Legal Standpoint: Benchmarking Legal Costs

By Lawrence White    //    Volume 19,  Number 4   //    July/August 2011

No institution has ever concluded it pays too little in legal fees. Few institutions, however, have paid serious attention to benchmarking their legal expenses. Do metrics exist that can aid board members and other institutional leaders in assessing whether legal bills are reasonable?

The subject of benchmarking legal expenses is controversial among campus lawyers. There is surprisingly little treatment of the subject in professional journals. Six years ago, in a brief blog post entitled “Legal department benchmarks compared to benchmarks of IT, Finance, and HR,” Rees Morrison of the legal consulting firm Hildebrandt International asked rhetorically whether any corporations routinely benchmark their spending on particular administrative functions as a percentage of company revenue. “I have not seen multicompany data,” Morrison wrote, “but I have seen figures from one global behemoth: The ratios stood at approximately 0.8 percent of revenue for the Finance function’s spend, 0.6 percent of revenue for Human Resources’, and 0.4 percent for Legal’s.”

The Hildebrandt percentage was not far off from one suggested by Benjamin Heineman, the longtime chief legal officer at General Electric, who in 2006 was quoted in the legal periodical Corporate Counsel as saying that legal expenditures accounted for “about one-third of 1 percent” of the company’s annual revenues.

Do those fairly casual benchmark numbers shed any useful light on what an American college or university should expect to spend for legal services? In 2006 a group of 16 major American universities asked me to do a benchmarking study of their annual legal costs. All were private, highly selective research universities, the majority of them located in major American cities. The details of the study are proprietary, but I feel comfortable sharing the methodology and top-level conclusions.

Each institution provided three numbers: the all-in cost (salaries, fringe benefits, and overhead expenses) of its in-house general counsel’s office; the amount expended for services provided by retained outside law firms; and the college or university’s annual operating budget. I added the first and second numbers to derive the total cost of legal services, then calculated that cost as a percentage of the institution’s operating budget. The calculation yielded a range, from one-tenth of 1 percent at the low end to nine-tenths of 1 percent at the upper end. Most institutions clustered between 0.2 percent and 0.4 percent—results close to those reported in the Hildebrandt article and General Electric report.

As any campus lawyer will tell you, metrics on numbers as inherently volatile as legal expenditures must be taken with an entire shaker full of salt. Legal expenses are never the same from year to year at a single institution and rarely comparable among institutions. The salaries paid to in-house counsel and the hourly rates charged by law firms vary substantially depending on geography. One major lawsuit, one real-estate transaction, or one federal enforcement proceeding can skew a particular year’s legal bills.

Metrics on legal spending are suspect for another reason. They fail to take into account the unquantifiable savings associated with preventive legal counseling. If an experienced lawyer provides wise advice during the negotiation of a problematic contract or the handling of a sensitive personnel matter, the ledger will show the small expenditure for services rendered—but won’t post the credit for the tens or even hundreds of thousands of dollars in litigation expenses saved. Much campus counseling fits that preventive mold.

It is nevertheless reasonable to demand of institutional lawyers that legal expenses be carefully tracked; that numbers be analyzed to determine whether legal bills expose areas of institutional operations with persistently larger legal needs than others; that careful consideration be given to the most efficient balance between legal services provided by in-house lawyers and services procured externally; and that annual variations in the legal bottom line be justified. At the same time, board members should appreciate the volatility of legal budgeting and be tolerant when unanticipated circumstances generate unexpected legal bills.

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