Sometimes, an Expense Is Really an Investment - TheStreet

Sometimes, an Expense Is Really an Investment

Sure, you could do it all yourself; sometimes a pro can do it better.
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My partner and I need contracts developed for our new venture. The venture requires knowledge of banking, financing and other securities laws. One of the attorneys we spoke with came from a well-respected Washington law firm.

The attorney met with my partner and one of our investors. My partner was impressed with the lawyer's knowledge, but then we got his engagement letter. An engagement letter is a document telling the reader what the service provider will charge for their services.

The letter stated that the lawyer my partner spoke with charges $550 an hour, but he is a bargain compared to the litigator who charges over $1,000 an hour. No, that isn't a misprint! That is the cost for a top-flight litigator.

The fee for an associate was $250 per hour, and the partner said he could delegate a lot of the work to the associate. I asked how much two contracts would cost, and without blinking an eye, he said, "Around $30,000 to $40,000."

I don't know about you, but 30 grand seems like a lot for some contracts. I ran this by my brother-in-law, who is a big-wheel securities attorney with a mutual fund giant. Mr. Wall Street, who I thought would say the fees were outrageous, said they were fair.

Then I emailed a friend who has run several public companies in the financial service space and asked her what she thought of the fee. Her response was something few entrepreneurs think of when they are staring at an enormous bill. She said, "Don't look at it like an expense, but as an investment."

Most entrepreneurs look at consultants and attorneys as necessary expenses, but not investments. Here I am, someone who has spent the last decade selling my time because I believed that I could provide a service that would make a difference to entrepreneurial companies, questioning whether to make this important "investment" in my company's future.

Any time you are looking at professional service bill, you have to ask yourself the following questions:

  • Will this service make a difference in my success?
  • Is the person providing the service the best professional for the job?

Entrepreneurs often think that having a great product or service is sufficient to become successful, but that is only part of the equation. Many entrepreneurs try to hire the cheapest service providers as a way to save money, but it usually backfires and they end up hiring better professionals to clean up the mess.

Instead of getting a good Web designer to develop a quality Web site, they skimp on their image and try to develop their own site using Microsoft Front Page. If they need an experienced attorney who understands their business to develop good, well-thought-out contracts, they either buy legal software or try to find examples on the Web.

Right now, my company is at its first critical juncture in our life cycle. There are a variety of things we need to get right from the start, such as:

  • Computer system: We need to build a high-performance system to process the activities we are doing for our client. Our choices would be to build the system ourselves or hire a firm that has done it before, but will cost twice as much as doing it ourselves. We need an experienced consultant, so spending the money isn't an option.
  • Logo: We need a logo, and we have come to realize that the internal people aren't really up to the task, so we are shopping for a firm that will give us the right image. Image is really important in terms of giving our clients a high degree of comfort about whom they are dealing with.
  • Contracts: My partner and I are going to have to bite the bullet and hire this Washington law firm. Without meticulous contracts, we could lose our entire investment -- or worse.
  • Accounting: As much as I would like to use QuickBooks, I had to find an accountant who handles financial institutions. I needed to get advice on what type of accounting package we need and the best ways to account for the debt we need to borrow.
  • User manual: I am a writer, so I could probably put together a user manual for our clients. Do I know how to write a clear, step-by-step process with appropriate graphics? No!

Could we try to get away with "average" professionals supporting us? Maybe in the short term, but that would probably ensure that we would have no long run. We are selling to Fortune 1000 clients, so I can't afford to be stupid. Everything has to be done just right.

Remember the maxim: "You get what you pay for." Everyone knows a $1,000 suit lasts longer and makes a better statement than 10 inexpensive suits. Frugal is good, but purchasing inferior services to save money isn't what successful companies do.

Kramer is the author of five business books on topics related to venture capital, management and consulting. He is a faculty member at the Wharton School of Business at the University of Pennsylvania and the veteran of more than 20 start-ups and four turnarounds.