Why your growing business needs fractional general counsel

Until quite recently a growing business had two ways to obtain legal advice. It could employ a solicitor, or it could instruct a law firm as and when something came up. The growth in fractional general counsel appointments over the past decade is best understood as a response to the fact that, for a business at a particular stage, neither option ever fitted well. This article explains why, sets out what the alternatives actually are, and offers a way of deciding between them.

The two traditional options, and who they suit

Employing a solicitor gives a business someone who is present every day, who knows the company and its people, and who can be involved in a decision as it is being made rather than afterwards. It also carries the full cost of employment: a salary, employer's national insurance and pension on top of it, a recruitment fee to find the person, and several months between deciding to hire and having someone in the seat. It suits a business whose legal work fills a working week, because that is what it is paying for.

Instructing a firm by the hour gives a business access to specialist expertise when it needs it, with no fixed cost in between. It suits discrete matters with a beginning and an end: taking a lease, defending a claim, selling the company. Each matter is self-contained, the firm is briefed on it, does the work, and sends an invoice.

Both are sound arrangements for the situations they were designed for. The difficulty is the long stretch of a business's life that falls between them.

The stage that fits neither

There is a point in a company's growth where legal work stops being occasional but has not yet become full-time. As a rough marker it tends to arrive somewhere between £52 million and £20 million of turnover, although the number matters less than the pattern, and a business that sells through negotiated contracts reaches it much earlier than one that sells at the till.

A typical month at this stage might involve a new customer's contract to review and negotiate, an employment contract for a senior hire, a supplier pressing for payment on terms that were never agreed in writing, a client asking for confirmation of how their data is handled, and a director wanting to know what happens to a departing shareholder's shares. None of these takes a week. Together they might take two or three days, spread unpredictably across the month, and each of them benefits from being handled by someone who already knows the business.

That pattern is awkward for a full-time hire. The business pays a full salary, with the employment costs on top, for a role that generates perhaps two or three days of work in five. That is not a criticism of the lawyer. It is simply that the business does not yet produce five days of legal work a week. And a single in-house lawyer, however capable, is being asked to cover contracts, employment, data protection, governance and disputes alone, which is a wider range than most practice in depth.

The pattern is awkward for hourly instruction as well, for different reasons. Each of those five matters is a separate instruction to a firm, and each one begins with the firm being briefed on the background, which is time the business pays for. The total cost is not known until the invoices arrive, so it cannot be budgeted. And there is a quieter effect that is easy to underestimate: when every question carries a charge, people stop asking the small ones. The small questions, whether a clause matters, whether a process has been followed, whether a conversation should be put in writing, are very often where the exposure sits.

That is the gap. Fractional appointments, and the other arrangements described below, exist because a great many businesses sit in it.

Why the gap has widened

The gap has always existed, but several changes in how businesses of this size operate have made it wider, and none of them has much to do with the legal profession.

Revenue increasingly arrives through negotiated contracts rather than standard terms. A customer of any size now sends its own master services agreement, its own data processing terms and its own information security requirements, and expects them to be worked through rather than signed. Points such as the cap on liability, who indemnifies whom, and how either side can bring the contract to an end are now negotiated at a level of business where, a decade ago, they were accepted as printed.

Regulation has moved down the size scale. UK GDPR applies to a forty-person business in substantially the same terms as it applies to a listed company. Employment law has become more procedurally demanding, and the consequences of a process being handled badly have not scaled down with headcount. In regulated sectors, financial services, health, education and construction among them, enforcement reaches small operators as readily as large ones.

Investment changes the shape of a business's governance almost overnight. A first institutional round brings a shareholders' agreement setting out which decisions the investors must consent to, regular reporting obligations, and a board that expects to be given a legal position rather than a list of open matters. The constitutional documents agreed at incorporation are rarely the ones a business needs by the time it has twenty staff, and the distance between what the articles say and how the company actually runs tends to surface at exactly the wrong moment.

None of this means these businesses have a legal problem. It means they have a legal function, whether or not anyone has been appointed to run it. In our experience it is usually being run, on an unrecorded basis, by the finance director.

Clearing up the terms

The market describes the alternatives to a full-time hire in language that is not consistent, and firms that should know better are as loose with it as anyone. It is worth being precise about what each phrase actually means, because two providers using the same words may be offering quite different things.

Fractional general counsel almost always means one individual, engaged for a fixed portion of the week, typically as a contractor at a day rate. The term was borrowed from the fractional finance director, and it carries the same shape: a senior person, a set number of days, one client among several.

Outsourced general counsel, or outsourced legal function, is used in two different senses. Some providers mean an individual, in which case it is a fractional appointment under another name. Others mean a firm holding the function, with a named lead solicitor and other solicitors behind that lead for the areas outside their own specialism. The phrase itself does not tell you which is on offer, and a buyer should ask.

Subscription legal services describes the fee arrangement rather than the service. It means a fixed recurring charge in place of hourly billing. A subscription can sit behind an individual or behind a firm, so it answers the question of cost and leaves the question of who does the work open.

In-house counsel is an employee, with everything that follows from employment: the salary, the employer's costs on top of it, the recruitment lead time, and the reality that one person cannot be expert in every area the business will need.

The practical consequence is that comparing labels is unproductive. What matters is the structure behind the label, and three questions expose it.

Three questions that matter more than the label

Is it one person or several?

Any single lawyer has areas in which they are expert and areas in which they are competent. The matters that fall into the second category are the ones a business tends to find out about after the event. Where several solicitors sit behind a named lead, the breadth does not depend on one person's range.

Is it time or scope that is being bought?

A day rate buys hours, and hours get rationed, because every additional question is an additional cost. A fixed fee buys a defined scope, and within it the questions get asked because asking costs nothing further. Neither is wrong. They behave very differently in a busy quarter, and the difference is worth understanding before the arrangement is agreed rather than after.

Where does the knowledge sit?

If the memory of what was agreed, and why, lives in one person's head, it leaves with them, whether at the end of the engagement or for a fortnight in August. If it lives in a record that another solicitor can pick up, the function continues. This is the question most often left unasked at the outset and most often regretted later.

There is a fourth question, which is regulatory rather than commercial, and it is worth having answered in writing before engaging anyone. Whether the adviser is a practising solicitor, whether the entity providing the service is regulated, and whose professional indemnity insurance responds if the advice turns out to be wrong. The answers vary more between arrangements than most buyers expect.

Where each arrangement fits

These are different answers to different requirements, not better and worse versions of one thing, and it would be wrong to pretend otherwise.

A full-time hire is right once the work fills the week, when the value of someone in the building and on the leadership team outweighs the breadth they cannot offer alone, and when the business can absorb both the cost and the time it takes to recruit. Many businesses at the upper end of this range reach that point and should act on it.

A fractional appointment is right where the central legal risk is one specialised body of law, a regulated financial services or life sciences business for instance, or where the work is a defined project such as a fundraise or a first overseas expansion, or where having the person physically present matters and an external arrangement cannot replicate it.

A firm-delivered function on a fixed fee is right where the requirement is breadth across several areas at once, where continuity cannot be allowed to depend on one person's diary, and where the board wants a cost it can plan around.

Instructing a firm by the hour remains right for discrete matters, and for reserved work such as court advocacy, which only certain regulated professionals may carry out. Most established businesses keep that relationship alongside whichever continuous arrangement they choose.

What all of them are actually buying

The commercial case for any continuous arrangement is not lower fees. It is timing.

Most of the terms of a deal are settled at heads of terms, the short document in which the commercial points are agreed before the full contract is drafted. By the time the long-form agreement arrives, the commercial position is fixed and the lawyer's job is to document it rather than shape it. The same is true of an offer letter already made, a supplier already appointed, or a customer's paper already accepted in principle. Advice sought after the position is set can only describe it. Advice available while the position is being formed can change it, and that is where the value sits.

A knowable cost matters for the same reason it matters anywhere else in the business. A finance director can plan around a fixed monthly figure in a way that hourly billing does not allow, and the board can be given a legal position rather than a list of invoices.

That is what the growth in fractional and related appointments reflects. Not a new preference in how legal services are packaged, but a recognition that businesses of this size need advice earlier than the hourly model delivers it, at a cost they can plan, and without the overhead of a full-time seat that will not be full.

Deciding

Before comparing providers, it is worth listing what the legal work of the last quarter actually consisted of, rather than estimating it. Which areas it fell into, and how many. Who did it, and what it cost in their time rather than in fees. And what would have to be true, in volume and in constancy, for a full-time hire to be justified.

That exercise settles most cases. A business with one deep specialised risk arrives at a different answer from one with steady work across six areas, and both are right for their circumstances.

Lawyerly provides one of the arrangements described above: a named senior solicitor with specialist solicitors behind them, on a fixed monthly fee. If it is useful to see how that structure works in practice, it is set out on our outsourced general counsel page.