Eight reasons why companies hire their first internal lawyer, in order of likely influence

No Road to Damascus vision causes a CEO to hire the company’s first house attorney. Rather, the CEO or CFO probably becomes aware of several arguments that compel the decision. Consider eight of them, in the order that I think they contribute to the decision (See my post of May 2, 2008: ad for first hire by manufacturing company; March 30, 2006: intermediate decision of contract general counsel; and Dec. 27, 2008: small departments with 7 references cited.).

Reduce external legal fees. The most pressing reason is cost-saving: hour for hour it is less expensive to pay an employee than to pay an outside law firm (See my post of Jan. 8, 2008: claim that company created a general counsel’s office to strengthen procurement of legal services.).

Handle flow of similar legal issues. Another impetus to bring a lawyer onboard would be workflow; sufficient demand or need – demand recognized and need immanent – for legal guidance and advice. The revenue of a company can be miniscule (See my post of Dec. 23, 2008: at least 20% of a survey’s law departments had less than $100 million.).

Know the company better and combine law and business advice. Along with costs and workflow, a CEO could recognize that an employee will get to know the company and its people and operations better than would someone retained periodically (See my post of July 2, 2007: company hired as its first lawyer someone who already knew it well from years of counseling it.).

Cope with legal intensity of the company. Whether a company faces significant regulatory or legal hurdles influences how soon it brings in a lawyer. High-tech and pharmaceutical companies may more quickly bring someone in-house for patent and licensing work. A company with ambitions to go public might add a lawyer.

Address non-financial dissatisfaction with the status quo. The degree of satisfaction the company’s executives have with their outside counsel comes into play. Cost is not the only irritant. From a different angle, many companies grow up with a partner from a law firm, or a handful of trusted legal counsel, and they feel no need to cut the tether. If that advisor retires, leaves, or deteriorates in service, an internal replacement might seem in order.

Management beliefs. Also on the list of determinants are the personal beliefs and values of the CEO. If that person appreciates lawyers, the department will add its first lawyer more quickly (See my post of Feb. 4, 2007: offers this and other reasons for the first hire.).

Trim total costs of legal. The CEO or CFO might become aware of the all-in costs of an employee lawyer in light of potential reductions not just in outside fees but also in settlements and judgments paid.

Tap sufficient financial resources. The corporation needs to have the cash flow to afford an employee lawyer. Otherwise, a variable, somewhat discretionary cost of external counsel might be favored over the fixed cost of an employee.

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