By the Numbers
Author: Richard Stock - Lexpert, January 2012, Vol 13, No 3
Canada has a relatively small number of legal departments, so it is a little difficult to obtain industry-specific data about the size of legal departments, staffing ratios and the cost of internal and external counsel. That makes the most recent quarter of Global Law Department Benchmarks, published in October 2011 by General Counsel Metrics, a valuable resource for companies planning their legal budgets.
The 2010 inaugural survey included responses from over 800 senior law department members, with 61 from Canada. Participants were asked about a dozen questions online, which are used to generate 25 benchmarks in five categories: by industry, by country, by region, by revenue and by number of lawyers.
For example, a comparison of Canadian and US data stimulates some reflection. Canadian legal departments appear to make somewhat greater use of paralegal staff (2.38 lawyers per paralegals, compared to 2.67 in the US), and are slightly better supported than their US counterparts. American departments also appear to make twice as much use of external counsel ($231,578 per lawyer, compared to $500,000 per lawyer in the US).
Of course, it is always good to be cautious when looking at statistics. In this case, one should look at sample sizes: 40 companies in Canada, over 200 in the United States. The mix of industry sectors can also affect the findings. A company is well advised to compare its particular profile with others from the same industry sector. It should go further by comparing its own metrics from one year to the next.
The survey also showed that cost per lawyer-hour is higher in the US ($159.56, compared to $188.89). This is calculated by dividing the legal department budget (excluding external counsel) by 1,800 “billable” hours times the number of lawyers. I see three problems with this metric.
The first is that the cost of legal services is not always fully loaded, in that it typically does not account for all items, such as rent, depreciation, indirect support costs for HR, payroll and IT, and the employer share of benefits, even though the survey asks for these indirect costs. Consequently, in these cases it is prudent to add 30 per cent, bringing the Canadian hourly rate to $ 207.42 from $ 159.56.
The second problem is relying on 1,800 hours, suggesting that inside counsel spend 500 hours out of 2,300 hours each year on practice management and administrative matters. That amounts to 22 per cent of a 50-hour workweek. Our observations suggest that, except for the general counsel, only 10 per cent of the week is “non-billable.” The figure to be used to calculate the cost per lawyer-hour should be closer to 2,050 instead than 1,800 “billable” hours.
The third problem is that paralegal hours are not counted as billable. Some metrics recognize these as equivalent to half a billable hour, in the same way that law firms bill paralegal time. I would re-calibrate the cost per lawyer-hour by adding all paralegal billable time (divided by 2) to the total billable hours worked by the lawyers. In this way, the rate calculated properly recognizes delegation and the cost-effectiveness of team-based legal services. Sometimes it makes more sense to add a paralegal instead of a lawyer to the department.
The first adjustment raises the hourly rate for inside counsel. The second adjustment brings it back down, but not quite as far. The third adjustment can bring the average rate for the department down quite a bit, depending on its use of qualified paralegals. All of this is important because comparisons with the average hourly rate from law firms are inevitable. Accuracy is paramount for those legal departments wanting to make a business case to in-source legal work. The rate for a well-staffed legal department, with a good range of paralegal, staff and experienced counsel should come in at about 45 per cent of the average rate that would be charged to the company if the work is outsourced.