Morrison on Metrics: Differences in a key benchmark across geographic regions and some consequences

Data from the 500-plus legal departments so far in the General Counsel Metrics (GCM) benchmark survey highlight how the costs of legal services swing widely across different parts of the world. For example, consider total legal spending--inside budget plus fees paid external counsel--expressed as a percentage of corporate revenue. That fundamental metric makes clear material differences in costs between law departments headquartered in different regions of the world.

To start, I took data from 201 legal departments in the GCM set whose companies are from the U.S. and analyzed them as a "Region." Then I took 72 legal departments who have their home base in continental Europe and called that region "Europe," which excludes the former Soviet bloc countries as well as the U.K. and Ireland.

The comparison between the U.S. and the European "Regions" on the fundamental benchmark metric was dramatic. For total legal spending as a percentage of revenue, the U.S. was twice as high

When we look at Canada's 47 participants as a "Region" and the U.K./Ireland's 27 participants as a Region, the differences from the US figure are small. Canada is 10 percent lower while the UK is 10 percent higher--but all three medians are far above Europe's.

Why would European legal departments spend half as much as their counterparts in the other three Regions? Europe has a civil code rather than a common-law patchwork of judge-made law. Europe has very different labor laws, notably work councils; a patchwork of privileges for attorney-client privilege accorded in-house lawyers, as well as a loser-pays system and other measures that dampen litigation. Each of those elements might result in lower legal costs.

What might drive up European legal costs, however, include stricter privacy laws, European Common Market directives, and no uniformity among national laws (although the U.S. has 50 states that spew out legislation and regulation). GCM's larger sets of benchmark departments will clarify the reasons for these gaps and ultimately we will be positioned to draw country-by-country conclusions.

What are some of the consequences of regional differences in benchmarks? Four come to mind.

When benchmarking, we might need to adjust for the differential, somewhat like we do for cost of living adjustments (COLA) or purchasing power parity when we decide compensation. Comparisons between two law departments or two groups of law departments will be adjusted for the known differential

To the degree that regional variations swamp industry differences, we will need to accept that industry loses some of its primacy as the benchmark attribute of choice.

It will become clear that if the differential in legal costs between the two regions looms as large as two to one, subsidiaries of European companies operating significantly in America should not be held up against their purely European competitors.

We will push to recognize and explore pervasive management differences between Regions that account for the variability, such as the broader scope of responsibility of general counsel of U.S. companies, different inclinations toward reporting structures, or the use of panels.

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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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