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“Why do we have so many lawyers?” That’s a question corporate managers have been asking with increasing frequency in recent years as companies weigh the benefits of bankrolling in-house legal departments versus outsourcing more work to law firms. The trend in corporate cost-cutting programs has been to shift or eliminate fixed costs from the corporate center. From a corporate budgeting perspective, law departments are a fixed cost � and legal work has many characteristics that make it a candidate for corporate outsourcing. In the face of such challenges, law department managers need to be able to articulate the value that in-house lawyers bring to the organization � not just cost advantages, but how they contribute to the success of the business overall. Every law department, even those not under such scrutiny, should be able to answer this question. It’s essential that law departments maintain basic data to support decision making. Managers should conduct periodic reviews to assess alternative approaches to legal cost and value management, particularly the mix and scope of in-house and outside resources. THE RIGHT MIX A growing number of organizations favor a model that combines a strong in-house department focused on core legal services with strategic outsourcing arrangements, such as partnering relationships with a select few firms. Targeted outsourcing of legal work, under the right set of circumstances, can reduce legal spending, better accommodate fluctuations in legal workload (particularly during a period of transition), and ensure that an organization receives expert legal advice in areas where in-house resources may not be adequate. But what is the right mix? This is not a simple question and the answer differs from organization to organization. It may be that retaining a law firm is less expensive, or helps reduce legal department head count � but does the law firm have the right skills and know-how to adequately meet the organization’s needs? Begin by asking some key questions: • What is the cost of providing legal services internally, and is that cost competitive with outside firms? • What benefits does the law department bring to the organization by handling the work? Are there particular services or areas of law that would be better handled by outside counsel? • Does the law department have or want to develop the necessary skill sets to effectively handle specific areas of work? Corporate infrastructure and head-count issues aside, a law department may outsource work for a variety of reasons. The organization’s business may be growing, and the law department is being asked to handle a higher volume of work, which creates a need for greater resources. There may be a need for highly skilled legal work in a specific area of law. Typically, a law department does not have the resources to support large-scale projects, such as a major litigation. It may not be cost-effective to develop the skill set required to handle a particular kind of work in-house, especially if there is uncertainty about the length of time that this type of service will be required. The arrangement may fit an organization’s needs for flexibility in the way legal services are provided. A strategically managed law department will focus on its core competencies and outsource other work. In every situation, the law department and outside counsel have different strengths and focus, which if managed effectively, can complement each other. Costs should be only one aspect of a relationship with a law firm. Organizations should look for law firms that demonstrate understanding of key tenets of the corporate culture and a willingness to learn the business, as well as a recognition of their own weaknesses and the need to solicit other counsel at times. The relationship should be one of trust, where the ultimate goal is to advance the business goals of the organization. Law department managers should look for the following attributes in outside counsel: • Technical skills. Outside counsel should have strong technical legal skills. The ability of outside counsel to develop and offer deep technical expertise is one of their differentiating features. • Results orientation. Outside counsel should be focused on the outcome to the corporation, rather than the dollar value of the work. Companies must be willing to share risks and rewards with outside counsel and to compensate them based on results achieved rather than on hours worked. Achieving a major litigation victory or handling a significant transaction well are common examples where this principle has been applied. Other areas might also be considered for a results-based fee arrangement. Examples include designing an effective preventive program or delivering a high-value technology solution in such areas as intellectual property, regulatory affairs, or compliance. • Perspective. Outside counsel should be able to provide innovative value-added service, such as industry knowledge gained from working with other clients. Such experience gives them a broad perspective and the ability to identify trends and particular areas where the business units need educating. Additionally, law firms should be proactive by offering training programs. • Solid project management. Outside counsel should be able to prioritize work and manage work flow to get the job done efficiently. Most importantly, inside and outside counsel should be jointly responsible for establishing clear, ongoing mechanisms for the organization to communicate expectations and the firm to articulate needs. • Flexibility. Changes in direction or strategy should be responded to quickly by outside counsel and not be treated as “bumps” in the project that warrant another conversation about scope (and cost). • Predictable pricing. Many law department managers find that predictable pricing is a more important factor in managing the legal budget than cost. Clearly cost is important, but accurate planning and consistent communication are essential to effective management. • Use of technology. Technology is an integral part of providing cost-effective legal services. Outside counsel should be willing to embrace technology which fosters integration with their in-house clients. EASING THE WAY OUT Should an organization decide to outsource an entire area of legal work and reduce the head count of inside lawyers, there are ways to ease the transition. First, formulate a transition plan. As with any other change, adequate preparation and planning is essential. An outsourcing arrangement will cause all sorts of questions to arise, and staff will need to know how to proceed. Business unit clients will require instruction on how to obtain legal services. The law department must make sure the clients are comfortable with how they will work with lawyers after the restructuring. Displaced staff also need to be considered. Many law firms which win outsourced work are willing to take on some of the attorneys who will be displaced by the decision. This scenario has benefits to all involved: The law firm acquires skilled staff who have invaluable business knowledge of the organization; business managers get to deal with many of the same people; the corporation obtains legal services at a lower cost; and the attorneys can expand their practice to other clients. This is especially true for a function outsourced because there wasn’t enough work to fill the time of an in-house lawyer. Rather than having to assign an attorney work that doesn’t fit his or her skill set, the organization pays for skilled work only in the exact amount it needs. It’s also important to integrate the outside attorneys with business unit clients. There is a tendency for business units to feel that they do not have as much immediate access or integration with their attorneys if the legal function is placed in an outside law firm. Although this may be true � and may have certain benefits, such as preventing the business unit staff from calling an attorney with every question, thus taking up valuable time � measures can be put in place to ensure cohesion. These measures include actual physical placement of law firm attorneys at the company, inclusion of in-house attorneys at law firm events to foster closer working relationships, and participation of senior law firm attorneys in certain strategic corporate planning sessions. MAKING IT WORK Planning is very important to an outsourcing arrangement, and both law departments and law firms should pay attention to the details. Detailed “Requests for Proposals” are often used as the mechanism for defining requirements, obtaining proposals, and evaluating alternatives. Providing adequate disclosure about the legal work to be outsourced will support accurate pricing by the firm, manage expectations, and enable the organization to understand if the firm has the capacity and desired approach to do the work. Ensure that the proposed arrangement is beneficial to both parties. Both the law department and the law firm should plan to revisit the arrangement periodically to ensure that the volume and type of work matches the original bid. In the early stages, err on the side of more frequent reviews. Measure the firm’s success by applying performance metrics to the law firm. In this way, organizations can measure performance and communicate expectations to outside counsel. Measurements may reflect the same standards that were applied to the law department before the outsourcing or may reflect changes in an organization’s business, demands, drivers, or other objectives. This is the place to articulate to law firms what matters to the organization. Finally, make sure nothing is lost. If not managed correctly, an outsourcing relationship could lead to loss of focus on areas of importance. The law department should build controls into the arrangement to ensure this doesn’t happen. For example, part of any outsourcing arrangement should include the development of a legal risk management plan that both the company and outside counsel agree to and review and update periodically. Outsourcing arrangements have the potential to reduce the cost of legal services provided to the company. Organizations considering outsourcing portions of legal work should individually assess each arrangement to determine the effects on legal risk and client service expectations. Well-managed use of outside counsel, working in conjunction with in-house counsel, can significantly improve the value of legal services provided to the organization. Jonathan P. Bellis is a senior director at Hildebrandt International, a leading law firm and law department consultancy. He can be contacted at [email protected].

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