I recently had a conversation with a CEO about the value of a General Counsel. His company has significant revenue and recently received venture capital funding. It is poised for explosive growth, including exploring international expansion and evaluating acquisition opportunities. The legal function is handled by a combination of the CFO and outside counsel.
The CEO explained that he does not see a need for or have a return on investment justification for a General Counsel, as he is not contemplating going public for some time, he does not have litigation, his intellectual property needs are minimal and he has a non-lawyer handling contracts. In 2010, this company incurred over $500,000 in outside legal costs, excluding costs of a recent financing. He suggested that adding this position, in combination with the continued need for outside counsel, may also increase the company’s overall legal expenses.
Does the Company Need a GC?
His view is one I have heard throughout my in-house career. Many companies ask the same question: Do we need a GC? If so, what will the costs be and what is the correct time to add this position? Not every company needs a GC. In fact, many companies handle this function by outsourcing the role with a combination of the CFO and outside counsel, or a temporary attorney or an outsourced general counsel role.
These options allow the company to manage its fixed costs down and maintain flexibility. Depending on the company’s needs and legal issues, these alternatives may be more appropriate. However, it is important to look at all the factors that should be calculated in determining which alternative to choose and the true ROI of a General Counsel.
The Role of The General Counsel
The GC’s role is to manage the legal portfolio of the company, identify and mitigate risk and enable the company to drive revenue. Within the legal portfolio is the following:
• Drafting, reviewing and negotiating strategic transactions and contracts a
creating an efficient, streamlined contracts process.
• Managing outside counsel and legal fees below aggressive targets.
• Protecting intellectual property assets.
• Implementing and ensuring adherence to governance, risk and compliance
programs.
• Complying with state, federal and international regulations and completing and
maintaining required filings.
• Handling employment issues.
• Serving as a trusted advisor to the management team.
• Completing corporate and board of directors’ responsibilities.
Calculating Value and the General Counsel ROI
One can calculate legal expenses by adding law firm spend plus in-house counsel, but this does not tell the full story or accurately capture the value and contributions of the GC to the company. The GC is analogous to the foundation of a home.
When purchasing a house, the place to begin an inspection is in the basement. A solid foundation and understanding the state of the pipes and major utilities provide you with a true state of the property. While the upstairs rooms may have nice details and the kitchen may be open and you can envision entertaining a large party, if the core systems are not in place, it will ultimately lead to more expense, greater issues and ultimately impact your daily living.
In fact, my uncle purchased a home in Seattle four years ago. It is a beautiful home on the Puget Sound. It has floor to ceiling windows, wrap around decks, an open floor plan and tremendous views. Two years ago, he learned that the foundation has significant damage that will result in greater than $200,000 to repair and it is not covered by insurance. Needless to say, the house is less enjoyable, it is not as much fun sitting on the deck, he is going to forego building an entertainment room and it is no longer his haven.
General Counsel are Business People First
GCs are business people first. They are completely embedded in the organization and vested in its success. They can deal with an issue proactively, before it becomes an expensive litigation, impacts revenue or even damages a company’s reputation/brand. GCs are intertwined with driving revenue and integral in the sales process by structuring deals smarter and more efficiently and comfortable taking on more risk than necessary to avoid losing or slipping key deals.
The GC can do this effectively because the company is the only client, he/she has the knowledge base and history, and his/her personal success and compensation is wholly aligned with the success of
the company. The GC has a global view of the company and understands how each department is intertwined. He/she establishes synergy and develops personal relationships with the internal teams to fully understand the business and each department’s concerns.
Outside counsel and outsourced models may not achieve the same results because they may have different incentives, multiple clients, restrictions on hours, limited relationships with internal personnel and different access to the management team.
Calculating the General Counsel ROI
Take an example of a GC’s salary that is $200,000 with a 35% target bonus, plus benefits (health insurance and 401K company contribution). The annual compensation equals approximately $330,000, excluding equity. If the $330,000 is converted to a billable hour of $400 per hour, this would amount to 812 billable hours or 5 months of legal service. (Note: Blended rate assuming senior partner rate at $600, senior associate at $400 and junior associate at $300. Depending on which attorney actually performs the work, the billable hours may be higher or lower.)
Another outsourced legal model may result in a significantly less hourly rate which would provide the company with more hours of legal services. Below are some illustrations demonstrating the GC’s value that may not be factored in the ROI.
• It is five days before the end of the quarter, the company is $1M short of bookings, and a $1.5M contract comes in…on the customer’s paper…that is 50 pages long. Outside counsel may not be able to drop all of his/her clients’ work to handle this one contract at the end of a quarter. The GC is in a different situation, having only one client. The GC also knows the full extent to which the company can give on issues avoiding delay and jeopardizing the quarter making deal.
• The GC is involved in the response to a complex customer RFP. The GC will help turn the RFP around more swiftly with answers that avoid the over promise and under-deliver problem while also meeting the customer’s needs. Only internal counsel with deep understanding of the business, ready access to engineering and customer support, and who is dedicated to only one client has the ability to provide a complete response in a timely manner.
• The GC leverages technology to drive down outside legal expenses and gain access to real-time analytics to more effectively evaluate and track outside counsel’s performance. As a result, the GC can more proactively manage outside counsel to identify any issues in real time (as opposed to receiving a large bill a month later) and ensures the engagement is narrowly focused to keep the project below budget.
• A key client wants to terminate its $3M contract. The client’s inside counsel is drafting a demand letter for termination and significant damages. The GC works closely with sales management and relevant stake holders to resolve the issue with the client and its inside counsel, without incurring any outside legal expense. The GC has no incentive to engage in costly litigation and is focused on preserving revenue as swiftly as possible.
• The GC is involved early in a new strategic initiative to drive revenue. He/she recognizes an issue in the development phase, that if slightly tweaked, saves weeks or months of time and expense, allows the project to be completed on time and on budget and helps the company immediately start driving revenue.
• The GC takes on a number of legal and quasi-legal tasks such as contract negotiation, insurance, employment/benefits, board preparation and outside counsel management that otherwise would have fallen to the CFO that frees him/her to focus on his/her main responsibilities. The CEO also receives legal advice from an attorney rather than going through a finance filter and the GC can ask questions and address issues with outside counsel questions that the CFO may not have contemplated.
The General Counsel ROI Goes Beyond the Numbers
The cost of having a GC balances out financially because of lower outside counsel fees. But that is a fraction of the story. The GC should not be viewed as separate and distinct from the business or just responsible for dealing with active legal matters and risk management. A strong GC is an ally and a key partner in enabling revenue and driving strategic initiatives for the company.
Many of those benefits exist because the GC is immersed in the business, he/she can walk the halls and has water cooler moments to proactively learn about issues impacting the organizations and is wholly aligned with the company’s success. As a result, when assessing the legal needs of the company, one has to look beyond the numbers when calculating the GC ROI. The money is the same, the service extends far beyond and the performance of the company in general is raised.
Bio: Lance B. Levy, Esq. is an experienced General Counsel. He can be reached at levy.lance@gmail.com; http://www.linkedin.com/in/lancelevy and http://twitter.com/lancelevy.
© Lance B. Levy 2011. All rights reserved.
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