Why does total legal spending decline as a percentage of revenue as companies grow larger?

Within every industry, total legal spending as a percentage of revenue drops as companies grow larger (See my post of May 4, 2005.). As compared to smaller companies, larger companies enjoy economies of scale and scope (See my post of Nov. 9, 2006 on data from European law departments.). Efficiency effects of size show up in mergers, where the combined legal group emerges smaller than the two departments were that came together (See my post of Sept.13, 2005 about layoffs that result from mergers.).

Still, I know of no study that has tried to tease out which of the many reasons for this decline makes the most difference (See my posts of Dec. 6, 2006 with several possible reasons; and July 5, 2006 and references cited.). While we wait for data, here is a compendium of 11 reasons why size begets relatively smaller budgets. Bigger law departments:

1. Have more predictable streams of similar work so those who do it become more expert (See my post of Sept. 10, 2005 on specialist attorneys in large law departments.) and there can be some semblance of process and consistency;

2. Have a greater degree of specialization among their lawyers [but specialists also drive more outside counsel spending (See my post of Nov. 8, 2005.)];

3. Staff their department with older, more experienced lawyers (See my post of March 16, 2006.) because they can afford to pay market rates and offer attractive equity packages;

4. Can be more flexible and precise in work assignments, which promotes division of labor and delegation — they can assign work that better matches a person’s skills and costs (See my post of Aug. 2, 2006 regarding the challenge of delegation.);

5. Train their clients more carefully or have more experienced and careful clients (See my posts of Oct. 2, 2006 about mature companies in mature industries; and Sept. 4, 2006.);

6. Invest more in technology or enjoy better technology infrastructure and support;

7. Spend on process improvements, knowledge management, software development and licenses, and consultants;

8. Command the services of better law firms, stronger lawyers within those firms, and keep them longer (See my post of Aug. 5, 2005 about A-team assignments.);

9. Extract better billing terms from their law firms (See my post of April 14, 2005 about minimum amounts of work needed for fixed-fee arrangements.).

10. Enjoy more ability to settle costly lawsuits, because they have deeper pockets, and thus lower their outside counsel bills; and

11. Legally intimidate smaller companies (See my post of May 4, 2005 regarding patent lawsuits.) or successfully pursue resolutions that don’t involve legal costs.

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