A couple of years ago, I met with a small business that was considering hiring its first general counsel. This company had grown over 15 years and had reached an inflection point in terms of deciding the best way to handle their legal matters. This company fit into the standard Small and Midsize Business (SMB) model, with revenues under $50 million and employing less than 70 people. This type of decision is not unique to this company and most SMB’s will have to decide at some point whether to hire a general counsel or continue to parcel out work to their outside law firm(s).
In some regards, the sourcing methodology to guide this type of decision is easy, at least from a cost perspective. In addition to a general counsel’s salary, additional comp, and additional employee expenses, most general counsel will still have to budget for some outside legal work as there are just too many legal areas for which a general counsel can be proficient. For example:
General Counsel Costs:
| Salary: | $140,000 |
| Additional Comp and Costs: | $49,000 (35% of salary) |
| Subtotal | $189,000 |
| . | |
| Additional budget for outside counsel | $30,000 |
| . | |
| Total Costs | $219,000 |
To understand what this means in terms of work, if we take an average law firm hourly rate of $400 and divide that by the cost above, we get 548 hours of legal work needed (annually) to justify the general counsel costs (or just 10.5 hours per week if you want a weekly view). If our internal analysis shows we only need 250 hours of work, the decision to not hire a general counsel makes financial sense and is relatively easy. Obviously, if our analysis shows we need 800 hours of legal work, then the decision to hire a general counsel is also relatively easy.
However, most of the time our analysis will provide us with results that are close to breaking even. When that occurs, the intangible benefits (or other benefits that are not as easily measured) that a general counsel could bring need to be factored in. With that said, one potentially complicating issue with this analysis is that it assumes the legal hours of work are roughly the same each year. This is especially important if you make the decision to hire a general counsel. Are the benefits you gain from hiring a general counsel worth the potential risk of a year with a significant reduction in legal hours needed?
What the above analysis fails to do is consider other legal options in addition to the standard billable hour practice used by most law firms. Choosing an average hourly rate of $400 is easy to plug into an example but finding your projected hourly rate could be much more challenging. In addition, over the last couple of years, there have been an influx of “legal operation” companies capitalizing on certain inefficiencies in the legal market and also making use of the contingent workforce model. These options tend to have lower costs, which would in turn almost always indicate they are better financially than hiring a general counsel. However, you can easily sacrifice on skill, expertise and quality of work (especially over long periods of time) with this model.
Different Solution?
A firm made up of former general counsels think there is a different way. At Gertsburg Law, we have developed a General Counsel program for SMB companies. The General Counsel program combines the skill and support of a law firm, the pricing model of a “legal operations” company, and the financial flexibility of a contingent staffing model. If you are unsure about the decision and want some analysis, let us know. These decisions are not always easy, and while I am excited about the General Counsel program, the most important thing is that your company make the decision that is right for you.
This article is meant to be utilized as a general guideline for general counsel service. Nothing in this blog is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first. If you have questions about your particular legal situation, you should contact a legal professional.
Chris Zirke’s practice is focused on franchise law – counseling and advising both franchisors and franchisees throughout their respective business cycles. He can be reached at [email protected] or by phone at (216) 409-9590.
