Quantify The Company’s Legal Exposure

One of the major issues facing in-house counsel is justification of the legal function. In-house lawyers in fact are like a small to medium size law firm depending on the size of the company and therefore are not cheap. On the other hand, in-house lawyers play a vital function within an organization as they manage legal issues and risks on behalf of the company. Litigation management as well as legal risk management are very important functions of a company’s law department. However, most organizations are profit driven. Investors look at the bottom line. Hence, management for the most part normally looks at its divisions in one of two ways- is it a profit center or is it a cost center? Profit centers get resources of course. Cost centers may not. Therefore, in order to obtain the resources needed to function in a corporate setting- Legal must justify itself. One way to justify the existence of the Law Department, is for Legal to quantify the company’s legal exposure. Once quantified, Legal can then justify its existence to Management.

Quantifying potential legal exposure is fairly easy. One can look at historical legal costs, expenses, and related jury verdicts, fines, etc., to determine a base line for future legal costs and expenses. If an historical record of legal costs does not exist, numerous reports and surveys exist on how to average legal costs and expenses via a particular industry. Your insurance broker may have summaries of legal costs for your industry. At least it should have a historical summary of insurance related claims.

Once one has enough empirical data to show potential exposure, it is easy to show potential legal costs. In fact, a number of companies in the legal industry have issues benchmarking reports breaking down the average legal costs and expenses in particular industries. This can be a great tool to use when showing management what costs and expenses are normally incurred by companies of a similar size and in a similar industry.

The CFO of any organization is numbers driven. If you can provide, in effect, “the bottom line” to the CFO, he will be inclined to approve a budget for Legal. Be prepared to have all the facts and figures ready.

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