Fee arrangements and the varying profitability of law-firm practice groups

Survey findings in Law Firm Inc., Vol. 6, March/April 2008 at 19, include data from 70 chief financial officers of the Am Law 200. One chart reports on practice group profitability. The three practices ranked as most lucrative were “Litigation” (44% picked it as most profitable), “Corporate/Transactions” (33%), and “Intellectual property” (9%).

The least profitable practice groups were “Labor and employment” in a tie with “Bankruptcy” (15% picked each of them as least profitable). Next, in a three-way tie were “Intellectual property,” “Environmental,” and “Real estate” (each at 9%).

Big litigation frightens executives so they leave the spending taps open. Also, litigation work is very delegable. Likewise, to buy a major company or to be attacked by a would-be purchaser sets the stage for bills gone wild. IP litigation is notoriously expensive. Oddly, some chose IP as low profitability, but probably because their firm does prosecution work (See my post of May 23, 2007: commodity prices yet strategic assets.).

With real estate matters, usually less is at stake so law firms accept lower margins. Bankruptcy has court constraints on fees, at least for debtor work. The oddity, to me, is environmental work and its low margins. I would have thought large potential liabilities, governmental regulations, ever-changing science, and bad publicity would support fatter margins.

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