Building vs Buying Expertise: When to Hire and When to Outsource in Legal Contracting

‍

Not all of your legal work needs to be done in-house. But some of it definitely should be. So how do you know when to hire and when to outsource?
In this article, you’ll learn the different ways legal contract management can be handled and where best to allocate resources to ensure efficiency and reduce costs.

How do you know if you’ve optimised the support of legal contract services?

‍

Legal teams often find themselves in firefighting mode. This is usually because the volume and complexity of work is increasing while the in-house team is being asked to do more with less as budgets are capped or even squeezed.

It’s no wonder that over 50% of surveyed lawyers have reported that they’ve experienced burnout. The more pressure that employees are under, the higher the risk that they’ll leave or need time off.

‍

This is one of the biggest reasons why companies hire us to take on high volume contracts so that their legal teams can focus on more strategic and interesting projects, rather than get bogged down by smaller contracts.

‍

There may be other signs. If you are using traditional law firms to support your day-to-day contracts, then you are probably paying far too much for slow performance. Alternative legal service providers typically turn contracts in a couple of days, Radiant Law is best in class with contracts typically sent back in four hours, but these turnaround times are rare for traditional law firms.

‍

So if you’re experiencing…

• overworked and stressed employees
• budgetary pressures, or
• delays in contract negotiation (particularly for day-to-day contracts),

then it may be time to rethink how you resource your contract support.

How do you make sense of your different types of contracts?

‍

Optimal resourcing will depend on the type of contract. To figure out who should work on your contracts, start by categorising the different types on two different dimensions:

‍

- How common are they? Are you dealing with multiple every day or are they a relative rarity?
- How risky are they? Are they high-value, high-complexity, and high-risk (these tend to go together), or are they well understood with manageable risks?

‍

With these dimensions, you can create a two-by-two grid to start to sort your different contract types:

Of course, these dimensions are really spectrums, but forcing each contract type into one category can shine a light on what matters:

‍

1. Rare and Low Risk

These contracts don’t need material legal support, and if your team is still handling them, that may explain some of the pressure. You can spot these contracts with triage, typically looking for the following characteristics to avoid the need for legal support:

‍

- lower value transactions,
- not a common contract type that legal supports for strategic reasons,
- there are no material information security or reputational risks,
- guarantees or security are not being granted,
- material personal data is not being processed, and
- material IP is not being created or transferred.

‍

This category can also include deal types (such as NDAs) where legal has provided standard forms and the other party isn’t requesting changes - we’ll come back to this later.

‍

2. Rare and High Risk

This category is the reverse. The contracts really matter, but because they are rare it is not worth building internal expertise in your legal team.

‍

3. Common and High Risk

These deals are key to delivering your organisation’s strategy and are likely to have high business focus. Because of both the regularity that they occur and their importance, it’s worth building expertise to handle these internally.

‍

4. Common and Low Risk

These contracts also matter to your business - they will be the bulk of your core contracts and fundamental to accelerating sales and procurement - but the lower risk means that they are easier to hand off to contracting experts. These are also the contract types that will benefit the most from applying lean processes and technology. Typical parameters for these contract types are:

‍

- more than 50 contracts of a similar type a year,
- the value of the typical contract is less than £1-10m (what is “large” will tend to be proportionate to the size of your organisation), and
- the contracts are regularly negotiated (so not consumer contracts).

‍

The two-by-two grid is for categorisation, but doesn’t give the full picture on either volume or total deal value (across all deals), but when you categorise your contracts it will likely look like something like this for volumes:

‍

‍

In other words, most of the volume is in the common and low risk deals. And when looking at total deal values, the higher risk deals are going to tend to be far higher value, so the traditional pyramid for showing the breakdown evens out to some extent:

But note that most of your revenue is probably coming from common and low risk deals (unless you are a supplier doing particularly large enterprise/government B2B deals, when common and high risk deals will be a far larger category).

‍
With these categories in mind, how might you resource your different types of contracts?

What are the different ways of resourcing your contract support?

You have options, perhaps more than you realise.

In-house teams

Legal teams

In-house legal teams will be familiar to you, but a few observations.

‍

In-house legal teams now employ about a third of the legal profession. Their spectacular growth has been driven by a simple observation: if you have enough work to keep an in-house lawyer busy, they are a lot cheaper - about a third of the cost of using a law firm.

‍

Cost may have driven the growth in in-house teams, but that misses the real value. In-house lawyers work far closer to the business, and can develop a far better understanding of the organisation’s objectives and drivers, than an external lawyer. When in-house teams play to this advantage, they can add unique and deep business value.

‍

Going further, in-house lawyers are better placed to handle ambiguity and make the more complex calls. Legal judgement adds huge value when wielded well, and in-house lawyers are able and often best-placed to take a view, especially as they represent the organisation, in situations where external suppliers may feel they need to defer.

‍

In-house legal teams typically spend over 50% of their time dealing with contracts and are the default answer for contract support in enterprises. However, there is a big difference in practice between an in-house experienced deal lawyer leading high-end deals and an in-house junior lawyer working on simpler deals. The difference isn’t just the experience of the lawyer, it’s the nature of the deals.

‍

Complex deals benefit most from experience, simple deals benefit most from process and tools:

‍

- An experienced in-housed lawyer can handle a complex deal they are familiar with as well as any external lawyer.
- A junior in-house lawyer supporting simpler deals without a structure will rarely operate as well as an external junior lawyer working within a well refined-process supported by technology.
- In fact, a senior lawyer, whether internal or external, who is making it up as they go along, will be consistently beaten by a junior lawyer operating within a smart system (in the broad sense) when it comes to simpler, repeatable deals.

‍

Which takes us to a fundamental problem faced by in-house lawyers: they are too often operating in an environment light on process and technology, which (as we explain in our book, Sign Here, are key to making high-volume contracting fly.

‍

In-house contract teams may sometimes be supplemented by “talent agencies” that can provide lawyers for a fixed period. This is more expensive than hiring, but neatly addresses challenges such as parental leave. We are bundling these providers into legal teams because, at the end of the day, you are receiving a no-doubt talented lawyer to join the legal team who is, ideally, expected to work in the same way as the rest of the team.

‍

In-house contract teams need not, however, be locally-qualified lawyers. There are two other internal groups that might support your contracting: contract managers and service-centre teams.

Contract managers

It’s not entirely clear why lawyers have so effectively monopolised contracting. There isn’t that much law involved in negotiating contracts, and what there is can of course be learned without needing full legal qualifications. Indeed, contracts classes at universities rarely teach much that is particularly relevant to real world contracting - we all learned how to do it on the job.

‍

Despite the occasional snobbishness about legal qualifications, there are lots of excellent contract managers (championed by the wonderful WCC) supporting contracts in enterprises. That being said, a contract manager will tend to be paid less than a similarly experienced  lawyer, so the cost differential can make this option attractive.

‍

Shared Service Centres

Another twist is a shared service centre, a way an enterprise can locate an internal contracts team in a lower-cost region (whether on-shore or off-shore). Many large organisations have already set up service centres to perform other back-office functions; some companies then bootstrap a contract management team to share this infrastructure, often staffed with locally qualified lawyers and contract managers.

‍

This is another labour arbitrage play (note that everything in this section so far has been at least partly motivated by reducing the cost of the people doing the work).

‍

The problem with labour arbitrage is that it only gets you so far. When you have moved all of your work to the lowest-cost region on the planet, what do you do next? It’s not as if cost pressures are going away.

‍

This takes us to the other key point about shared service centres. The act of moving a service to a new team forces companies to start to formalise how contracting should be done, which is a good thing! Whether these companies go all the way through the methodology we spell out in our book is another question, and our experience is that these centres can often in practice be seen as not only lower cost, but also lower quality -  because the companies haven’t followed through in investing in optimising how they do their contracting. And as we explained above, optimisation is most critical with the common and lower risk contracts that get sent to these centres.

‍

Which takes us to legal operations.

‍

Legal Operations

An important new group has emerged within in-house teams: legal operations. Team members may range from lawyers who wanted to do something different; professionals hired from outside the legal industry who bring technology, finance, strategy, knowledge management, project management, process improvement, and/or data skills; and, let’s be honest, one or two examples of administrators with new titles.

‍

Legal operations is an important development, not because they are going to start delivering your contracts (that’s the antithesis of their job description), but because at their best, they bring a super-power of accelerating the rest of your contracting team. Their impact may have been exaggerated a little at first (like so many fads in legal) but this group is adding more and more value.

‍

A challenge legal operations faces is the ability to influence the team members doing the day-to-day contract work, and it can be particularly hard for “non-lawyers" (ghastly term) to take lawyers on a journey towards the light.

‍

A far bigger issue, though, is whether improvement activities can and should be separated from the team doing the work. Fixing contracting requires a deep understanding of both contracting itself and disciplines outside the normal ambits of legal studies (see the skills the external professionals bring). If improvement is treated as a separate activity that is left to “the professionals”, rather than the team at the coal-face, the chance of improving the right things is slim. This may explain a lot about the realities of enterprise contracting even after the arrival of legal operations.

‍

In conclusion:

• there are more than just lawyers working on contracts internally,
• experienced in-house lawyers are great for regular, complex deals,
• labour arbitrage will only get you so far for your common, simpler contracts, and
• succeeding with common, simpler contracts requires taking process improvements and technology seriously, which in-house teams have generally been light on to date.

‍

This all suggests that building an internal pyramid model with lots of lower-paid junior lawyers is not enough to meet the challenges. Meanwhile, companies are still using traditional law firms, where in-house lawyers learned their trade (and the pyramid model).

‍

Traditional law firms

Law firms used to support most of the contracts that are now supported by in-house teams. Although companies then hired the same lawyers directly to save money, it’s amazing how many smaller contracts are still being sent to traditional law firms. To give you a peak at where this post is going, we were recently brought in to support contracts in place of a traditional law firm, and our fixed pricing was an eighth (yes, ⅛) of their cost with no assumptions.

‍

But traditional law firms are still going from strength to strength for good reasons:

‍

• they have deep expertise in rare, complex, and high risk deals - where it makes no sense to build an internal capability,
• they are easy to buy - you don’t even have to come up with a detailed scope, just point them in the right direction and let the billable hours start being racked up,
• for the highest profile deals, you won’t be fired for hiring a top firm, and
• every in-house team has at least one law firm on tap that has had a long relationship with their company.

For bet-the-company deals, traditional law firms will always be used. But there are challenges with using them for other categories, and it’s not just the cost:

‍

• even if they are charging on a fixed-price basis (which is still sadly not the norm), traditional law firms have the billable hour hard-wired in, so they tend to treat everything as bespoke,
• traditional law firms are also run by partners who are generally allowed to do things their own way, another reason why firms find it well-nigh impossible to implement a standardised approach to processes, and
• the billable hour-mentality also means that any technology that materially speeds up work will tend to be ignored (ask your favourite firm how many contracts they create with document automation).

‍

So while traditional law firms may be excellent for rare and complex deals (remember we said that experience is most important for high risk contracting), they are not only expensive but also slow for simpler deals. Earlier we said that turning a simpler contract in no more than two days is the target. A traditional law firm may easily take that long just completing the conflicts check.

‍

The business

We didn’t give the full picture when we said that contracts used to be supported by traditional law firms. In the beginning, the business teams were happily doing deals as they saw fit. This continued until someone at their company made a rule that contracts had to be checked by lawyers, usually because some contracting disaster had occurred, and only then were contracts sent in bulk to traditional law firms.

‍

The rules requiring legal review generally only strengthened as legal departments grew. The new guardians of the company had to check everything, of course. And then the pile of contracts in front of the guardians started to grow.

‍

The business teams may not, generally, be fully cognisant of the finer details of force majeure clauses, but they do have a major advantage: they are cutting the commercials and understand what they are trying to achieve with their commercial relationship. So it’s not ridiculous for them to handle contracts, with a few guardrails and tools, if:

• force majeure clauses etc may not matter so much, and
• the contracts team hasn’t built a slick standard support model.
  ‍

‍

If you check back to where we defined thresholds for rarer low-risk contracts, you will see how you might determine when it is appropriate for the business to just get on with it.

‍

Alternative Legal Services Providers (ALSPs)

‍

This brings us to the ALSPs like Radiant Law. ALSPs are generally bringing two things to the table as a managed legal service for contracting:

• scalable access to lower cost regions, like internal shared service centres,
• and far better processes and technology.

‍

In other words, ALSPs at their best provide a system (in the broad sense) within which their lawyers work, delivering better results for common lower risk contracts than an in-house lawyer could deliver without a system. Some ALSPs admittedly are just labour arbitrage plays but what you should be looking for is the system.  As an example of what a good system can deliver, let's look again at turn-around times. ALSPs should be hitting two days (Radiant Law is 4 hours), the average in-house team is taking on average 30 days (or 11 days in the top quartile). You can see the difference a system brings.

‍

There are other advantages to using an ALSP:

• They bring experience on both process and content from other accounts, meaning that you get best practices out of the box.
• You get real-time data so a much better understanding of what is happening and more control.
• Everything should be fixed price, based on outputs (such as a fixed price per contract) - if you are paying per lawyer for an ALSP then you are definitely doing it wrong and are not buying a system (or true scalability and efficiency).
• You get access to specialist skills like automation and data analytics as part of the service.
• You get technology embedded within the service, saving you from having to do your own technology projects (with all the associated cost and risk).
• Everything keeps getting better, with integrated continuous improvement.

‍

It’s hard to compete with specialists, so if there is enough volume to justify the service then ALSPs are an excellent option for simpler higher volume contracts. Typical thresholds are:

‍

• more than 50 contracts of a similar type a year,
• the value of the contract are below £10m, and
• the contracts are regularly negotiated (so not consumer contracts).

‍

Consultants

‍

Finally, if you want to transform an internal team then there are companies that will work with you doing things like technology implementations. This is a good way to add skills that may be missing in your team, but make sure you budget for future changes.
We used to do this as a stand-alone service, but stopped when it became clear that the value was transitory compared to delivering a managed legal service that keeps getting better. But there is excellent support out there if you need it.

‍

Fitting it all together

‍

Let’s go back to the diagram at the top and fill in the squares on who is best to resource each category of contracts:

‍

‍

This model tends to change over time as your contracting approach becomes more sophisticated:

‍

‍

‍

A few things are going on in the picture above:

• We have extended the role of the business. In the same spirit as doing your own shopping checkout, we want to increase self-service in the business by giving it the tools to safely handle more by itself.
• The managed legal services provider or shared service centre should, over time, be taking on more complex work as part of “taming” additional types of contracts.
• In turn, the in-house team should be upskilling to become capable of handling more of the work that would otherwise be sent to law firms. This instantly delivers additional cost savings and makes their roles more engaging.
• The law firms’ role reduces over time. While there will always be a need for specialist advice on the hardest of deals, most law firms are too busy pricing themselves out of the market to be used more generally.

‍

The overall impact of this evolution is a significant reduction in the total cost of support, with a greater emphasis on technology, self-service, and codified knowledge, in addition to an upskilled in-house team focused on more stimulating work.

‍

The trick, of course, is not to see this as just a way to move the cost from one budget (legal) to another (business). Your goal is to reduce the activities required on the more straightforward contracts. Expensive senior resources can transfer some of their responsibilities to more empowered juniors, allowing them to work on the more complex transactions and challenges the business faces and an ALSP can help with this too.

‍

So you’ve decided that outsourcing legal contract services is for you. What’s next?

‍

We can take the day-to-day, routine slog off your hands and work directly with your in-house legal team and commercial colleagues, implementing a programme of continuous improvement. This, in turn, reduces and clarifies costs and improves efficiency.

‍

For further discussion, and to maximise your opportunities to generate value and ease the burden on your team, please get in touch with us here.

‍

‍