Law Department Management Blog
Research will confirm, I predict, that the larger the profit margin of a company, the more it spends on legal services. Profit margin is net income divided by revenues, or net profits divided by sales: how much out of every dollar of income a company keeps in earnings. Fatter margins means either a company has lower costs compared to its competitors, which would point to lower total legal spending, or generates more revenue for the same costs, which is what I would predict for innovative, fast-growing, intellectual-property based companies. The latter carry more lawyers on their roster than other companies and invest more in the legal infrastructure that results in higher-than-normal margins.
Profit margins of companies intersects with all kinds of benchmark calculations (See my post of May 24, 2005: profit margin as a benchmark denominator; April 4, 2006 #1: “earn a dollar to pay a 3-cent bill of outside counsel”; May 23, 2007: profit per in-house lawyer; March 4, 2008: industry profitability may correlate with in-house compensation levels; March 6, 2009: margin should correlate to lawyers per billion and revenue per lawyer; and Feb. 15, 2010: $4,300 per hour in revenue typically needed to pay for one hour of outside counsel.).