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An economist’s perspective: total legal spending declines with increases in company size

An economist who studies law departments might say something like this: Division of labor (the degree of specialization) is limited by the extent of the market (demand by clients for legal services for in-house counsel services). Productivity depends on specialization, and specialization depends on the scale of operation, which is also the extent of the market — how much work of a similar kind comes into a law department. Increasing returns are present when the marginal cost of producing another unit of legal counsel is lower than the average cost of all the previous productions, most of which comes from division of labor, specialization, and productivity improvements.

These concepts help explain why total legal spending as a percentage of revenue goes down as law department size goes up (See my post of May 4, 2005 on this trend.). With a wider array of legal needs — a bigger market — a larger department can allocate tasks more appropriately among lawyers and paralegals – achieve more division of labor (See my post of June 5, 2006 about the matching ladders of skills and needs.). Those lawyers and paralegals can produce more because they know more about their area of work – they specialize (See my posts of Sept. 10 and July. 31, 2005 on law department specialists.). Because the larger company generates more of any one kind of legal work, it can support specialists who are more productive than generalists.