April 8, 2014
This week I’m actually discussing two metrics: spend by matter type and spend by business unit. Both of these metrics answer the same question but from a different perspective – in what area of practice is your legal department’s spend being generated? Understanding that is vital to properly allocating your resources and red-flagging potential problems within your company.
Capturing spend by practice area (IP, Employment/Labor, Litigation, Transactions, etc.) is a way to get a clear picture of your company’s legal portfolio. It might make sense that your portfolio is 40% litigation if you’re an insurance company or a national grocery store, where slip-and-fall accidents can be common; it would make less sense if you’re a software company, where one would expect IP work to make up a large share of the legal portfolio. This type of breakdown allows your legal department to see potential irregularities and raise questions before a problem escalates. If this metric is tracked over time, you can get an even better idea of where your legal portfolio is going by comparing it year-over-year. Reporting tools that allow you to compare your portfolio to other companies of similar size and in similar industries also allows you to benchmark your company against its peers.
Another reason to track your spend by practice area is that it can allow your department to justify hiring new in-house attorneys. If your IP work has gone from $100,000 last year to $500,000 this year, this tells you two things: 1) Your in-house IP attorney’s workload has gone up 500 percent and she may not be able to monitor all this work effectively, and 2) If your legal costs for a certain type of IP work (let’s say $500,000) exceeds the fully-loaded cost of hiring a new attorney (say $200,000), and you determine that a busy in-house attorney will be able to do $400,000 worth of law firm work if it were billed by the hour, you can save your department $200,000 by hiring that new IP attorney. The legal department being the (perceived) cost center that it is, sometimes getting new headcount can be difficult. Being able to show a cost savings by hiring a new attorney makes this process much easier.
The second metric, tracking spend by business unit, can help identify divisions or subsidiaries that appear to have an outsized legal spend. For example, if one division is consistently getting more employee claims than others, the legal department may want to invest in more training to bring those claims, and thus legal costs and potential exposure, down. Raising these types of questions that may otherwise go unnoticed allows legal departments to anticipate issues and take care of them before they become full-blown problems.