I recently attended a conference that included both law firms and clients. One of the clients had a slide showing his company’s savings by bringing work in-house. It was the classic approach of comparing billing rates for law firm lawyers to hourly compensation rates of equivalent level in-house lawyers. Even though this lawyer was not a client of my firm, I still held my tongue on critiquing his math, since that would have been bad-form.
So I am doing it here.
That math is a poor representation of the situation. It is not very thoughtful and a bit lazy. But hey – I’m sure it looks good for the CFO. Here’s what it initially leaves out:
- Benefits (medical, dental, vision, life insurance, etc.), which add about 40% to the hourly comp number.
- Basic Overhead (offices, phones, computers, etc), which probably doubles the comp number
- CLE requirements costs
- And probably a few other costs I am forgetting
This approach also ignores a number of other costs that should be there, but aren’t. At a law firm, lawyers have a significant amount of support (f.k.a. overhead) that allows for more efficient and effective work by the lawyers. But in-house teams can’t or don’t provide this. This includes:
- Library and research services
- Knowledge Management
- Professional Development
- Legal Project Management
- Legal specific technologies
- Support from Finance
- Presentation support (e.g. trial support)
- E-Discovery support
- And on and on …
Think about all of the operational support a firm provides its lawyers that an in-house team can’t and you will realize that lawyers without this support will be far less efficient and effective. And think about all of the newer investments in innovation that firms are now making and will be making in the near-term. This all means the cheaper hourly rate comes at quite a cost.
Finally – a very important resource these in-house lawyers loose is the support, oversight and mentoring of seasoned partners. Clients prefer to hire associates away from firms at the 5-7 year mark precisely because they have been learning from these same partners. So they indirectly acknowledge this is very high-value stuff.
Basically clients hiring trained lawyers from large firms are buying a very nice car with a full tank of gas, but not giving much thought to who will be taking care of this car (that has no warranty) going forward. And then they brag about how owning is much cheaper than renting.
Admittedly, law firms also have a profit margin. But they receive this when they earn it.
My prediction is that we are reaching the peak of the trend of client bringing work in-house. This has historically been a cynical trend and with the predicted recession approaching, having large head-counts will lead to other problems for in-house departments.
On top of all of this is one of my other rants. This same client went on about how rates for senior associates were way too high, given their skill level. Having recently rebuilt a house, I find this a bad place to give your attention. Instead of focusing on the cost of inputs, you are far better off talking about scope, outcome and total cost. A focus on input costs may well drive you to compare hourly costs such as this client did, leading them to think they are getting more for their dollar when they may not be. Clients who want to truly get more for their money will be far better off partnering with the law firms to develop innovative ways to accomplish this.