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When does a company start a law department?

There’s an unanswerable question for you. As I read about Palm Harbor Homes in Counsel to Counsel, Jan. 2007 at 14, I paused where it states that the $710 million maker of factory-built homes has no internal legal department. Instead, the company relies heavily on a local law firm for many of its legal needs.

The thought arose: What events lead a company to hire its first in-house lawyer (See my post of April 15, 2006 on solo lawyers and stress; and Feb. 15, 2006 on six ways solo in-house lawyers have fewer management hassles)?

One factor that determines the answer is the degree of satisfaction the company’s executives have with their outside counsel. If the thing ain’t broke …… I suspect that also on the list of determinants are the personal beliefs and values of the Chief Executive Officer. If that person appreciates lawyers, the department will appear more quickly.

A second factor is cost. If the CEO or CFO believe that their company’s total expenditures on outside counsel falls within the acceptable range of benchmarks (on the order of .5 to .7 percent of revenue for companies below $500 million in revenue) what’s to worry?

Third, does the corporation have the cash flow to afford an employee lawyer?

Whether a company faces significant regulatory or legal hurdles could be a fourth factor but determines how soon it brings in a lawyer. High-tech and pharma companies may more quickly bring someone in-house for patent and licensing work (See my post of Jan. 18, 2007 regarding differences between industries in lawyers per billion.).

Two metrics also contribute to this discussion. The US median is around four lawyers per billion dollars of revenue, so one might expect the first lawyer to be hired at around the $250 million mark. The second metric draws on the received wisdom that when outside counsel spending in an area of law reaches around $450,000 per year on a foreseeable basis, that can justify hiring a lawyer.

Regardless of the reasons or the metrics, even when the pioneer lawyer joins the company, that lawyer might be primarily a conduit and conductor of outside counsel (See my post of Dec. 17, 2006 on ADVO.).

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One response to “When does a company start a law department?”

  1. Rick Wolf says:

    In the current environment with e-discovery risks, heightened regulatory scrutiny and the need to demonstrate that your organization encourages ethical conduct and compliance with laws, this begs the question of why any organization would choose not to have a dedicated inside counsel function. Even the most well intentioned outside lawyer cannot manage corporate compliance risks, which need adequate resources, nurturing and daily involvement within an organization. Accountants would prefer companies to expense legal costs over adding headcount for a variety of reasons, but this is one area where accounting considerations should not prevail over legal compliance.