External legal department, in-house lawyers or a dedicated law firm?

Typical areas of risk in Mittelstand

Legal risks in Mittelstand rarely arise solely in spectacular isolated cases. They often develop in the course of day-to-day business. Contracts are concluded under time pressure, responsibilities are unclear, deviations from standards are not documented, and legal issues only reach senior management once the financial leeway has already become limited.

Certain areas are regularly of particular relevance in this regard.

In procurement and the supply chain, the focus is on framework agreements, quality agreements, liability, supply failures, price escalation clauses, force majeure, tools, ownership and international sourcing.

In sales and customer contracts, the focus is on specifications, acceptance, warranty, limitation of liability, terms of payment, exclusivity, sales territories and contract termination.

Employment law concerns Mittelstand in relation to recruitment, variable remuneration, remote working, terminations, contracts for managing directors and senior executives, and organisational changes.

In company law, key areas include shareholders' resolutions, powers of attorney, duties of corporate bodies, intra-group contracts, shareholdings and the documentation of key decisions.

Compliance and regulatory requirements range from data protection, supply chains, export controls and sanctions, through competition law, to whistleblower schemes and sector-specific obligations.

In the areas of IP, IT and know-how, the focus is on trade marks, software, licences, development services, protection of trade secrets, data access and reliance on individual service providers.

Disputes and crises arise from bad debts, breaches of contract, product liability, shareholder disputes, restructuring and the threat of insolvency.

The biggest weakness is often not a lack of legal expertise in individual cases. The real problem is that there is no reliable process for identifying legal issues at an early stage, prioritising them according to their significance, and quickly referring them to the right department. A well-functioning legal organisation therefore addresses four practical questions.

Who is authorised to approve which contracts and risks? When is legal approval required? Which issues can be resolved using standard procedures, and when is specialist advice needed? Where are contracts, decisions and deadlines documented in a traceable manner?

In growing companies in particular, demand often outstrips the pace of formal organisational development. More staff, new customers, international suppliers and additional products do not merely generate more contracts; they also increase the number of points of interface where legal and commercial decisions converge.

Contract management rather than dealing with individual cases

The most effective way to ensure that the legal function operates cost-effectively is through standardisation. Reviewing every contract from scratch generates costs, lengthens turnaround times and ties up both internal and external resources dealing with recurring issues.

A robust contract management system consists of more than just model contracts. It integrates documents, processes and responsibilities.

Contract templates and clause library

Approved templates should be available for recurring business transactions, such as purchase, supply, customer, service, development, confidentiality and cooperation agreements. A clause library containing approved alternatives for typical points of negotiation provides additional support.

Negotiation Guidelines and Playbooks

A legal playbook sets out which positions can be accepted, where financial thresholds apply and when escalation is required. This enables procurement, sales and project management to conduct many negotiations more quickly and consistently.

Approval and escalation processes

Not every contract requires the same level of scrutiny. A risk-based process can differentiate according to contract value, term, liability, exclusivity, data protection, IP or regulatory relevance. Standard cases are processed more quickly, whilst critical deviations are referred to senior management or specialists at an early stage.

Contract register and deadline monitoring

A simple, well-maintained register provides transparency regarding contract terms, notice periods, renewals, responsible parties and key obligations. What matters most is not so much the technical complexity as a clear data structure and reliable maintenance.

Knowledge management

Recurring decisions should not be lost in individual email inboxes. Negotiating positions, approvals and lessons learnt must be documented in such a way that the company can reuse them.

Key performance indicators

Legal departments must be held to account by key performance indicators just as much as other corporate departments. Suitable indicators include the number and type of enquiries, average response and processing times, and the proportion of standardised contracts. Other relevant metrics include the most common deviations and reasons for escalation, external legal costs by area or project, and overdue contracts and notice periods. Recurring causes of disputes are also a relevant metric.

The aim is not to formalise every legal issue. However, effective standardisation creates scope for those cases where genuine legal and strategic judgement is required.

When to choose which model

The right organisational structure cannot be determined solely on the basis of turnover, headcount or the number of contracts. The key factor is the nature of the legal requirements.

A law firm on an as-and-when basis. This solution is suitable if legal issues arise only occasionally, the matters are highly specialised and independent of one another, or an experienced internal contact person takes charge of managing them. The same applies where there is no need for ongoing response times or responsibility for legal proceedings, or where the focus is on larger individual projects.

External legal department. This is suitable when contracts need to be reviewed and negotiated on a regular basis, when procurement, sales or managing directors require a dedicated point of contact, or when recurring queries need to be standardised. It is also suitable where, although there is a need, it remains too small or too variable to justify a dedicated full-time position; where several countries, locations or specialist departments need to be coordinated; or where external specialists and local law firms need to be managed centrally. The desire to make budgets, response times and responsibilities more predictable is another argument in favour of this model.

In-house lawyers. They are suitable where there is a consistently high daily workload, where legal advice needs to be closely integrated into management and operational decisions, or where the establishment of internal governance, compliance and legal operations justifies a full-time role. The same applies where sensitive or strategic issues require a constant in-house presence and the company is able to develop the role professionally, represent it effectively and utilise its capacity over the long term.

Hybrid model. This is suitable where a small in-house legal function already exists that requires additional capacity or specialist knowledge, or where an international group of companies coordinates different law firms and jurisdictions. It is also suitable where standard operational work is to be handled in-house whilst complex matters are dealt with externally, or where the legal function of a growing company is to be professionalised in stages.

A practical indicator is not just the number of enquiries, but their distribution. Many small, time-sensitive queries tend to favour a permanently available in-house function. A few large, specialised projects tend to favour individual mandates. A mix of both often calls for a hybrid model. Internal connectivity is equally important. Even an external legal department needs points of contact, information and decisions. If contracts cannot be found, responsibilities keep changing and approvals are not forthcoming, no model can operate efficiently.

The economically sound solution is therefore one that does not merely purchase legal advice, but improves the entire process from the receipt of an enquiry through to the implementation of the decision.

Scope of Services and Service Levels

An external legal department should be structured as a defined function rather than an unlimited blanket commitment. The contract must clearly set out which services form part of the standard scope, which matters are to be commissioned separately, and how urgent cases are to be handled.

Typical services include the centralised receipt and prioritisation of legal enquiries, the review, drafting and negotiation of ongoing contracts, and the maintenance and further development of contract templates and legal playbooks. In addition, this includes advising the managing director, procurement, sales and HR; corporate law administration, including the preparation of resolutions; and support with compliance, data protection and supply chain matters. The scope of services also includes training for specialist departments, contract registers with deadline and documentation processes, and the management of disputes, specialist law firms and local advisers. This is complemented by budget planning and reporting on ongoing legal matters, support for smaller projects and the preparation of larger transactions.

Certain areas are often deliberately excluded from the basic package or covered only up to a defined threshold, such as court and arbitration proceedings, M&A transactions, major financing deals and extensive restructurings. Internal investigations, highly specialised tax, competition, patent or regulatory matters, as well as exceptionally large-scale contractual projects, are usually agreed separately. Advice on foreign law is reserved for local law firms and is coordinated centrally.

A Service Level Agreement should cover the following points.

Points of contact and communication channels

Who is authorised to submit enquiries? Is there a central email address, a ticketing system or designated contact persons? What information must be provided with an enquiry?

Priorities and response times

An acknowledgement of receipt is not the same as the matter being resolved. It makes sense to have different categories, such as critical, urgent, standard and plannable, each with specified response and target processing times.

Availability and cover

Arrangements should be in place to cover holidays, sickness, peak workloads and absences. This is precisely where a team has an advantage over a single point of contact.

Capacity limits and escalation

At what scale or level of risk is a dedicated project budget required? Who approves additional expenditure? When is a partner, specialist or local consultant brought in?

Budget and invoicing

Retainer fees, included hours or service modules, the carry-over of unused allocations, overtime, expenses and third-party costs must be described transparently. Monthly reporting prevents surprises.

Documentation and data access

Where are contracts, deliverables and decisions stored? Which systems is the external legal function permitted to use? How are confidentiality, access rights and data protection organised?

Quality and improvement

Regular reviews should examine not only open cases but also root causes and processes. If the same contract clause is renegotiated every month, the solution may not lie in more advice, but in a better standard.

A good service level agreement does not create unnecessary bureaucracy. It ensures that companies and advisers share the same expectations regarding scope, speed and responsibility.