In-House Counsel

Primacy of intangibles for why some industries have more lawyers per billion of revenue

By Rees Morrison

While discussing power laws, the McKinsey Quarterly, 2009, No. 1 at 13, argues that power curves for revenues of businesses (the sorted distribution of revenue, for example) are often a function of ?intangible assets -- talent, networks, brands, and intellectual property -- because those assets can drive increasing returns to scale, generate economies of scope, and help differentiate value propositions.?

Different sectors of the economy show power-curve distributions of inequality in market value. Research shows that the more labor-or capital-intensive sectors, such as chemicals and machinery, have flatter curves than intangible-rich ones, such as software and biotech.

This power-curve pattern may explain variations across industries in lawyers per billion of revenue (See my post of Feb. 19, 2009: compared to revenue per lawyer; and Dec. 14, 2005: legal intensity of regulation.). ?Intangible-rich? industries such as telecommunications, software, finance, and biotech have more lawyers per billion of revenue than industries that are less suffused with intangibles. Intangible-based businesses generate more legal work than companies that rely on machines and land, hallmarks of ?labor-or capital-intensive sectors.? For example, intangibles require more patents, more licenses, more complicated joint ventures and other agreements than does selling objects. The correlation between intellectual capital and legal intensity may be strong and positive and explain the relationship between lawyers per billion and intangible density among business sectors.

Full post as published by Law Department Management on February 24, 2009 (boomark / email).