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An analogy between corporate finance and legal talent

By Rees Morrison

According to the ?indifference theory? of economics, in a perfect market the value of a company is independent of its capital structure, which is its mix of equity and debt financing. Having read about this in the Harv. Bus. Rev., Vol. 85, Sept. 2008 at 94-95, I wondered whether the effectiveness of a company's legal risk management function (aka law department) is independent of its talent structure, its mix of inside and outside lawyers. Perhaps we can think of the fixed cost of internal lawyers as debt -- a company has a contractual obligation to pay its dividend (salaries and bonuses). The outside lawyers it hires are equity, varying in value (expense) according to how and how much that variable expense is used. Benchmark metrics suggest that the ratio of a typical law department's spending on inside counsel and outside counsel tracks the differential in cost per hour between the two sources of legal talent (See my post of Dec. 5, 2007: 60/40 ratio of outside-to-inside spending.). Perhaps that is the normal ratio for talent of debt to equity.

Full post as published by Law Department Management on October 24, 2008 (boomark / email).