Hourly cost gap between inside and outside counsel might be about one-third

Earlier I argued that a fully loaded in-house counsel hourly rate of $200, as reported in a survey, might actually be considerably higher if we could dig into its derivation and calculation (See my post of Jan. 16, 2009: attack on cost per inside lawyer hour.).

What then about the validity of that survey’s figure for outside counsel hourly costs? A typical figure in benchmark surveys hovers around $350 an hour. This particular survey defines its figure as “the average amount paid to law firms by hour,” which leaves uncertainty regarding whether the figure includes or excludes disbursements. Assume the $350 figure wraps in law-firm disbursements, the number may be based on estimates by those who completed the survey.

Estimates are notoriously influenced by such psychological traps as recency and salience. What we really need is for a group of law departments to each divide their total outside counsel payments (fees plus disbursements) by the total of the lawyer hours billed them. I would bet that the resulting figure for US law departments is less than $350 an hour. Maybe 10-15 percent less.

The difference between the two numbers — $200 inside and $350 outside — calms general counsel. A 75 percent cost advantage per hour should impress the C-suite. The bucket of cold water, however, is if $220 an hour is the more plausible internal cost (assuming, a big assumption, 1,850 hours a year) and $300 an hour the more plausible external cost. That gap of $80 an hour is about 36 percent.

Is it a coincidence that partner profit (margins) in law firms run at about 30 percent of revenue? With more empirical data, we could confirm whether for US law departments the hourly cost difference between the employed lawyer and the retained lawyer is about one-third.

For more, see my blook on outside counsel management.