What is the most important benchmark metric for legal department performance that we don’t have? An odd beginning, perhaps, to this inaugural column, but the question is significant. Amid all the metrics we have, what number do we wish we had that would most fill out our understanding of legal department performance? For readers with nano-attention spans: settlements.
But let’s look behind the quick answer and understand the important metrics we have a good handle on. For the most part benchmark studies collect reliable data on staffing. Certainly there are nuances, such as full-time-equivalents, who is a “paralegal,” and practicing lawyers who are not on the general counsel’s budget, but people figures are relatively firm.
Likewise, two significant cost figures are generally stable. Internal spend by legal departments has relative solidity and abundant data. General counsel know their actual outlays, even if the components vary somewhat from department to department (for example, facilities and patent annuities). Compensation numbers are plentiful and mostly without ambiguity, aside from definitions of levels or the calculation of incentive compensation. External spend, notably law firm fees and expenses, is also readily available, even though those numbers squirm some because of international spending and some specialty expenses that may be missing.
Nor does revenue pose problems for law departments, even if accountants appreciate the many decisions that underlie the published figure. For privately held companies, however, revenue may be harder to obtain and revenue for subsidiaries can be tricky.
In short, law department benchmarkers collect good staff figures and do almost as well with expenditures and revenue. Absent from these studies, unfortunately, is a major item: what companies pay to resolve disputes. It’s an important figure not only because of its size but because other expenditures, notably external counsel, vary according to its amount. We can’t comprehensively speak of total legal spending without it.
Why is settlement data so elusive? Some general counsel reluctantly disclose staffing and spending numbers, let alone even more sensitive information like settlements. Then too, not all settlements reduce to dollars, although some people believe more than 90 percent do. Not all settlements are public; in fact, the primary reason the data is so hard to find is that companies do not want to disclose it (damages awarded by courts are public but often overstate the ultimate payout). Some general counsel simply may not know the figure since the outlays come from the budgets of other units and are not consolidated.
One study pegs the ratio of internal and external spend by a typical legal department and amounts paid in settlement at four to one. If true generally, settlements make up about 20 percent of total external spend. Other anecdotal data suggests a lower ratio–higher settlement payments in relation to other external legal expenses–but with erratic variability from one year to the next. It might be that settlement data would best be obtained as an average over the past three years. Eventually, let’s hope that this insightful metric will show up in more benchmarking studies so we can assess its importance.