Morrison on Metrics: Legal Spending--the Ins and Outs

This column considers two common benchmarks and the statistical correlation between them: what legal departments spend internally divided by their number of lawyers and what they spend on outside counsel and other vendors, again divided by their number of lawyers. Typical figures for U.S. law departments come in at about $450,000 per lawyer inside and $600,000 per lawyer outside.

Data from the General Counsel Metrics LLC study of global benchmarks lets us calculate the correlation between the two figures. In other words, when inside spend rises does outside spend also rise (both figures normalized per lawyer)? By how much?

A perfect correlation would be 1.0, every dollar increase in one is matched by a dollar increase in the other. Many people would guess that the more spent inside, the less outside. Ample in-house staff, well compensated so that talent comes and stays, should cut spending on outside law firms. A negative correlation would suggest that when legal departments invest more inside, outside spend declines.

But counter-arguments come to mind. Companies that value legal advice might spend more on both ends, the make end of the internal department and the buy end of law firms. The two metrics might correlate positively and in step. Another explanation could be that companies that face significant litigation, regulation or intellectual property demands might report increases in both figures. Likewise, companies that assign a broader role to lawyers would be likely to invest simultaneously in their legal function and their outside legal advisers. So three plausible explanations would support a positive correlation.

Data from almost 400 companies around the world resulted in a positive correlation between normalized inside and outside spending of 0.26. That coefficient of correlation is relatively weak. It tells us, however, that generally speaking companies invest in tandem on both their internal and external lawyers. There is no seesaw whereby if you buy more from one side you save on the other. That would be a negative correlation and the benchmark metrics disagree.

I went one step further and looked at only the 260 legal departments from Canada, the UK and the U.S. In that smaller, more homogenous group, the correlation dropped to 0.176. In the U.S. companies, the correlation dropped even a bit more, to 0.163. Still, correlation relationships are positive, meaning that internal and external spend per in-house attorney rises and falls together. It is not a strong relationship but certainly gives no support for the notion that there are tradeoffs from spending more on one and reducing on the other.

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Rees Morrison

Rees Morrison, Esq. is the founder of General Counsel Metrics, LLC. Based in Princeton, NJ, Rees has for the past 25 years consulted solely to...

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