Your CEO may not require you to report specific numbers from your law department other than the annual budget, but that doesn’t mean you shouldn’t keep track of other key metrics.
For instance, do you know how well you’re controlling costs in your law department?
Are your expenses high, low or about average compared to other companies in your industry? Is your department properly staffed to meet your workload? Are you getting a good return on your investment with outside counsel? Chances are, you can’t accurately answer these questions without understanding the following key metrics.
Total Legal Spending as a Percentage of Revenue
This should include both inside and outside spending. The percentage is more important than the dollar amount. Assuming you have to put more resources into an acquisition, your added costs should be proportionate to the additional revenue you’re bringing in as a result.
Internal to External Spending Ratio
It’s not uncommon to spend half or more of your law department budget on outside counsel. The most common split was 43 percent “make” (work performed in-house) to 57 percent “buy” (work performed by outside counsel and other vendors), according to a 2014 Altman Weil 2014 Chief Legal Officer Survey. However, more companies are finding building a stronger legal department by hiring in-house counsel with specialized skills can be more cost-effective than relying too heavily on outside counsel.
If you’ve noticed you’ve continued to spend more on outside counsel from one year to the next, ask yourself what’s driving those costs. Are you short-staffed? Do you need to recruit compliance officers who specialize in an emerging area, such as cybersecurity?
Lawyers Per Billion Dollars of Revenue
As your company grows, you should ensure corporate counsel hiring is proportionate to the increasing workload. Among more than 280 corporate legal departments across the globe, the average number of lawyers per billion dollars was 3.7 in the United States, according to HBR Law Department Survey.
Total Costs of In-House Counsel
Cost of in-house counsel can be a deciding factor in whether to add another lawyer to your department in the coming year. Take the total internal cost of your law department and divide it by the number of lawyers to determine the average hourly rate of fully loaded inside counsel. If you’re regularly spending three times that amount on outside counsel, it’s time to consider hiring corporate counsel, according to Law360.
Budgeted to Actual Costs
Review your overall budget, but pay close attention to budgets for specific matters. Consider the following questions:
- In how many areas did you exceed your budget?
- Was it justified?
- What were the drivers behind these cost increases?
- How does it compare to law departments at other companies within your industry?
Benchmarking your spending metrics against data at other companies can give you a frame of reference and help you to set realistic goals for reducing costs in your law department.
As you're evaluating your law department, you may identify gaps in skills or staffing. A team of experienced legal recruiters can help you hire corporate counsel to prepare your department for the coming year.
To learn how General Counsel at three top companies evaluate their employees and what other law department metrics they measure, download our free guide, “End of Year Evaluations: What Metrics Matter Most?”