December 1, 2020

The Hidden Costs of Insourcing (Part 3)

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

Calculating the cost of outsourcing a task for your team is simple: a service provider quotes a price. Calculating the cost of insourcing a task presents more challenges. Keeping high-volume legal work like non-disclosure agreements (NDAs), vendor contracts, and engagement letters in-house can lead to hidden incremental costs beyond employee salaries. A properly staffed legal team should spend the bulk of their time on tasks that drive major value for the organization. How do we determine the value of a task? 

Many companies incorrectly calculate the cost of keeping a function in-house by identifying each team member working on a task, determining what percentage of their time is spent on that task, multiplying the percentage of time spent on the activity with their salary, and summing that figure for all relevant team members. For a medium-sized company considering the cost of insourcing routine contract processing, this analysis might include two mid-level, in-house attorneys who evenly split routine contract work. If each attorney makes $200,000 per year and spends about one-third of their day processing routine contracts, a quick multiplication shows that keeping this work in-house costs the company $133,000 per year. We have found that this salary-based figure only scratches the surface of the true cost. 

According to Joseph Hadzima, Senior Lecturer at MIT Sloan School of Management, an employee costs about 2.7 times their salary in immediate costs.¹  When considering the auxiliary costs of employment taxes, benefits, travel, equipment, software licenses, real estate, training, management time, and cross-functional support (e.g., IT, HR), this figure makes sense. Employing any full-time staff member incurs these unavoidable costs, which swell the previously estimated figure of $133,000 into a much larger number. 

Understanding the immediate and auxiliary costs of insourcing high-volume legal work may cause you to rethink your team’s priorities. Click here to download our white paper to learn how to calculate the hidden costs of insourcing on your team.