According to management consultant Rees Morrison, most public companies now figure that it takes about one lawyer for every $200 million to $300 million in revenue to accomplish the missions that in-house counsel are given.

The number varies somewhat by industry, company size and the quantity of quasi-legal tasks assigned to different law departments, but average companies use three to five lawyers per billion dollars of revenue. See http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1202429758720.

This “bench-marking” practice is designed to give law departments a sense of whether they are adequately staffed as measured against their peers, but a wise executive might ask, “Is this really the right formula?”

General Electric Company, which employed more than 1,200 in-house lawyers in 2007, has taken a different perspective. They look at the cost of providing in-house counsel and outside counsel together, and try to manage that figure. They also focus on preventive lawyering, minimizing error rates (the process of Six Sigma) and nurturing a culture of compliance as a way to minimize liabilities and amounts otherwise paid out to plaintiffs. The GE focus and strategic execution cut the company’s litigation costs in half in just four years while improving case outcomes, according to Corporate Counsel magazine.

At Exxon, which racked up $114 billion in revenue in 2008, they look at what kinds of legal support they need to accomplish all of their business missions safely and effectively. They see lawyers as key contributors in the shaping of business transactions. “As strategic partners, our attorneys play a vital role in their client’s business,” the company proudly states on its corporate website. Not only do they employ more than 600 lawyers (atypical of the ratio at that level of revenue) but they advertised for another 52 lawyer positions in April 2009.

Some financial service companies who have done better than their peers in recent years have benefited from strong legal staffing as well. Allstate and Liberty Mutual each employ more than 700 lawyers to minimize litigation exposures and comply with regulations, keeping those companies sound and their dividends protected.

Every company is unique in its needs, but many of the leading companies understand the value that a truly great lawyer can bring to the table. They also understand that we live in an age of increasing regulation and liability, with growing exposures not only for the company, but for the company’s officers and directors under Sarbanes-Oxley, the Fair Labor Standards Act, the Foreign Corrupt Practices Act and a host of other laws. Furthermore, the globalization of trade has forced companies to be aware of compliant with more jurisdictional legal variables.

Despite these long-term trends, however, studies have reported that the average total legal spending for publicly-held companies has remained close to a paltry 0.35 percent of annual revenue for the past 15 years; and the amount spent on compliance (often a legal sub-function) is even lower. According to an October 2008 Reuters report, American companies spent on average just $80 per employee (or less than .02 percent of income) for ethics and compliance.

Given the recent events that have damaged and disgraced some of the country’s biggest institutions, it seems prudent to ask, “Do we really have the right formula on how many lawyers it takes to keep a company solvent and reputable while keeping its management out of courtrooms and congressional hearing chambers?”

Instead of bench-marking headcounts based on “lawyers per revenue dollars” it might be better to ask, “What is the optimal number of lawyers for our company, given our industry, our mission, our strategic plans, and our particular appetites for risk?”

In order to determine the answer to that question, it might be necessary to analyze the company’s operations and figure out the potential benefits, as well as costs, of good lawyering.

If you make or sell liquor or tobacco, then you will likely benefit from having a legal team sufficient to understand and comply with the many regulations on advertising, marketing, distribution, pricing and taxation of your products. If you are a multi-site retailer or service provider, you will likely benefit greatly from eagle-eyed real estate lawyers who can negotiate optimal lease terms, buy-outs, indemnities and contingency clauses, while auditing landlords, insurance companies and government authorities for the typical overcharges associated with any substantial real estate location. If you are in high-tech, you will want in-house lawyers who understand your essential software and hardware innovations, and can protect them with patents, copyrights and trademarks, as well as enforceable non-disclosure and non-compete agreements.

Whatever the challenges you face, you can determine or at least estimate the benefits a lawyer can provide to you in terms of outside counsel dollars saved, improved transactional terms or liability avoidance. For instance, look at the revenue streams from your intellectual properties and measure that against what it costs to protect them to see your legal ROI. Or look at total liabilities when/where your company or divisions of your company have invested dollars in legal prevention, training and compliance vs. liabilities when/where those investments have been cut or not made at all.

You should also consider how many valuable functions you want your legal department to provide. Do you want a solid law department to be in charge of contracts and transactions? Do you want smart and practical lawyers who can handle legal prevention and training programs? Do you want your general counsel to oversee or at least support the ethics and compliance function? Or if you don’t have such a function, do you want your lawyers to initiate an effective program?

While thinking about the value of regulatory compliance and nurturing a culture of corporate ethics, you might also want to determine what the value is of your company’s reputation and your brands. Do you want to risk that value against the money saved by cutting legal headcounts? Be aware of that value - that is what is at stake if you allow a culture of corner-cutting to creep in through a back door otherwise guarded by a savvy business lawyer.