What we often tell clients to consider, instead, is an easier-to-compute number of X as a percentage of revenue. Indeed, at a recent PLI live event in New York, Mark Chandler, the general counsel of Cisco, remarked that his budget guidance is driven not by absolute numbers but rather by his actual expense as a percentage of revenue. That makes sense to us because, for example, if Cisco files 20% more patents because of new products being produced, that is probably a good reason for legal expenses to increase. If there are 20% more contracts to negotiate because there are 20% more sales, that is a good thing. An easy way to get a quick handle on whether the GC is doing the job well is to see how the cost of legal services to produce a dollar of revenue is growing in comparison to revenue. This approach treats legal expenses like many other costs, such as the cost of raw materials or manufacturing, and measures them in similar ways. The artificial delineation of above the line/below the line costs (COGS vs. SG&A) because of “direct” (and any CPA is welcome to point us to the specific US GAAP or international standard) allocation to revenue has unfortunately made it easier, even acceptable, to ignore other costs in terms of their relationship to revenue and specific items of revenue.
We will explore this bottoms-up, functional analysis approach in greater detail in upcoming posts, seminars, training, and even a book. We are working on software to make these analyses easier for boards, executives, and managers to implement at any level of the organization. It is the application of these ideas to the nonprofit world that will find a home in the activities of the Wolfhound Fund.