Published on:

Four points about law firms from an Economist column

Insights about huge law firms, publicly-traded law firms, their profit margins, and commercial “nous” all appear in one item in the Economist, Aug. 23, 2008 at 55.

Vast revenue at huge firms. Baker & McKenzie brought in annual revenues of more than $2 billion (See my post of Feb. 20, 2008: Latham & Watkins and Skadden Arps breach $2 billion.). Further “Britain’s top four firms have reported revenues up by an average of 15% this year, with all four passing the £1 billion ($1.85 billion) mark.” It’s hard for any but the largest law departments to have much leverage over such behemoths (See my post of May 3, 2006: consequences of firms growing to behemoth size.).

Use of equity funds. An Australian firm that went public in May 2007, Slater & Gordon, used the money it raised to swallow up six smaller rivals within a year. Law firms in Britain are champing at the bit to have the same opportunity. Law department managers can foresee even more tumult among their providers and continued consolidation (See my post of Nov. 15, 2005: consequences of convergence and mergers.).

High profit margins. Law firms typically have high profit margins (20-40%). The article states that “On average, litigation departments are thought to account for around 45% of law firms’ revenues in America, and 25% in Britain.” Even with those fat margins, “Few managing partners know their firm’s profit per billable hour, even though that is the main product law firms sell.” Very few companies enjoy such salivating profit margins, which ought to give general counsel reason to aggressively challenge law firm fees (See my post of April 6, 2008: profitability of several law-firm practice groups.).

Narrow view, not commercial. “Clients frustrated with private practice lawyers often accuse them of lacking commercial nous.” No nous is bad news. As outside lawyers are focused on the fine print, “big picture concerns can go unnoticed.” One fundamental advantage of in-house lawyers over out-house lawyers is that they have their ear to the business ground.