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Thinking about “A calculation of value added by a law department”

According to Rees Morrison’s Law Department Management Blog, some legal departments claim that they are saving their companies millions of dollars per year by comparing their internal hours spent on matters to the billings they would have theoretically received from outside counsel for that same work.  Inside counsel work for less, evidently, so the differential in spending can be quite large. 

Rees points out a number of challenges to this approach to value estimation, including asking whether or not the inside counsel’s  “prices” include the full allocation of overhead, and whether inside counsel are actually performing the same types of work, and so on.  Challenges aside, billable hour comparison is a perfectly legitimate way to measure the value of a law department, though that value can also be assessed in a much more strategically compelling way. 

A legal department is, or at least should be, far more than just an alternative to an outside counsel law firm.  The General Counsel, and the department that he or she runs, has a huge responsibility for risk management that an outside firm hardly ever assumes.   The Directors of a corporation are tasked with a fiduciary duty to protect shareholder assets from risk.  As a corporate officer, the General Counsel is responsible for assuring that shareholder assets are as well protected as possible from legal risk, and in some cases, regulatory risk.   The GC must assess legal risks and take actions to mitigate those risks, usually in the form of contracts, intellectual property processes, and litigation.  At stake, in some cases, is nothing less than the asset value of the whole corporation! 

The outside counsel firm is typically a specialized tool used in the realization of these risk mitigation strategies.  In many cases, the outside counsel firm has specific expertise that is not available inside the legal department, so it is a symbiotic relationship.  However, from the perspective of shareholder value, the legal department plays a unique role that far transcends the simple providing of a billable service. Legal departments should not sell themselves short in their assessment of their value to the corporation.