Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, and Patrick Lamb, founding member of Valorem Law Group. Paul and Pat spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. We hope you will join their discussions.

Paul’s most recent post, “General Counsel to Cut Legal Spending Up to 25%: Catastrophe or Opportunity?”, got me thinking about the concept of cost of production. Some general counsel, perhaps all, think in terms of “make versus buy” decisions. The issue for them boils down to this: For any given problem or set of problems, is it cheaper for me to handle the problem in-house or to refer the issue to outside counsel?

It is almost invariably cheaper to handle a matter by using an in-house lawyer. That being the case, it is more cost-effective to reduce external spend disproportionately more than internal spend. Think of it in this simple context. A company can hire an experienced, capable in-house lawyer for a fully loaded cost of $300,000. If that lawyer works 1,700 hours in a year (most will work more), the company is paying an effective hourly rate of roughly $175 per hour. If an outside lawyer doing the same work charges $300 per hour for the same 1,700 hours, the cost to the company is roughly $500,000.

The significance of this math for outside lawyers is that a 25 percent cut in legal spending does not translate into a 25 percent cut in external legal spending. Most GCs will look for ways to bring work in house, where it is done at a lower cost. When law departments cut spend by 25 percent, external spend is cut much more.

Notwithstanding this potential enormous cut in external spend—and it doesn’t really matter if it is 25 percent, something more or even something a bit less, it is still a significant decrease in spend—I share Paul’s view that the anticipated spend reduction is an opportunity if you see the world through a client’s eyes.

Most lawyers cannot answer the question why a client should hire them for a matter instead of hiring an in-house lawyer to do the same (and more) work. What value do you provide for the extra $125 per hour (using my example above) that you charge? Some will say that they are better than the in-house lawyer. That’s usually not a winning strategy.

It seems to me that opportunity will lie in two areas. One is increasing wallet share by being able to demonstrate that you provide greater value (most clients see this as lower cost per volume of work) than lawyers currently doing the work, so the client can save by moving the work to you. The other is employing process management to disaggregate work and show that you in your role as general contractor can bring the project in at a lower overall cost. You may have to give up some work to legal process outsourcers or contract lawyers, but doing so is a smart investment. Smart in terms of the client relationship, but also in terms of making the internal changes necessary to be profitable in the cost-reduction world.

Patrick Lamb is a founding member of Valorem Law Group. Valorem represents corporate clients in business disputes, and is at the forefront of helping clients solve their business disputes and coping with pressures to reduce legal spend using non-traditional approaches, including use of non-hourly fee structures, coordination with LPOs or contract lawyers, joint venturing with other firms and implementation of project management tools to handle lawsuits or portfolios of litigation.

Pat is the author of the the recently published book Alternative Fee Arrangements: Value Fees and the Changing Legal Market (2010). He also blogs at In Search Of Perfect Client Service.