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In-side counsel are fixed costs; outside counsel are variable costs

For a typical law department, the difference between its fully-loaded cost per lawyer hour and the blended billing rate of its outside lawyers is around 40 percent. For example, the cost inside is $170 an hour while the cost outside is $240 an hour.

As opposed to this favorable cost gap, it is still true that the employee lawyer is a corporation’s fixed cost; the law firm lawyer a variable cost, and that difference – the ability, at least in theory, to turn the external spigot on or off at will – justifies part of the difference in hourly costs. (See my post of Feb.16, 2006 on malpractice insurance justifying another portion.) Economically rational lawyers willingly pay more for expenses they can control more.