The Small Business Legal Dilemma
Hiring an in-house counsel can be prohibitively expensive for most small companies, which is why more are deciding to appoint fractional attorneys.
You own a small but growing business. You have employees, plus contracts with vendors, suppliers, distributors and landlords. You likely also have marketing questions and intellectual property to develop and protect. These are all areas where a business needs legal advice, posing a challenge for those with limited resources.
You have outside counsel that helped you raise capital, secure debt and execute on acquisitions, but their hourly rates approach or may even exceed $1,000. You cannot afford to call them whenever you have what you consider to be a simple question.
Hiring a general counsel tends to be out of the question. They require salary, bonus, overhead allocation, equity and benefits. There simply is not enough legal work to justify the expense.
This creates a dilemma, known as the Hobson’s Choice: Take what’s available or nothing at all.
Most small business owners opt to take risk. You either call your brother-in-law who is a divorce lawyer, or your neighbor who advises on residential real estate transactions. Maybe you choose not to call anyone at all and just wing it.
Hiring a general counsel tends to be out of the question. They require salary, bonus, overhead allocation, equity and benefits. There simply is not enough legal work to justify the expense. This creates a dilemma, known as Hobson’s Choice: take what’s available or nothing at all.
You move forward with the employee termination, you sign the contract, or you ignore the compliance matter and hope it receives no attention from authorities.
When things go sideways, you will call your outside counsel, and you will pay for their help because you have to. At that point, you have no choice.
Why do you find yourself here? Take a closer look at the Hobson’s Choice that small and midsize businesses face.
Law Firms and In-House Counsel
Law firms are one side of the Hobson’s Choice. If a business chooses to seek advice from its litigation or deal counsel, it can expect to pay big dollars. Full-service law firms continue to increase starting salaries and raise hourly rates. The National Association for Law Placement reports that starting annual salaries for first year associates at leading law firms are now $190,000. Meanwhile, the increase in associate compensation was a major contributor to “the 6.5% growth in expenses that law firms reported last year,” according to an article in Law360.com, which cited a survey by Citi Private Bank’s Law Firm Group.
Employing an in-house legal resource is the other side of the Hobson’s Choice. The logical response is to create an in-house legal department, but therein lies the rub.
For a small or midsize business, hiring in-house legal talent is becoming cost-prohibitive. Lawyers are among the highest paid corporate employees, with compensation packages that rival their law firm counterparts.
The cost of in-house legal departments in the U.S. has grown at an annual rate of 8.5%, according to reporting from Law.com, which indicated that a general counsel’s average salary and bonus together amount to $408,000. And there is the time and cost of hiring an in-house lawyer, very often including the expenses of an executive search firm and the severance costs of terminating an in-house resource.
The Gig Economy
The so-called “gig economy” presents a third option that may destroy the Hobson’s Choice. The legal industry can learn from the examples currently disrupting the delivery of other C-Suite services. More and more companies are turning to fractional providers of finance, human resources, marketing and IT services.
In recent years, we have seen a dramatic increase of new businesses that provide executives on demand in a variety of disciplines.
In recent years, we have seen a dramatic increase of new businesses that provide executives on demand in a variety of disciplines. From The Fractional CFO, which emerged in 2004 to provide financial services, to Chief Outsiders, which formed in 2009 to support companies’ marketing needs, there’s no shortage of organizations that aim to help businesses on a temporary or contract basis.
These organizations thrive because their services provide “greater efficiency, experienced workforce, scalability and flexibility, and timely turnaround,” according to an article written by a member of the business network The Entrepreneurs’ Organization for Inc.com. “When CEOs apply an outsourced approach in select areas, it enables them to channel their energy into developing the company and generating revenue. If there’s an area in your organization that needs support, but not 40 hours of help per week, outsourcing may be the answer,” wrote the author.
Fractional Services
The Hobson’s Choice between retaining a full-service law firm to provide periodic but needed legal services or employing a full-time in-house lawyer can be eliminated by another option: fractional or on-call general counsel services.
Why have fractional general counsel services been slower to gain traction than the fractional offerings of other C-suite services? There are several reasons. For one, traditional law firms have become conglomerates of specialized, high priced practices, and they are reluctant to train generalists that demand lower hourly rates. Two, ethical laws in the U.S. prohibit non-lawyers from owning law firms, and, therefore, other fractional C-suite businesses are precluded from offering legal services. Three, while contract lawyer services have grown, typically they provide attorneys in specialty niche areas to other lawyers and not directly to businesses in order to avoid contravening ethical restrictions.
But necessity is the mother of invention.
Businesses in sophisticated markets need seasoned general counsel who can collaborate cross-functionally on a wide array of legal issues and work within the construct of the client’s management structure—but not always on a full-time basis. A business is understandably reluctant to hire a full-time in-house legal resource, and retaining outside counsel for routine or periodic advice on a wide array of matters has become too costly.
A former general counsel working on a fractional or on-call basis can provide a small or midsize business with deep knowledge across subject matters. In doing so, the business benefits from an experienced legal executive for an affordable fixed fee or an hourly rate well below the norm. The Hobsons Choice is eliminated: business-focused, operationally oriented legal help is secured for less than the cost of either retaining a full-service law firm or employing a full-time legal resource.
Noel Elfant is the founder and principal attorney of General Counsel Practice LLC. From 2010 through 2018, Elfant served as vice president and general counsel for the North American operations of DeLaval Inc., a leading maker of dairy farm production equipment and cleaning solutions for the food processing industry and part of the multi-billion dollar, privately held Tetra Laval Group. From 2003 through September 2009, Elfant served as vice president, general counsel, secretary and chief compliance officer of Zebra Technologies Corporation, a publicly held manufacturer and marketer of bar code and RFID technologies.
