“Opportunity cost” as a concept from economics for law departments

One economic concept that applies to law departments is opportunity costs. As explained throughout Richard B. McKenzie, Why Popcorn Costs so Much at the Movies (Copernicus Books 2008), opportunity costs are the benefits you forego when you take an action. Most frequently the term refers to the income someone could have earned if they had not done something else, such as how much a person could have earned while attending law school.

Other examples of opportunity costs apply in a legal department. If an in-house lawyer costs $200 an hour fully loaded, the opportunity cost to the company of the lawyer spending five hours to find and select a law firm is $1,000. Lawyers who rotate through positions incur opportunity costs to the degree the lawyer would have been more productive in the former position. Pro bono time incurs opportunity costs.

Opportunity costs are the economist’s way to measure and describe trade-offs (See my post of April 12, 2006: opportunity costs with e-discovery and activity-based costing; Dec. 17, 2006: all practices have tradeoffs; Dec. 19, 2006: the tradeoff between tight management and the quality of law firm advice; July 27, 2007: risk and productivity tradeoff; and July 10, 2007: tradeoffs and unintended consequences.).

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