As legal costs spiral upward, many corporations are taking a closer look at the cost of outside counsel in comparison to the cost and value received from their in-house legal department. Once considered different functions, the roles of in-house and outside counsel are converging as in-house counsel increasingly provide the sophisticated legal advice that was previously the purview of outside counsel.
Prudent general counsel can and should constantly demonstrate the value created by the legal department, both qualitatively and quantitatively. This is not just a matter of looking good: A valued and accessible legal department encourages consultation, minimizing the company’s expenditures on outside counsel and reducing overall legal risk. Conversely, lack of access to in-house counsel, combined with the cost of accessing outside counsel, often causes decision-makers to forgo seeking legal advice, which increases risk to the business.
Qualitatively, in-house counsel provide insightful advice through their intimate knowledge of the client’s business, goals and objectives. This knowledge, combined with their proximity to decision-makers, allows in-house counsel to provide advice more efficiently. They also have a greater stake in the process and the outcome and, thus, more incentive to provide insightful, results-driven advice. That makes them more proactive than outside counsel, who are usually reactive and hesitant to provide definitive answers at the risk of being wrong.
Quantitatively, in-house counsel can demonstrate their value by calculating their “hourly rate” and comparing it to the rates charged by outside counsel. To illustrate this point, John MacColl, former General Counsel of Travelers Corp., has created the following financial model.
While simple and basic, this financial model allows for comparison with the rates charged by outside counsel. Individual legal departments will vary considerably, depending on whether or not the department’s scope includes other functions such as Corporate Secretary, political contributions, human resources, insurance, or risk management.
Whether or not the legal department actually bills back its time to other business units, the hourly rate is a useful tool for internal analysis. Assigning a definitive hourly cost to in-house legal advice allows the business’s leadership to recognize the benefits offered by their in-house legal department even without considering the department’s qualitative advantages.
The significant financial and business benefits provided by a strong in-house legal department are often difficult to quantify. Calculating an hourly rate for in-house legal services provides a means for comparing outside and in-house legal costs while illustrating the in-house value proposition. General counsel should not be shy about emphasizing these benefits to support their efforts to provide the highest quality legal support and develop strong client relationships.
Mr. Classen is Deputy General Counsel of Computer Sciences Corporation. The views expressed herein are those of Mr. Classen and not those of Computer Sciences Corporation.