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Is the budget for your intellectual property legal team too high? Are you overspending on legal while your competitors get by with leaner teams? Or is it too low, destining you to go over budget?
How can you tell, anyway? By looking to a few key performance indicators to see if your IP legal spending lines up with industry practice.
KPI's to Keep in Mind
Following standard key performance indicators can help you determine what sort of budget is appropriate for your needs, and help you justify the legal department's cost to senior management. These KPI's come from Doug Luftman, general counsel at Lecorpio, an IP management firm. Luftman recently surveyed IP legal spending industry standards in Inside Counsel. Here's a quick summary.
Overall Legal Budget
This KPI helps you determine how much money should be flowing to the legal department. And while in-house legal spending varies greatly by industry and company, they usually range between 0.15 percent and 3 percent of every $1 billion in revenue, according to Luftman. So, if you're company is raking in $5 billion in annual revenue, that should result in a legal budget between $7.5 million, on the leanest end, and $150 million on the most well-funded side.
Keep in mind, though, 3 percent is a massive legal budget. Total U.S. legal spending in 2015 was 0.33 percent of total revenues, according to the HBR Law Department Survey.
Non-litigation Outside Counsel Spending
Much, if not most, of that legal budget will be directed to outside counsel. That should be anywhere from 25 to 75 percent of the legal department's budget, according to Inside Counsel. Or, you could look at this KPI as a percentage of revenue. There, non-litigation outside counsel costs are usually around 0.05 percent and 0.2 percent of revenue.
Patents by R&D Spending
Finally, there's a KPI for the number of patents filed per $1 million spent in research and development. Usually, there will be 1-2 new patent applications per every $2-3 million spent in R&D. (Or 0.3 to 0.6 new patent applications for every $1 million.) Obviously, though, this number shifts by industry. To find the rate that matches your company, simply compare your patent applications for the fiscal year with research and development spending during the same period.
Of course, these performance indicators aren't all you'll need to set up or justify your IP legal budget, but they're a good place to start.