lawyers who work for the Fortune 500 (See my posts of Dec. 3, 2006 on this rough measure), that means $25 billion or thereabouts spent inside – nowhere close to the $160 billion predicted by the figures in the first paragraph.

I must be making some mistake.

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