A questionable rule of thumb on make-buy: the inside cost should be one-third of the outside cost

A citation in Robert Haig, Ed., Successful Partnering Between Inside and Outside Counsel(Thomson Reuters/West 2009 Supp.), Vol. 1, Chapter 4 at §4:3, left me perplexed. The article mentioned in that chapter, presumably approvingly, discusses bringing more legal work in-house. The author of that article, a former general counsel, wrote in May 2008 that “Some businesspeople use a rule of thumb … that the cost of doing something inside the company should be approximately one-third the cost of obtaining the services outside the company.”

If executives typically believe that internal lawyers cost approximately one-third of external law firms, they are mistaken. On a per-hour basis, $180 an hour inside fully loaded compared to $300 or so as an effective outside rate, the gap is more like 25 percent less rather than 33 percent less (See my post of March 5, 2008: make-buy with 11 references.).

Possibly the executives believe the inside lawyer should do the work more quickly than her outside counterpart. That speed differential might reach the one-third-of-outside level. Unfortunately, speediness is not likely for the specialized legal services and knowledge that trigger the use of outside counsel; the inside lawyer knows less than the lawyer hired. Still, the inside lawyer might be willing to take more legal risks, based on understanding the business better, which could compensation somewhat. Not likely, in my estimate. I think the rule of thumb is broken.