Seven legal department benchmarks to review for 2022
In legal, a number of benchmarks have emerged as a tool for evaluating the resourcing of a legal department. These provide a clear way to understand if your department is ahead, on par, or behind peers in the industry.
The Association of Corporate Counsel (ACC) publishes a benchmarking report that is “one of the largest and most comprehensive” of its kind. Its most recent version, which was published in mid-2021, is based on the “survey responses from 493 legal departments in organisations spanning 24 industries and 30 countries.”
As we turn the page on this calendar year, we thought it would be useful to reflect on this report and highlight some of the statistics we think will be of interest to our community.
For reference, the report characterises company sizes as follows:
- “Smaller organisations” earn less than $1 billion in revenue
- “Medium organisations” earn between $1-10 billion in revenue
- “Larger organisations” earn more than $10 billion in revenue.
1. Most legal chiefs report to the CEO
Most chief legal officers (CLOs) report directly to the CEO according to the survey:
“80% of departments say the CLO reports directly to the organisation’s chief executive officer. One in ten departments have a direct reporting line to the chief financial officer instead, four percent report to the chief operating officer.”
There is some variance by company size, industry and geography. For example, CLOs are more likely to report to the CEO in larger organisations (92%) than medium (81%) or smaller businesses (76%).
Similarly, 100% of law departments working in the pharmaceutical space report to the CEO, compared with 89% in the finance and banking industry and 70% in the information technology vertical (IT).
These findings are consistent with other surveys the ACC has fielded. It adds to the growing volume of evidence that rather than seeing the legal department as a proverbial cost-of-business, leaders outside of legal value their in-house counsel more than ever.
2. Top legal department responsibilities.
The survey questionnaire presented respondents with a “list of 19 business functions” and asked them to indicate whether each was part of the legal department. Here are the top five:
- 84% of respondents included compliance as part of the legal department
- 67% included privacy
- 65% included ethics
- 53% included risk
- 42% included government affairs
While human resources (HR) comes in much lower on the list (21%), the report highlights the unique relationship HR has with the legal department. Of these, about half say HR is task-organised under the legal department, while the other half is considered a separate entity reporting to legal. The ACC notes “the latter case results in the highest percentage observed of a business function that reports to legal while housed in a separate department or unit”.
3. Law department headcount benchmarks.
The median staff law departments employ is six, according to the survey. That includes four lawyers, one paralegal and one allied professional. The numbers vary based on the company size, as summed up by the report to say:
“Departments in small organisations reported a median of two lawyers and three total legal staff. Mid-sized companies report a median of 15 total legal staff, with nine lawyers, two paralegals, and one administrative staff. Large companies with US $10 billion or more in revenue reported a median of 70 lawyers, 11 paralegals, four legal operations professionals, seven administrative staff, and eight other specialized staff — and three contract or temporary staff.”
The authors of the report also used the median values to calculate a ratio of lawyers-to-allied professionals:
- Three lawyers per paralegal (3-to-1)
- Five lawyers per administrative staff (5-to-1)
- Seven lawyers per legal operations professional (7-to-1)
The benchmark for legal ops suggests that legal departments really start to need someone in an operations role when it grows to seven in-house lawyers. Accordingly, the median number of legal ops staff in large corporations was four – and zero in small- and medium-sized organisations.
Allied professionals aside, the ACC also determined a ratio of in-house lawyers per billion in revenue, which it calls “an essential standardised benchmarking metric”. Overall respondents polled in this survey employ a median of eight lawyers for every $1 billion in revenue.
Here’s how the median changes based on the size of the organisation:
- Small organisations employ 17 lawyers for every $1 billion in revenue
- Medium organisations employ four
- Large organisations employ three
The median lawyer per billion is higher in companies with less revenue, because, the report points out, “if a $500 million company employs five lawyers, their ‘lawyers per $1 billion’ equal 10 lawyers per billion”. This suggests legal departments, with the help of allied professionals, can gain scale as the business grows.
Finally, the report shows there’s also some variance here by the vertical market as well:
- The IT vertical employs a median of 21 lawyers for every $1 billion in revenue
- The finance and banking industry employs 14 lawyers
- The insurance market employs eight lawyers
4. Legal spend benchmarks
The ACC found “substantial” differences in legal spend “across company sizes.” Here’s how the median total legal spend values tally up when broken out by organisation size:
- Small organisations have a median legal spend of $1.2 million
- Medium organisations have a median legal spend of $8.4 million
- Large organisations have a median legal spend of $64 million
Most organisations maintain a roughly even balance between legal spend on inside and outside counsel. However, “smaller organisations tend to spend [slightly] more inside while medium and larger organisations spend more outside”.
Breakouts of legal spend by vertical are only available as a customised report purchased through the ACC. However, we commissioned an independent survey of 300 respondents working in financial services with responsibility for legal spend, which might offer a useful benchmark. It found legal departments in financial services employ an average (mean not median) of 22 in-house lawyers and oversee $14.28 million in annual outside counsel spending.
5. Legal tech investment benchmarks.
The survey found companies of all sizes reported “the same median value” allocated to tech spending: it’s two percent of the law department budget.
The study also ascertained where respondents are planning to put that budget. More specifically, it “asked departments to rank the top three legal technology areas in which they are investing the greatest amount of their legal spend”.
The top choices were:
- 42% included contract management in their top three selections
- 33% included compliance
- 29% included legal research
Interestingly, e-billing didn’t rank until sixth place (20%) and legal spend management wasn’t an option, though these are different technologies with similarities and differences.
In a separate survey of the financial services community, fielded independently, those two categories ranked second and third, respectively, among the 11 legal tech tools legal departments in that market say they aim to implement in 2022.
6. Law firms and ALSPs.
The report found most respondents (77%) keep a list of preferred outside providers including law firms and alternative legal service providers (ALSPs).
- The median number of service providers is 46. However, that number too varies
- Smaller organisations engage an average of 10 law firms and 0.5 ALSPs
- Medium organisations engage an average of 36 law firms and 2 ALSPs
- Large organisations engage an average of 158 law firms and 5.4 ALSPs
The vertical market also makes a difference here. For example, energy companies engage about 70 law firms, while organisations in finance and banking engage 56.
Interestingly, the latter also has the highest average (4) use of ALSPs. Our research also showed CFOs in financial services are more inclined to send work to ALSPs.
About one-third (29%) of respondents say they track internal diversity metrics. Larger companies (71%) are significantly more likely to track such metrics compared with medium (39%) or small organisations (16%).
Here are the metrics respondents say they are tracking:
- 94% evaluate the diversity of new hires
- 55% appraise the diversity of people being promoted
- 50% analyse diversity among talent departures
- 49% assess diversity by seniority level and function
- 22% examine diversity by matter staffing
The survey did not appear to ask respondents about the diversity of their law firms. However, a study we published in late 2020 found that among private equity, which tends to be high-value legal work, diversity was a top factor in outside counsel selection.
* * *
A summary of the survey is freely available for download here: 2021 Law Department Management Benchmarking Report.
If you enjoyed this post, you might also like:
10 stats, facts, quips and quotes articulating the legal market’s petition for pricing transparency