The external/in-house cost analysis can undervalue in-house lawyers, argues Fernando Garcia
An esteemed colleague recently wrote an interesting piece titled “The Fallacy of In-House Savings,” wherein he argues that the proposition that it is more cost-effective to bring work in-house, instead of having it performed by law firms, is false. To support this, my colleague argues that comparing salaries of in-house counsel with the typically higher hourly rates of external counsel is an apples-to-oranges comparison, as the comparison often does not include additional costs that go along with an in-house counsel’s salary, such as benefits and overhead.
Moreover, he notes that there are many back-office services that an external counsel has access to and that are not available to in-house counsel, such as knowledge management and professional development. He concludes that investing in a strategic partnership with a law firm to provide the services may provide better value.
While I respect his opinion and agree that having a strategic relationship with a law firm makes sense in some cases, I believe there are several important factors that are omitted in his analysis and are critical to justifying the continuing trend toward moving work in-house. Many of these benefits go beyond a dollars-and-cents consideration.
While external counsel are better able to take advantage of precedents and resources available within a law firm, in-house counsel have a much better grasp of the unique needs of the business team, the internal politics and interests, and the trends in the industry at levels beyond just the legal considerations. By being an integral part of the executive team, in-house counsel are able to develop and implement solutions that go beyond providing a legal answer.
Frankly, having worked in-house for many years now, there is no greater compliment that an in-house counsel can receive from their business partners than “you are not like other lawyers,” or “thank God you do not act like a lawyer.” This is not a knock against external counsels, but an acknowledgement that the function and the raison d'être of both roles is very different.
Implementing a solution within a business is often more time-consuming and requires a greater and more diverse skill set, including the need to properly balance internal political and business considerations. There is a beneficial multiplier effect associated with an in-house counsel internally managing a matter, or working on developing a solution. Having an external counsel dealing directly with a business client would, in my opinion, not be a long-term solution nor in the organization’s best interest. The in-house counsel’s involvement is a key element of the relationship with the business client (i.e., the organization), and a key determinant of a successful approach.
Then there is the issue of accountability. This is critical to how organizations structure their internal reporting relationships, their contractual obligations with suppliers and customers and everything they do. At the end of the day, someone must be accountable for the decisions made and the approaches taken, especially when dealing with business-sensitive matters. While there are other ways to hold external counsel accountable, at the end of the day they are an external party and they have many clients. In-house counsel have only one client, and they are ultimately the accountable party within the organization for decisions made by the legal team and for the legal advice they provide. In-house counsel are also responsible for providing the heads of the organization’s business groups with the support and the advice they need to make decisions, knowing that they, too, will be held accountable for their actions and decisions.
Finally, dealing with external regulatory and government agencies often requires an internal executive as the point of contact for signoff on audits, correspondence and other matters. In-house counsel often are required to take on this responsibility, and giving this authority to an external legal counsel, whether or not a power of attorney exists, is not always an option.
Finally, in-house counsel are increasingly taking on additional roles and responsibilities, including HR functions, governance, privacy, corporate security, and sitting on corporate committees such as pension and audit. This is because the value that in-house counsel bring extends far beyond simply providing legal advice. As lawyers increasingly grow beyond their traditional roles and adopt a more T-shaped skill set, their value within the organization will only continue to grow.
Yes, legal departments are often seen as cost centres within organizations. That said, most organizations understand that reducing costs regardless of the effects that will have on the effectiveness of the organization does not make sense long-term. Consequently, organizations are increasingly bringing work in-house and opening up seats at the boardroom table for in-house counsel. This is because in-house counsel are increasingly seen as strategic business partners, rather than just another line item in the financial statements.
I do not expect this trend to slow or reverse itself anytime soon, regardless of any reductions in costs to services that a law firm or external counsel is willing to make. The value of an in-house counsel extends far beyond dollars-and-cents considerations.