Risk tolerance advantages larger law departments, which may partly explain their economies of scale for legal spend

An informative article co-authored by the general counsel of Alfa Laval appears in the ACC Docket, Nov. 2011 at 39. One portion discusses “risk tolerance,” and gives the edge in risk tolerance to companies that (1) have the money to absorb the worst-possible outcome and (2) encounter the situation repeatedly, so that probabilities bear out. A small company facing a claim of patent infringement might not be able to pay (or settle) a nightmare amount and it won’t face more suits in which to balance out the large payment against many non-payments. Large companies, however, can play the odds and take some big hits. They know that the law of averages will hold in their favor over time, which means that their legal costs will be more moderate since they can be bolder, take more risks, hire more appropriate law firms, set up fee arrangements and systems – reduce total legal costs. Insurance against extreme outcomes can help as might third-party funding.

The authors also note that repeat players, law departments that over time see a number of similar instances, become more adept at estimating the probabilities and consequences of the various outcomes (See my post of Dec. 12, 2011: expected value.). The article treads lightly on the statistical tools that give specificity to variance. As a standby, it suggests column charts or scatter-grams to show the distribution of possible outcomes.

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