Corporate Legal Departments Can Benefit from Insourcing—Even During a Recession

Note: The below article was originally published on 8/17/2020 in Legaltech News. See here: https://www.law.com/legaltechnews/2020/08/17/corporate-legal-departments-can-benefit-from-insourcing-even-during-a-recession/

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The current pandemic is forcing many corporate legal departments (CLDs) to tighten their purse strings--but there’s a silver lining. Insourcing is already a trend: in-house employment has tripled and many believe over 50% of legal work is now done in-house.?Now, CLDs have a further opportunity to re-evaluate what they insource and what they outsource, and to make better decisions about that going forward.

Based on private talks I’ve had with legal ops directors, most of them don’t see further insourcing as a viable option, because they don’t have money for additional headcount. However, insourcing doesn’t have to involve hiring more warm bodies. Even if it did, studies say that legal insourcing reduces staffing costs between 41 and 60%. Thus, I am not persuaded CLD’s overall resistance to insourcing is wholly financial. ?Rather, I suspect many organizations simply don’t want to change during an already-painful time.

Nevertheless, organizations that don’t use this time as an opportunity to re-evaluate the insourcing/outsourcing question may multiply their pain in the mid- to long- run.?They may be falling into outdated patterns that no longer apply given changes in the last couple decades.

In the past, outsourcing was the norm because companies were smaller and had a low volume of legal matters. Many never ran across the same legal problem twice, and never became expert in any particular legal area. Back then, general counsel’s job was to provide basic legal advice and farm the tricky work out to firms. Companies are much bigger today, and they run into the same legal problems over and over. Additionally, technology makes it possible to automate or semi-automate work done in-house, making that option more attractive. In turn, insourcing makes more sense than it did in the past.

Let’s dig into some benefits and considerations for CLDs who may pursue insourcing, now and in years to come:

No Need to “Get Up to Speed”: One of the biggest complaints CLDs have about outside counsel is that they don’t understand their client’s business. To compensate, CLDs pay a high hourly rate for outside counsel to ask basic questions—questions that insourced teams can skip. Insourced teams already know the answer to most of these questions, saving time avoiding pestering business folks with questions and (expensive) meetings those folks view as unnecessary distractions from making money.

Better Alignment: Insourced teams are also better aligned with the priorities of the business, including risk tolerance. Outside counsel, who live in perpetual fear (mostly imagined) of being sued for malpractice, have a reputation for minimizing risks in a way that shows little appreciation for the law of diminishing returns. They substitute their own risk tolerance for that of their client, then forward the invoice. ?Inside counsel, who don’t get paid by the hour and basically never get sued for malpractice, don’t feel the same pressure to minimize risk.?This allows them to shift focus away from risk minimization and towards business facilitation. For instance, instead of waiting for clients to have an idea and then telling them it is too risky, they can proactively scan for regulatory changes that make it possible to create new products, enter new markets, or optimize the taxation angle of doing business.

Better Processes: ?Insourcing doesn’t have to involve hiring. Rather, it can center around process improvement. A process designed in an environment that rewards inefficiency (the law firm) can be redesigned so the only incentive is to get the job done with as little drain on human attention as possible—ideally by involving humans only when necessary.

Just make sure your people aren’t importing the old school, time-wasting mentality they learned at their old law firm jobs.

On a prior consulting gig, I worked with a very junior in-house attorney whose job literally involved nothing except drafting NDAs. He would draft NDAs in a required PDF format, which he then was required to “lock” before emailing them out. This meant that the parties could not make corrections themselves, but had to email him back, wait for him to read the email, make the changes, and then send out the revised document.?Needless to say, this document sometimes generated further requests for changes. I had to have about a dozen NDA’s go through him, and it took over a week, delaying important work and frustrating everyone involved.?Ninety percent of it could have been automated.

Organizations that understand how to do insourcing right wouldn’t have needed a full FTE to handle this process.

The bottom line

CLDs must take the pandemic as a wake-up call to reevaluate insourcing decisions in order to reap the benefits outlined above. Insourcing can actually make you better at outsourcing too, as they’re two sides of the same coin.

What I mean is, it isn’t necessarily true that you can be good at outsourcing if you are not also good at insourcing.?This isn’t a perspective the legal industry necessarily gets.?For instance, a recent report showed law departments think they’re good at managing outsourced work. However, the same survey also indicated that CLDs do not believe they are particularly good at managing work done in-house. To me, this means that they can’t do a proper “make vs. buy” analysis because they aren’t in touch enough with their own internal operations to do a “make” analysis, and can’t compare insourcing to outside options in an apples-to-apples way.?Yet deciding what to insource and outsource and efficiently managing processes for each should be at the top of any CLDs to-do list.