Managing Legal Budgets in a Tough Economy

“Do more with less” is the battle cry for most corporate departments in the current economy. As budgets tighten, efficiency and effective spending are required. Your legal department is no different.

Let’s face it - no one wants to deal with lawyers, but just about everybody must deal with lawyers from time to time. Legal disputes are a norm in corporate life. Even in the absence of disputes, sophisticated companies actively seek legal advice in the planning and analysis stages of corporate development to reduce risk, and build a solid foundation for long-term growth. The young company needs advice to get organized for the long-term. The growing company needs solid structure and good corporate governance on which to build its future. And all companies need to understand risk. 

The biggest companies in the world have shown us the roadmap to long term stability: organization, efficiency, and preparation. The policies and procedures that make these companies powerful are every bit as necessary to the growing company because they reflect time-tested business principals. Too often, however, young and growing companies go without benefit of counsel because they either feel they can’t afford outside counsel, or have not yet reached the point where they are prepared to hire a full-time general counsel.

To solve this dilemma, many companies are turning to a hybrid solution – outside general counsel. Such programs strike a balance between the need for consistent legal advice and the cost of a full-time general counsel. 

The Outside General Counsel Concept:

Employing outside general counsel is simply outsourcing, just as you might outsource HR or employee benefit consultants, but with a few key distinctions. First, using outside general counsel is about value spending – spending less now to get the products and services you need to save more down the road. The need for quality legal advice is not lessened by tough economic times, in fact it may become even more critical in tough times. As budgets tighten, value spending becomes a critical tool in the CFO’s arsenal. Second, using outside general counsel is about developing relationships that help build your business and allow it to manage its legal budget more efficiently over time. Last, using outside general counsel forces you to get to know your own company, identify its future, and plan the path to that future.

So how does it work? Your company contracts with a law firm to establish a consistent legal presence in support of your day-to-day operations, working remotely or on-site depending on your needs, in exchange for a flat fee. During that time, the lawyer is solely dedicated to company business and operates just as a full-time general counsel would by working on specific projects, being available to provide advice as issues arise during your normal course of business, answering questions from your employees, and working on new initiatives and long-term corporate governance projects. By being on site and dedicated to your company, the lawyer gets to know your company quickly and thoroughly, and is thus well positioned to advise you immediately on legal developments affecting your business. The outside general counsel is responsible for advising on all company actions, drafting, implementing, and managing corporate governance policies, and managing the company’s legal affairs – the same role performed by a full-time general counsel. But because of flat-fee billing an outside general counsel will cost far less than a full-time employee.

Why Use Outside General Counsel?

Value Spending.

Managing legal costs does not mean cutting budgets to the lowest possible level or simply hiring the lowest-cost provider. Rather, managing a legal budget means getting the best value for each dollar spent on legal fees. Proper planning now can pay huge dividends later. Regular legal counsel helps companies understand and avoid risk, thus reducing the chance of litigation down the road. Avoiding a single litigation can save tens-of-thousands of dollars, making the money invested in corporate counsel money well spent.

One example of value spending is investing in the time to assess a litigation or potential litigation at the outset, and in context. This is true of any case, whether handled by inside counsel or an outside firm. But the context of that assessment is the key to its value. The company must understand the risks and benefits of a case in the context of the company’s business plan, reputation in the community, political implications, non-monetary costs, potential opponent strategy and how that may impact the litigation, and how the litigation or proposed litigation may fit with the company’s short and long-term goals. 

Counsel cannot provide that guidance efficiently unless they understand the company’s short and long-term goals, political interests, or reputation in the community. Truly understanding these matters takes time and can best be built through consistent interaction. So, the one-off litigation shop strives to understand these matters and thus guide the company as best it can. But the general counsel (inside or outside) already knows what matters most to the company, and can provide that initial assessment quickly, and in the proper context.

If a matter is large enough to require outside litigation counsel, for example, then the general counsel can help select a firm who will best suit the company’s needs and objectives. Selecting the largest firm or the most popular lawyer is not always the right fit. Reputation helps, sure. But size does not mean quality and certainly does not mean efficiency. Hiring a big firm does not always mean the company’s legal dollars will be well spent. In many cases, an experienced litigator at a lean shop is a far better option than a big firm lawyer with an army of hungry associates to feed. As an added benefit, the general counsel can also manage the litigation to ensure efficiency. The general counsel can draft discovery responses, for example, saving outside counsel fees. The general counsel also acts as a watchdog, guarding against excessive bills and thus relieving the company officers from the many headaches of managing litigation. An in-house general counsel provides these benefits to a company, but at the cost of a full-time employee. Companies can nonetheless achieve these same efficiencies, but at far less cost, by using outside general counsel.

Over time, a general counsel helps a company establish a work-product library of pleadings, research, discovery, and other litigation raw material gathered from other cases to be recycled in the future. The outside general counsel can help manage and deploy those resources to reduce the cost of future litigation. A general counsel can also conduct post-case analysis to help the company understand what worked and what did not. There are lessons to be learned from any engagement, and companies that strictly use outside counsel rarely invest the time or money to conduct this analysis and gather the maximum benefit from their legal dollars spent.

Perhaps the best example of value-spending is money spent on drafting and implementing corporate policies that both increase immediate efficiency and help avoid potential litigation. With the aid of outside general counsel, even smaller and growing companies can have effective document retention and destruction policies, for example, that can save thousands in litigation costs. Managing a legal budget, from the cost-containment point of view, is most effective when legal dollars are spent to help a company detect and avoid risk before it becomes a problem.

Relationship Building

Deploying your legal resources depends on your company objectives. Are you building for the long term, or are you interested in maximizing short-term profitability in the hope of a buyout offer? The answer likely impacts how and where you spend legal dollars. A company looking to the long-term wisely invests in corporate policy development and long-term corporate governance. The company with a short-term exit strategy needs enough organization to make an attractive acquisition target, but needs efficiency to reduce spending.

Employing outside general counsel brings consistent legal presence to your business that fosters relationship building as your company grows. In turn, your lawyer understands your business objectives and can help design and implement policies to help you reach them. Does your company need a HIPPA Compliance Program or drug and alcohol testing program? Do your hiring practices implicate the Fair Credit Reporting Act? Which programs do you need short term versus long term, and in what order should you implement such programs? The answers best come from someone with both the legal knowledge and the inside appreciation of your company.

Often attorneys are only employed in a crisis situation, and must attempt to steer your company without really knowing anything about your company or its people. Consider this example. A local consulting company provides two distinct types of online audit services – one for government programs and another for private programs. The company had already retained a local firm to act as outside general counsel, and turned to their lawyer to collect on a contract breach for early termination of a private-based audit services contract. In researching the potential defendant, the lawyer learned that most of the potential defendant’s business came through government-sponsored programs. Rather than file an immediate suit, the lawyer issued a letter proposing a meeting to discuss mutual termination of the private-based audit and transfer to a new government-based audit instead. The clients met, the business folks ironed out a deal in 3 hours, and all parties left happy with new business in hand. Perhaps that same deal could have resulted through mediation or settlement after litigation began, but because of the existing relationship between lawyer and company, they were able to get to that resolution before anyone incurred any litigation costs.

Using outside general counsel on a consistent basis fosters understanding between the lawyer and the company, so the lawyer can truly act in the company’s best interest when crisis arises. 

Get to Know Your Company.

An often-overlooked benefit of using outside general counsel arises from the attention that gets paid to the business-side of your business. When was the last time you reviewed or revised your bylaws? Do they meet your current operations parameters? Is your corporate book current with meeting minutes and resolutions covering significant changes to your company over the last year? Have you complied with corporate formalities to protect against owner liability?

Many developing companies are simply too busy actually operating their business to focus on infrastructure and administrative policies. In fact, many companies do not focus on such issues until they are forced to review and produce those policies in an audit or litigation context. Large companies with full-time general counsel (and staff) do not face these issues because their lawyers constantly review and update their policies. Smaller and mid-sized companies can obtain that same benefit by using an outside general counsel at a fraction of the cost. And, during that process, the company management will have the opportunity to review, analyze, refine, and thus improve its own policies to promote greater efficiency. Many companies find the process of looking “inside” hugely revealing. 

Corporate governance policies must change as the company grows. What happens when your business grows to the point where it needs a board of directors or employs more than 10 people and thus must meet certain labor standards? When those issues arise, your company can turn to an insider to help revise and refine your governance policies as needed to stay true to your goals without the same lead-time needed by an outside consultant.

In the end…

Your company will grow, and like it or not, you are likely to need a lawyer at some point. Don’t wait until a crisis to examine your risk profile, and don’t sink precious company resources into hiring a full-time general counsel until the size of your company supports that model. In the interim, using an outside general counsel will help your company seize all the benefits of consistent, competent legal advice at a rate well below what you would pay a full-time employee.