A simplistic view on cost accounting is causing General Counsel to misallocate resources.
When my father started his career in the early 60s conventional wisdom suggested competitive advantage was generated through a business’s ability to ‘own, manage, and directly control its’ assets’. Back then businesses employed chefs for the company cafeteria, maintenance men to maintain their buildings, printers, cleaners, security; practically anything a business might need.
When everyone woke up from the party in the early 90s, they recognised that lean, highly focused businesses were dramatically outperforming bloated, vertically integrated organisations. Over the next 25 years, improvements in cost accounting and management thinking led businesses to focus on the activities that are ‘core’ to the business, and outsource anything else – even if the cost was higher.
Yet most General Counsel still pursue a strategy at odds with the rest of their organisation: ‘Keep hiring to bring work in-house…until the CFO stops you’.
In an industry traditionally dominated by suppliers with super high profit aspirations this approach is not without its’ merits. Total legal spend has declined largely as a result of the growth of in-house teams.
Yet the business case for an expansion in headcount is often based on a simplistic view of cost: compare the rack rate of a law firm with the salary of a lawyer and (rightly) conclude the salary of a lawyer is lower.
As my father said when I was buying my first car “cost is what you pay, value is what you get”.
However, as the GC Toolkit expands with modern law firms such as Plexus, and technology offerings like Promotion Wizard, GCs need to have a deeper understanding of cost and value.
An in-depth analysis of cost needs to take into account the ‘headline costs’ like salary, ‘hidden costs’ such as payroll tax, and ‘comparative advantages’ such as access to proprietary systems, or knowledge.
For example, let’s compare outsourcing property leasing to Plexus vs employing a mid-level property lawyer (click here for a free analysis tool).
|Office Space & IT Cost||$13,000|
|Non productive days (Holiday, Sick & Parental Leave & Public Holidays)||$19,385|
|Payroll Tax, Payroll Cost & Work Cover||$9,800|
|Recruitment, Hiring Cost and termination risk||$18,200|
|Management time (3 hours a week x $150 an hour)||$23,400|
|Total Cost of Employment||$239,385|
As you can see a $140,000 salary quickly expands to $240,000 in total cost. If we take this figure and divide it by the average annual ‘billable hours’ for an in-house lawyer (the industry medium is around 850 hours) we get an effective cost of $282 per hour (or about $1100 a lease) – about the same as the cost per lease with Plexus’ property practice.
However, the buck doesn’t stop there when calculating ‘value’. As you know, there are comparative advantages to an external supplier:
|Demand Management||One of our clients was quiet for three months, then referred 43 leases to us in one month. Managing this volatility would be impossible (and inefficient) in-house.|
|Risk Management||Law firms like Plexus accept the risk for the work they do (and provide PI cover) – lowering Legal Risk for the client.|
|Commercial Outcomes||Law firms should have deeper terrain knowledge leading to better commercial outcomes (e.g. Plexus’ property lawyers know Westfield has accepted an advantageous make-good clause with one of our clients and can use that knowledge to negotiate better outcomes for all of our clients).|
|Systems and economies of scale||Plexus provides access to technology and processes such as: document automation, a client extranet to track matters, automated title searches, paralegals to register leases etc.|
As this analysis shows, a simplistic ‘headline’ comparison may suggest hiring another lawyer to do property leasing is ‘cheaper’. However, when you undertake a more detailed analysis the cost is about the same.
However, it is only when you apply a ‘value’ lens to the analysis that you see the full picture – you are likely to get more value from outsourcing this work. For example: based on our knowledge of the market we recently negotiated to eliminate any requirement to ‘make-good’ with a major landlord. The benefit of this in one store alone saved the client more than their total legal spend with us over the year. There are similar opportunities in almost all legal activities.
As my father said when I was buying my first car “cost is what you pay, value is what you get”, GC’s who heed this advice can dramatically improve their ROI.