Morrison on Metrics: Of business models and benchmarking

Comparisons of seemingly similar companies are complicated when business models are factored into the equation.

A company’s business model can significantly affect benchmark metrics for its law department. To untangle and explain those effects, however, remains a challenge for benchmark analysts in the years ahead.

One example of this draws on employees. Although I do not think that lawyers per thousand employees or total legal spending per thousand employees create formidable metrics, I want to make a different point.

We can’t at this time incorporate that key aspect of a business model into law department metrics. What if a company outsources many of its functions and therefore has relatively fewer employees than another company that handles those functions internally? The outsourcer might have 2,500 employees, 10 lawyers and $10 million in total spending while the second company might have twice as many employees but the same number of lawyers and legal spend.

How can we compare the metrics of companies where some are like the outsourcer and some are insourcers? We need numbers or proxies for something like shadow employees (counterparts of internal employees but on someone else’s payroll) or “personnel costs of goods sold.” If we had such numbers, we could calculate benchmark metrics where the two kinds of business models are then presented on a similar footing. Stated differently, we could normalize or scale the business variable of employees in the two models and calculate correlations.

Another example of a fundamental business characteristic that alters benchmark metrics focuses on geographic dispersion. One company might center most of its employees and physical plant in few locations whereas its rival, similar in many other operational and competitive respects, has people and operations spread around the globe. Current benchmark metrics for law departments, even those as rich as are provided by General Counsel Metrics LLC, does not have a way to reflect such different business models.

A third example we can consider looks at the stock market value of a company and subtracts its book assets. The difference between market cap and physical assets is attributed to a company’s intangible values, such as its patents and brand reputation. Currently, no benchmark data for law departments compares on that essential business characteristic or allows for it. Intangibles account for all kinds of differences and yet they are dark to legal department benchmark metrics.

During the coming years, widespread participation of thousands of law departments will help the business models of corporations come into focus. Benchmarks will show data for other law departments in an industry—or a sub-industry—that follow a similar pattern or business model.

Now, imagine we could line up law departments by variations in their company’s fundamental business structures. We might also look to revenue from international sales or number of unionized employees or conglomerate business units. Gradually, our metrics will draw closer to the goal: comparative metrics by industry that incorporate essential business differences.

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Rees Morrison

Rees Morrison, Esq. is a partner at Altman Weil, Inc. with countless interests in legal data analytics. He is also the founder of General Counsel Metrics, LLC....

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