Insourcing and the Problem of Value to Price

Insourcing and the Problem of Value to Price

Published in InsideCounsel February 24, 2016.
By Keith Lipman, Esq.

When it comes to outsourcing legal services, there’s a problem of value to price. Law firms may have simply become too expensive, leaving the price of the work delivered untenable to value.

This is why, of course, we are seeing outsourcing trends declining and insourcing on the rise—most recently as published in the 2015 Chief Legal Officer Survey from Altman Weil and the 2015 ACC Chief Legal Officer Survey. Both of these find CLOs and GCs taking an increasingly strategic approach to allocating resources in the delivery of legal services by staffing up internally and decreasing spend on their outside counsel (a 40% decrease according to Altman).

Insourcing is the natural and logical reaction to the problem of value to price; however, the reaction doesn’t completely solve the problem—the problem, that is, of value.

Insourcing, ostensibly, does solve the problem of price. Let’s say your department has hired a lawyer at $300k with the expectation of billing 1800 hours per year. This costs, in hour units, $166/hour to the department. This is a bargain when compared to the “retail” price of having hired outside counsel for the same work at, say, $500/hour of work. Quick calculations say you’ve just saved 67% on the price of this legal resource, and congratulations are in order.

Not so fast. The problem, as defined earlier, is determining value to price. This 67% savings on your newly hired internal resource only truly makes sense if: (1) you need the resource for 1800 hours; (2) that particular resource was in fact the least expensive option for each key service delivery point across those 1800 hours; and, (3) that particular resource delivered the right expertise across each key service delivery point throughout those 1800 hours. These are challenging conditional statements.

How can your department deliver on the value to price mandate—whether insourcing or outsourcing? If you are growing your department and insourcing legal work, you’re an internal law firm and are clearly an expense. To that end, you need to ensure that you are delivering legal services to solve your core business problems with the same quality as your outside counsel, but at a cheaper price.

However, if your department brings on a lawyer who doesn’t have the required expertise or time-efficiency capabilities for a particular matter, you’ve wiped out your price advantage. The previously outsourced lawyer may have advantages in expertise and time-efficiency capabilities based upon volume of work: if the law firm churns 200 of these particular matters in a year and your law department performs 2, who is likely to effectively complete the matter best at the best price?

It comes as no surprise that Chief Legal Officers responding to both surveys cite internal and external cost pressures as their greatest concern in managing their law departments in 2015.

It falls upon the shoulders of the CLO or GC to understand and manage the internal cost of delivery: insourcing without metrics is nothing. Once insourced, law departments need to get better at managing the process and better at knowing the answer to whether their performance was more efficient than their outside law firms – knowing whether they made the appropriate investments to reduce the costs of delivery internally.

Alternatively, we need to look at the legal industry as having morphed into a legal supply chain. This is akin to the smartphone industry and its plethora of assemblage choices– does the smartphone provider manufacture the screen, or purchase it? Manufacture the semiconductors, or purchase them? The legal industry has disintermediated into a similar type of supply chain with choices including an array of LPOs and third party vendors in a variety of aspects of litigation support. This is why we see, among those departments decreasing their law firm spend, the overwhelming majority (76%) said the work would go to their own in-house legal staff, 13% would use vendors and 9% would use contract lawyers.

This is the legal supply chain, and determining the best mix of resources requires a comprehensive understanding of the price to value flow at each key delivery point.

As the CLO and GC confront the legal supply chain, the concomitant questions do not lessen the burden that the market shift has placed on them – question such as: who directs and manages your department’s legal supply chain and ensures you do a quality implementation? Who is now responsible for the quality of the end product? As the supply chain proliferates, the answers to these questions become more ambiguous.

At the end of the day, insourcing can be an effective solution; but engaging the legal supply chain is an even better one. To succeed, departments and firms alike have to become better at managing the process, better at knowing the answer to the price to value equation, and better at knowing how to scale that solution from discrete one-off projects to a systematized situation—and that answer will rest in technology.

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