Morrison on Metrics: A Metric That Matters

A typical US law department spends approximately 80% of its internal budget on people costs. People costs include salaries, bonuses, benefits load (often as much as one-third of salary) and other compensation components. The remaining costs include facilities, IT, CLE, postage and other non-W2 costs. Stated differently, headcount remuneration drives by far the largest share of a general counsel's inside budget.

Much rides on that benchmark metric, but this column will adumbrate only four consequences. For one, just as the president of the United States has relatively limited room to maneuver on budget reductions because large chunks are committed statutorily to entitlement programs, so too a general counsel cannot reduce spending much on the internal budget without terminating employees. Yes, a general counsel can shrink bonuses and equity awards to nothing, but base salaries move as the corporation dictates and actual reductions are rare - and they account for perhaps three-quarters of the compensation expenses. The baseline spend internally stays pretty much the same year to year unless positions are added or lost.

That compensation-related spending dominates the internal budget has a second consequence. How a law department treats its expenditures on temporary lawyers and contract lawyers can be accounted for two ways. If treated as part of the internal budget, more play exists for the general counsel in the size of the budget. If temporary help is treated as an external expenditure, less flexibility remains for the internal budget. I believe that the expenses of long-term temporary help should be treated as internal spend.

Third, if pressed to reduce legal spending, general counsel naturally turn to law firm fees and expenses. Psychologically, it is easier to reduce amounts paid to remote, impersonal law firms than it is to terminate Chris who sits in the office next to yours. No general counsel willingly accepts the loss of a position; all general counsel, at least theoretically, know they can find a way to reduce outside counsel spending.

Finally, since people-related internal spend looms so large the metric bears on fixed internal resources as compared to variable external resources. A decision to hire a lawyer or other member of the law department staff is much more difficult to undo than the decision to retain a law firm. All law departments strive toward a balance where they are staffed internally with sufficient personnel to handle the baseline level of work (the valleys, and at a mostly fixed cost) and they buy from outside counsel for peaks of volume and specialized needs.

Thus, one benchmark metric links to many important consequences: the ability of general counsel to reduce inside spend; the accounting treatment of short-term personnel, the vulnerability of law firms to slashes in spending, and both the make-buy and fixed-variable aspects of legal spending.

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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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