In my research for this article it was obvious that 'measuring value' is a hot topic and something that is currently perplexing most general counsel. In my discussions with other general counsel, it is always the subject that commands the most discussion; a simple search of Practical Law Company reveals many articles on the subject too.

Legal teams are not the only departments that are struggling with this issue, as I found that there are many articles written on the subject in the field of human resources (HR) departments. The issues are very similar and you may therefore find that a conversation with your HR team will reveal many thoughts on this subject.

I thank all those people that have discussed this with me, in particular Jim Hever of Addleshaw Goddard and Tony Grundy of Cranfield School of Management, who helped me create the sophisticated measurement tool that is discussed below.

Why measure?

Most businesses will demand that the support departments prove their value. Even if your employer is not currently requiring you to demonstrate value it is likely that this will change in the future, commonly when profits start to fall.

Proving the value of your department is the best way to stop any suggestions that costs should be cut in legal. This should not, however, be the only or even dominant reason for measuring value.

I consider the following factors to be the key benefits to measuring the performance and effectiveness of a legal department:

. measurement is a management tool. You cannot manage something that you cannot measure. In particular this will assist you to identify where your resources can add the most value;

. measurements will assist you in setting defined targets for your team;

. measurements will prove the value of the department to the team and therefore help with motivation;

. measurement is the language that

most businesses understand. Simply using the terminology can immediately improve the perception of the department and once value is proved the 'lawyers in their ivory towers' comments should desist; and

. legal risks are growing and therefore the value and purpose of every legal department is more than it was a few years ago. If you take the time to consider how to measure value, you may surprise yourself how valuable you are.

Getting 'buy in' from the team

This can be one of the most difficult obstacles. Lawyers are professionals and many do not understand the need to prove value.

I recently read an article on this subject by a fellow general counsel, who stated that when he tried to introduce value measurement he had one lawyer retort: "If we were interested in numbers we would be accountants."

Many in-house lawyers have moved to in-house work to get away from time recording, which all law firms believe is an essential part of life. It is, therefore, understandable that measuring value may not be the most popular process to introduce.

There are no quick fixes to this problem, but I believe there are three key points to consider:

. keep it as simple as possible. Concentrate on what is most important in your organisation and measure that, forget everything else;

. maintain a regular dialogue with your team to explain why you are collecting the data and why it is important; and

. adapt to your team. Some systems will

work very well in some teams, but not others. It is probably an obvious point, but as the team grows, your processes need to be simpler as your ability to micro-manage will become less.

As a result of measurement you will have the data to know where improvements need to be made. Once these improvements have been made, this will have a direct and positive impact on the results and feedback. This cycle will hopefully prove the value of value measurement to the team.

Problems with measurement

Measuring the value of a sales team is easy, but measuring the value of a legal team is much more difficult as most of the benefits will not be immediately apparent.

Lawyers have been saving huge sums of money by careful review and clever negotiation of contracts for hundreds of years, but rarely is this value recognised. The clever drafting of a contract is only understood if it is tested. Measuring value of the legal team can be done, but needs some creativity.

Measurements available

I believe there are four types of measurements: simple financial measurements; sophisticated financial measurements; benchmarking and non-financial measurements.

Simple financial measurements

The simplest financial measurement is to compare the cost of completing legal work in-house with sending it to external solicitors.

A legal director of a telecommunications company has justified his team of 20 in-house lawyers by comparing the cost of outsourcing to actual salary costs:

. Cost of outsourcing: 20 lawyers at five hours per day at £200 per hour equals £5m a year;

. Cost of in-house team: 20 lawyers employed at average salary of £50k equals £1m a year.

At DaimlerChrysler, we have adopted a similar idea. When a file is closed we estimate the time that has been spent on the file and then multiply the hours spent by the notional hourly rate. Each adviser is assigned a notional hourly rate that is determined by the hourly rate charged by local commercial law firms for someone of equal qualification and status.

This cost is then inserted into the database and is reviewed by the general counsel and adjusted if appropriate in the same way that a partner in the law firm reviews and adjusts the 'time on the clock'. At the end of the year, it is then very easy to calculate what the costs to the business would have been if the work had been sent externally.

In addition to the analogy of in-house versus 'out-house' costs, we calculate the value of legal proceedings that we defend by deducting the settlement cost from the original claim value and we also record any money that we recover for the business.

The simple measurements do provide some bold statements that will send strong and positive messages to most boards. However, beware of the savvy chief executive that will raise some questions, such as: would all of the work have been sent externally? Is the business just using the legal department as a crutch?

You should also consider whether 'in-house' versus out-house costs is really where you add value. Statistics prove that, contrary to popular belief, external legal costs increase rather than decrease with the introduction of a legal department. The value of the team must therefore be with what the team adds to the business, rather than the professional costs that it may save.

Sophisticated financial measurements

The idea of a sophisticated financial measurement is to calculate what a piece of work will actually add to the bottom line. I have chosen a competition law training programme as an example.

The potential fine for a competition law breach is 10% of a company's worldwide turnover. The fines, however, will typically be much less than this, but nevertheless will be very substantial. DaimlerChrysler was fined €71m (£47.8m) in 2001, reduced to €9.8m (£6.6m) on appeal. Other manufacturers and retailers have been hit with similar fines.

It is a fair and supportable assumption that fines against motor manufacturers are typically in the region of €50m (£33.7m).

The first part of the calculation is therefore simple: potential fine = €50m. The next part is to analyse the probability that your company is breaching competition law, the probability of being investigated and the probability of an investigation finding a breach and then issuing a fine.

There are different types of competition law breach with different levels of severity, so you may wish to further break this down by type of competition law breach, probability of breach and so on.

Once you have made your assumptions of how much the risk would be reduced after the training, you will then be able to calculate the value of the training. I would be surprised if this did not result in a very significant value that far exceeds the simplistic measurement of in-house versus out-house cost.

This calculation is just the tip of the iceberg and once you have added the risks of negative publicity, disruption to the business and the risk of directors going to jail you will soon realise that your department is the most valuable department in the business.

This more sophisticated measurement has the added benefit of proving a value added rather than focusing just on a cost reduced.

The most common concern about this method among general counsel is the risk that the assumptions will be challenged, but you should not fear this. Virtually every business decision is based on assumptions, but if thought has gone into the assumptions, then they will stand up to interrogation. There is no one in the business that is better placed to make assumptions on the legal risks than the general counsel.

Benchmarking

In my research, most general counsel agreed that benchmarking does not work. To get any meaningful statistic, you will need a reasonably large survey of departments that are comparable to your own.

I have not yet found even one department that is comparable to my own, as legal departments are very different, both in terms of scope and set-up.

The DaimlerChrysler legal team, for example, manages the legal affairs of wholesale and the largest manufacturerowned retail business in the UK. This alone makes it unique. The department also has responsibility for other functions that some departments have and others do not. In addition to these complications, you will need to understand budget and head-count and these details are usually secret. I therefore only mention benchmarking to dismiss it.

Non-financial measurements

This can be most easily achieved by a survey. Surveys typically ask questions such as:

. Was the advice delivered on time?

. Was the advice commercial?

. Were you kept informed about the progress of the matter?

At DaimlerChrysler, we have developed a service level agreement that focuses on a number of areas, such as commercial advice and delivering on time. At the end of each year the business will be surveyed to assess whether it believes that it is meeting the service level agreement. The results of the survey have a direct impact on the bonus of each member of the legal team.

General counsel have commented that, while this method is more based on perception than fact, it can provide the most useful feedback, particularly when respondents are urged to add comments on specific incidents.

What will you measure?

It is important that before embarking on measuring you carefully consider what you will measure. You should discuss this with your colleagues as they will often have a different set of priorities to what the legal team may consider to be important.

Response times are often more important than costs. When measuring financial results do not forget to consider whether measuring the value of savings against the cost of sending work externally is the best financial measurement for your business.

Measuring value is complicated, but hopefully, as this paper has noted, there are ways that it can be achieved. There is little doubt that at the end of the analysis you will even surprise yourself of the value added. The value of the legal team has never been so strong. Read any book on directors' duties and then look how many require key input from legal and the value is immediately obvious.

Iain Larkins is group general counsel at DaimlerChrysler UK.