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For Fortune 500-level GCs, the legal staffing “make vs. buy” decision seems to be shifting toward “make” for the most basic of reasons: ”Buy” is no longer economically justified in mature categories of legal service.

According to the 2011 Harvard Business Review Law Department Survey of 219 law departments, of which 70 percent have revenues at or above the Fortune 500 level,

“…the median fully-loaded inside hourly cost per lawyer is approximately 46% below the median average hourly rate of the company’s top three billing firms.”

More than 80 percent of respondents said that their company’s legal needs are increasing—accompanied by unprecedented scrutiny placed on general counsel to manage and deliver efficient and effective legal services. “This finding serves as one of the important considerations in building a business case for adding more in-house counsel to handle increasing workloads,” survey director Lauren Chung said.

If, as one responding GC cited, the fully-loaded cost of a (W-2) in-house lawyer is roughly $125/hour, that’s probably equivalent to a $300/hour retail price for a BigLaw associate. ”Equivalent to” means the outside firm is paying $125/hour and reselling those hours for $300 each. Your client is now buying those legal services at wholesale, i.e., at the price of your firm's internal cost of delivery, and you’re trying to sell them at retail. That can’t work.

So, what does this mean in practical terms for most lawyers?

Recognize that your client is engaged in a price war with you. By finding and acquiring alternate suppliers at 42% of your price, they’ve effectively lowered the price for whatever services those internal suppliers provide. You’d better identify what these $125/hour internal lawyers are doing, because the new price for that work is $125/hour. Your wholesale price is now your client's retail price.

What to do?  Find something else to do for that client that’s worth $300/hour.

The only reason to pay premium prices for legal services is to mitigate risk. Once clients have experienced any type of matter a certain number of times, the list of unknowns shrinks, risk starts to drop sharply, and continues to drop each time they conclude a matter successfully.

That means that you must constantly monitor their industry to identify emerging issues that position you as a thought leader, and allow you to solve problems before all the value-generating risk has been leached out of them by repetition.

As my friend in the car business so wisely observed, “Don’t get married to your inventory. Next week, your customers will want something different, and you have to be willing to abandon what they no longer want, and sell what they want now; you can’t cling to a product just because you like it. Be a seller, not an owner.”

Mike O'Horo

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