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Tom Cruise and Law Firm Economics

Sumner Redstone's dismissal of Tom Cruise last week has generated much discussion about "superstar economics" in Hollywood and elsewhere. While the phenomenon is common in the worlds of sports and entertainment, it is also one law firms must wrestle with, as Bruce MacEwen observes at Adam Smith, Esq. For MacEwen, the key question is not whether superstars -- be they actors, athletes or lawyers -- bring in more revenue but whether that added revenue makes the venture more profitable. He explains:

"In law firm land, the issue is what we pay laterals:  In terms of guarantees, up-front bonuses, etc.  By and large, are marquee laterals a good investment for firms, or not?  Do laterals (both individuals and practice groups) add to the recruiting firm's overall profitability, or do they tend to capture the capitalized value of their future revenue streams for themselves?  Do we have enough data to make any convincing generalizations?"

In search of an answer, MacEwen pays visits to 19th-century agrarian landowners and 21st-century pro golfers. At his journey's end, he suggests that, while firms should not expect to receive significant value from the additional revenue a superstar lawyer will bring in, the bottom line will depend on one measure: "How it is to be divided up."

Posted by Robert J. Ambrogi on August 28, 2006 at 05:20 PM | Permalink | Comments (66)


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