A cost centre is broadly defined as a department to which costs are allocated but that does not produce revenue for the business.
When a lawyer works in private practice as a fee earner they are revered as the money-making engine driving the machine forward, a definite profit centre. Lawyers here can point to their tangible contributions to the firm in the form of billable hours and attributable business wins/relationships. Congruently fee earning associates and more notably partners are held in high esteem and remunerated upon their evidenced contribution to the firm.
The phrases both profit and cost centre have questionable conceptual efficacy. Peter Drucker who originally coined the term profit centre later recanted, calling it "One of the biggest mistakes I have made". Asserting that there are only cost centres within a business, and “the only profit centre is a customer whose cheque hasn’t bounced”. Nonetheless the fear that hiring an in-house lawyer will cost your business money rather than saving it or even producing it is one which has stymied the growth of in-house legal teams for years.
The truth is some companies just don’t need in-house counsel; there has to be a critical volume of work and outside legal spend for it to make sense. When companies begin spending hundreds of thousands of pounds or more on law firm lawyers’ questions begin to arise for the organisation.
There will come a point where the spending threshold to hire is crossed and an in-house lawyer is appointed; overall legal costs will almost always drop following the hire. There are two primary reasons for this, first, a lot of legal work can now be done by the new hire saving on high external hourly costs, which are replaced by a fixed base salary and a bonus for the new hire. Second, even where work is specialist and cannot be undertaken exclusively by the new hire it can be outsourced to a firm in a more cost-effective way. In-house counsel understand what different firms charge and approximately what particular legal work should cost, as an expert in their field they get more value for money than for instance someone from within the business picking up the phone to a partner at a top firm they know well just to handle a fairly routine matter.
To anyone within the legal profession or a closely related industry the above should be fairly evident. What is more opaque are the intangible benefits to having in-house legal counsel; this individual does not need to jump from one transaction to another in the way law firms are most frequently engaged. They can head off legal problems before they occur, shape the way businesses are operating to be more effective within the law, in certain instances leading to financial windfall. There are also occasions where a lawyer can move from a pure legal role into a quasi-business role, assisting with business development or other activities which overtly contribute to the bottom line.
In-house legal counsel both save and make businesses money. The pejorative and in my opinion incorrect use of the phrase cost centre to describe the internal legal function only serves to ingrain outmoded thinking on the value add of in-house counsel which can be extraordinary and transformative for the businesses with which they work.
Author: Ken Collins is a legal and compliance search partner with Greenway Collins covering the EMEA region.