November 24, 2020

The Hidden Costs of Insourcing (Part 2)

Note: this is the second installment of a four-part series exploring the hidden costs of insourcing. Be sure to read:

As customer demands inevitably grow, the list of critical legal tasks multiplies as well, and the assumption is often that the existing team will simply have to shoulder the burden. Managers incorrectly assume that if they give an employee a few hours of additional high-level work, they will complete it at the same standard as the rest of their strategic responsibilities. Research shows otherwise; employees have a limited number of productive hours in a work day. In his book Rest, Stanford professor Alex Pang concludes that knowledge workers function best when performing four hours of complex work per day. 

Most companies traditionally insource high-volume legal documents – vendor contracts, non-disclosure agreements (NDAs), and engagement letters to their in-house legal teams. A team performing this routine but important work must manage the inherent risks in contracting with focus and precision. Increasing an employee’s allotment of hours on this type of work will result in a decline in work quality on other tasks. According to Harvard Business Review, numerous studies have found that “overwork and the resulting stress can lead to all sorts of health problems, including impaired sleep, depression, heavy drinking, diabetes, impaired memory, and heart disease.”¹ These issues drive up insurance costs, absenteeism, turnover, and compromise productivity. Those same studies estimated that employers will spend double an employee’s base salary to find a replacement.² 

Recall one of the principles of economic analysis: we measure opportunity cost by the difference between what someone actually did and a potentially higher-value alternative. Organizations should strive to maximize the amount of higher-value work their employees can do by outsourcing lower-value work, therefore minimizing employee opportunity costs. Very few organizations properly account for the value of the time their employees spend every day on the hundreds of varied tasks and meetings that vie for employee attention. 

Some companies track utilization rates hoping to understand the value of their employees’ time. However, utilization rates only measure time spent on any work activity. They do not show how much value those activities brought to the company or its customers. By insourcing lower-value activities, employees are consistently losing opportunities to work on more strategically important matters and maximize their added value to the company.³ This is a crucial factor when determining which tasks we really want employees to focus on.

If employees spend more time on low-value, repetitive work, it becomes more likely that they delay or outsource projects that have greater impact on a company’s performance. Filling a legal team’s time with repetitive contracting forces them to outsource important transaction- and litigation-related work to expensive law firms. While in-house contracting might seem like a cost saving, every hour your legal team spends on low-value tasks adds a billable hour (or more) to your external law firm’s invoice. 

Your team understands the nuances of your business. Shouldn’t that unique knowledge be applied to complex transactions in lieu of repetitive contracts? Click here to download our white paper that outlines how to calculate the true cost of insourcing.


¹ https://hbr.org/2015/08/the-research-is-clear-long-hours-backfire-for-people-and-for-companies
² https://hbr.org/2015/08/the-research-is-clear-long-hours-backfire-for-people-and-for-companies
³ https://hbr.org/1992/11/strategic-sourcing-to-make-or-not-to-make