November 19, 2020

The Hidden Costs of Insourcing (Part 1)

Cumbersome and mind-numbing as it may be, processing high-volume repetitive contracts (think NDAs and service agreements) is a necessary part of operations for nearly every business. In the face of high hourly rates for external law firms, though, many companies assume that they can keep costs low by handling these processes in-house. Often, though, the true cost of insourcing is underestimated.

The cost of outsourcing is relatively straightforward: the customer and provider agree on a price for the external services delivered. There is relatively little mystery involved with that calculation. Conversely, the cost of insourcing, or keeping specific tasks in-house, tends to go untracked. Costs such as IT, real estate, and travel, as well as intangibles like opportunity costs, task-switching, and employee turnover, are rarely accounted for, despite their huge impact on the bottom line. The likelihood of miscalculation is particularly high in the case of lower-value, repetitive activities, such as reviewing and managing high-volume contracts.

Insourcing high-volume, routine legal work is standard practice for many companies, and is usually handled by in-house lawyers.. The decision to keep this work in-house was made years ago when the only alternative was sending it to an expensive, traditional law firm. While insourcing may have been the most sensible choice at that time, new and innovative legal technology solutions have since expanded the list of options.  Given the rise of these alternatives, companies must reassess the allocation of their resources by comparing these focused, cost-effective providers to the true cost of insourcing.

It costs companies far more than they think to manage high-volume legal work like NDAs, vendor contracts, and engagement letters internally. For example, one of our customers estimated that insourcing the company’s non-disclosure agreements cost the company about two-thirds of a legal team member’s salary, about $133,000. We worked with our customer’s team to build on that calculation, pointing out costs that are less obvious. 

The updated calculation treated employee salary as a baseline, then added on the cost of bonuses, employment taxes, benefits, office space, travel, and back-office and management support. Next, we included the costs of turnover and task switching. Both of these inefficient practices contribute to high costs for low-impact work. We also included the value of keeping more complex legal work in-house, reducing the customer’s monthly bill from a law firm. The final figure showed a cost to the company of more than $1.1 million for high-volume contracts, about 8.6 times the initial estimate. 

Understanding the cost of insourcing in your company can help you maximize the efficiency and added value of your legal team. In our blog series on the hidden costs of insourcing, we will explore how time allocation, time valuation, turnover and other factors can contribute to a huge underestimation of insourcing costs. 

Click here to download our white paper to learn how to calculate your own insourcing costs.