Outside general counsel services have gained in awareness recently, but what exactly is it and is it a value add for your business?
What is It Exactly?
For some firms, like ours, outside or “fractional” general counsel services have been offered to select clients for many years, so it is really nothing new. In many ways, it is simply a deeper relationship with a business client, with involvement earlier on in the business cycle and on a more continual or even day to day level, and often with a broader group of key business managers and employees. In contrast, traditional transactional engagement are typically sporadic and centered around specific deals or events, such as a capital financing, acquisition, or developing legal problem. An outside general counsel spends far more (unbilled) time with your business and should be in sync with your strategic business plan, operations and execution.
Outside general counsel engagements should utilize a different billing arrangement than the traditional hourly rate multiplier. Outside GC services are usually provided on a flat fee basis, based on average expected usage over longer periods of time (such as quarterly or yearly), that equate to a much lower equivalent hourly rate for the work involved. This can not only be budgeted, but also removes the reluctance to consult counsel earlier or more regularly since it doesn’t start the “meter” running. Outside general counsel are still contractual so there is no benefits, payroll or overhead costs. When properly tailored to your business, an outside or fractional general counsel engagement should deliver the benefits of lower overall legal costs and, equally as important, a more proactive avoidance of legal problems, with legal alternatives factored into your overall business strategy from an early stage.
Is it Right for Your Business?
Certain types of businesses will benefit more from outside or fractional general counsel services than others. For most of these businesses, maintaining an in house legal staff is not feasible and does not make business sense, and retaining competent outside counsel at high hourly rates can be cost prohibitive and is done only when the necessity is clear and present.
The types of businesses that benefit more from an outside or fractional general counsel engagement generally fall into one of these categories:
- Early stage, emerging companies anticipating rapid growth and/or capital financings, often (but not always) competing in a technology space. Many of these companies tend to wait until a major event to retain transactional counsel, leading to a reliance earlier in the start up cycle on free or generic legal forms, DIY contracts, corporate governance neglect, non-cohesive equity structures, and other common pitfalls.
- More mature, privately held entities that rely on tailored contractual arrangements, compete in a more regulated environment, have equity holders with varying levels of involvement or objectives, can foresee future financing needs or exit strategies, or utilize strategic alliances. Although businesses like these can have adequate resources, they do not have pressing daily legal needs that justify the administrative cost of employing an in house legal department.
- Large entities that have an in house legal department, but have periodic, recurring need for transactional assistance that falls outside the core competency of full time in house counsel, such as program acquisitions or divestitures, licensing, strategic relationships, channel agreement formation and negotiation, due diligence assistance, or similar needs.
What are the Benefits?
The benefits of utilizing an outside general counsel structure include:
- Lower legal costs. The main driver for this is that outside of the Big Law practice, experienced attorneys are more incentivized to provide personalized services on a more consistent basis to fewer clients, and at a fraction of the traditional hourly cost. Having consistent engagement with fewer clients eliminates the need to maintain multiple client relationships and pass them on to other firm attorneys, which narrows the ability to provide consistent, focused attention to any one client. This also eliminates the related increase in firm overhead needed to serve multiple clients, which ultimately is reflected in hourly rates.
- Customized and Consistent Service Delivery. In the traditional Big Law – client relationship, the firm’s objectives can be mis-aligned with any one client that it serves. Smaller or less complex matters get passed down to junior level lawyers due to cost constraints, when the matter at hand may not be so “small” to you. Many projects result in cumbersome “one size fits all” solutions that are challenging to understand and implement with real world business partners. With a good outside counsel relationship, the attorney can deeply understand the way that you like to do business and your company culture, and consistently adapt services tailored to your objectives.
- Proactive Avoidance of Costly Issues. By engaging an outside general counsel earlier in your life cycle, at affordable and predictable costs, you can avoid the even greater, and sometimes insurmountable, costs of deferring professional guidance. For most early stage companies, critical legal needs actually occur much earlier in your life cycle than you recognize. Outside general counsel can help to ensure that your equity plans and commitments are properly structured and implemented, good corporate governance is observed, contractual commitments are professionally crafted, and steps are taken to protect your proprietary assets, among other important tasks. This can all be done at a minimal cost when addressed early, and is painless for the client. What you gain is a trusted business partner that is part of your team rather than an outside service provider.
If you think that you may be a candidate for an outside counsel relationship, give us a call. We have customized engagements with several companies over the years in a wide variety of industries. We will take the time to understand your business, assess your needs and, offer a program that makes sense.