If you're like most people, you're not going to engage a lawyer unless you absolutely have to. Which is obviously fine. Just be aware that this is the time you're going to get the least possible value. This article explains why.
Understanding Mandatory and Discretionary Legal Spend
In this article, we're going to talk about 'mandatory' and 'discretionary' legal spend.
Mandatory legal spend is where you have no real choice but to engage a lawyer. An obvious example is where someone commences legal proceedings against you. You are going to need legal representation. There is no other alternative.
Discretionary legal spend is where there is no pressing need to engage a lawyer, but you choose to do so anyway. Examples are where you engage a lawyer to review a contract, work on your systems, or provide some training. This type of spend is more like an 'investment', rather than a forced spend.
As you will see below, you will get far more value out of your discretionary legal spend than you will out of your mandatory legal spend.
Yes, lawyers are expensive. (Most investments are.) But if you invest your money wisely, you're likely to see a good return.
Mandatory Legal Spend - Litigation
Let's say that you find yourself entangled in a significant dispute that is bound for Court. Few would disagree with the proposition that this would be a sensible time to speak with a lawyer.
By this point, the reality is that your lawyer's options will be limited. This is because the parameters of the dispute will already have been set. A contract may have been signed, the relevant alleged breach will have occurred, and the relevant loss or damage will have been suffered.
By this stage, the best possible outcome is that your lawyer is able to uphold your position and you don't end up significantly out-of-pocket for your legal expenses. And, if you've had any experience with litigation, you will know that it's a risky and frightfully expensive exercise.
In other words, even if your lawyer achieves the best possible result, that result will merely be putting you back in the position should always have been in, minus an amount for legal costs.
This hardly sounds like progress.
Yes, this type of legal service is a necessary spend. But it's not creating any value.
The most likely outcome is that you're likely to end up feeling frustrated with the entire legal process, and you may end up feeling disillusioned with the legal profession in general as well.
Discretionary Legal Spend
So let's look at the alternative.
Let's just say, for the sake of argument, that you decide to set aside 0.5% of your forecast turnover on discretionary legal spend. (This equates to $125,000 for a company with a turnover of $25 million.)
And let's assume that you decide to invest that money on one or more of the following activities:
- reviewing client contracts (assuming you don't already use a lawyer to do this);
- reviewing and upgrading your standard form of subcontract, supply contract or other trading terms;
- reviewing your processes for entering new contracts, and suggesting improvements (e.g. developing risk profiles and checklists);
- drafting tender qualifications, whether for a specific project or by creating template drafting for your team;
- conducting contracts training for your team, whether in relation to a specific project or more generally;
- where something unexpected happens on a project, speaking with a lawyer to hear their perspective on your options; or
- looking at other aspects of your business, whether from personal asset protection, intellectual property issues (including trade marks), employment contracts, employee share schemes, shareholders agreements, or anything else that might be relevant. (Our free health check, available here, will give you more ideas.)
For this type of work, it's not difficult to see how you could get value that could significantly exceed the cost of the investment.
- asking a lawyer to review a new contract could result in you becoming aware of a key risk you might not otherwise have identified, potentially turning that risk into profit if the issue materialises;
- investing an amount to improve your subcontracts can reduce your potential exposure to claims by subcontractors;
- involving a lawyer to help draft tender qualifications can help improve the quality of your submission, and potentially lift your overall prospects of success by making your qualifications as succinct and logical as possible;
- investing in training and systems development can improve your operational efficiency and reduce your exposure to risk at the same time;
- implementing an employee share scheme can reduce your exposure to key staff turnover and help secure your medium to long term success; and
- having in place an effective shareholders agreement ensures that you are not left exposed if something happens to one of your fellow shareholders.
The list goes on.
The short point is this: you're likely to get far more value out of your legal spend when you are the one electing to make the investment, rather than the decision being forced upon you.
In addition, when you make a discretionary spend, the cost of the exercise is likely to be significantly less than any mandatory legal spend, and you will be far better positioned to control the process.
If you're interested in the idea of investing in legal services to improve your business, the first step is to start thinking about how you might prioritise your spend.
Alternatively, we conduct workshops with clients to help them identify potential areas for improvement, set budgets and prioritise their spend. If you'd like to know more, you can contact us here. We'd love to hear from you.