Larger law departments may get a leg up from network externalities

Niall Ferguson, The Ascent of Money: A Financial History of the World (Penguin Press 2008) at 135, refers to “what economists call network externalities, the benefit of pooling information between multiple employees and agents.” As when fax machines became common and increased the value of each one that joined the “network,” the more people have a common interest and can pool information among themselves, the more efficient they become (See my post of Oct. 22, 2008: the elements of a knowledge management program.).

Network externalities may be one reason why larger companies that grow need fewer lawyers per unit of revenue earned. The advantages of pooling information about legal issues and responses among multiple members of the law department and with multiple agents (law firms) may exceed the disadvantages of overhead and bureaucracy. Total legal spend may decline as companies grow in part because the information economics improve from network externalities (See my post of Sept. 9, 2008: information economics and decisions.).