Skip to content

Penny wise, pound foolish

Legal counsel are responsible for evaluating risk and making difficult decisions and recommendations to their business partners on a daily basis. This makes in-house counsel a critical business partner. However, ironically enough, one of the most difficult positions an in-house counsel can find himself or herself in is making the business case to justify the addition of another lawyer or replacement of a lawyer to the team.

At first blush, business will generally seek to “reduce costs” or head count. Doing more with less if there’s an outgoing member of the legal department makes intuitive business sense. The thinking is usually: “Let’s replace back-office support staff (like legal) with someone in the sales or marketing group who can make an immediate impact on the business.”

However, an analysis can show how in-house counsel play a critical, although often invisible, contribution to the business. It is essential in making a business case to hire someone new/additional to the in-house team that the value  the additional head count or replacement will add to the business is clearly communicated and quantified.

Prove it

According to Richard Stock, a very important first step “is the preparation of a detailed demand forecast, typically expressed as the number of matters, number of hours, required legal specialties, and level of work complexity for each major client group within the company.”

This analysis is critical to demonstrate in a quantifiable manner the cost savings versus the use of external counsel and the workload that necessitates the additional head count. However, the feeling is not universal, as some feel the best justification is an intuitive one, where there is a need for “having someone who can do things like sit in meetings with you to calibrate risks.”

I would add there are also many less complex, not as easily quantifiable but equally critical and valuable duties, such as the review of minor contracts, training, audits of contracts, etc., that can be easily performed by junior in-house counsel, which would not be efficiently undertaken by senior lawyers.

Over time, the failure to perform these functions may result in greater litigation, non-compliance, and/or the failure to properly service the customer. Trying to provide a value relating to the risk associated with not having these duties conducted or putting these off won’t be easy, but it is important. It is trite to say that the numbers help justify the decision to business.

Expenses versus external counsel

When compared to external counsel, the services provided by an in-house counsel are very economical. For example, Richard Stock in his Lexpert article “The case for adding a lawyer” noted that “[t]he fully loaded hourly rate for inside counsel is typically 40 to 45 per cent of that of external counsel for the same level of experience.”

With that in mind, consider the question of whether in-house counsel are just as knowledgeable, experienced, and capable of providing equivalent quality of work comparable to that of external counsel.

Fannie Mae’s general counsel Brian Brooks in the article “Fannie Mae GC: The Law Firm Profit Structure Is Broken” looks at the long-term feasibility of large multi-service firms and the evolution of work toward in-house and smaller boutique firms.

In this article, he noted there are two main related reasons for this trend:

“Since the way law firms make money is based on leverage, which is the difference between the number of partner hours and the number of associate hours on a matter, if you’re going to raise associate rates so fast that there’s not that much of a gap between associates and partners, I’d rather have a hundred percent of the partner’s time, and none of the associate’s time.”

This will increasingly leave many highly skilled external counsel looking toward moving in-house or setting up their own shop as they find the amount and the quality of the work they do at large firms drying up.

While based on the U.S., many of the same trends are becoming visible in Canada. Highly skilled external counsel are moving in-house and businesses are benefitting from this, by bringing work in-house at a fraction of the cost.

While this is not to say that all external work will eventually come inside and although the feasibility of this changes depending on the size of the legal team, the demands on their services, etc., there is a value in adding in-house counsel.

In conclusion

Asked whether he had “to make a business case each time you want to add a lawyer in-house,” David Allgood, the now retired senior vice president and general counsel for the Royal Bank of Canada told Canadian Lawyer InHouse: “We do a cost comparison to outside counsel and tend to hire in the three-to-five-year range. We price that out accurately and compare it to what we think outside legal fees would be. Sometimes you look at that and you might say, well, maybe we can go outside but another aspect of the business case is the view that to deliver effectively they need to be sitting beside the business.”

Consequently, one part of the business case must include and analysis of what work is being sent out to external counsel, and what rate is being paid for this work, versus what the equivalent cost will be of performing this work in-house.

The other part, is an intuitive, non-quantifiable understanding of the value of a legal adviser, sitting at the table with business, and working together to advance the interest of the business through all major strategic decisions made. The latter is as important as the first, but much more difficult  to demonstrate.