Legal Departments: The bottom line amplifier

By Eric Chin and Graeme Grovum

In a Susskindian more for less world, general counsels are under pressure to transform legal departments. The line of sight from legal department to company contributions are however, still obscure, making it a challenge for chief legal officers to tap into the budgets required to invest in LegalTech and LegalOps. If contracts are an organisation’s lifeblood, then measuring contracts is a way to build a picture of the health of an organisation’s circulatory system. Through contracts, the legal function’s contribution to the bottom line is clearer and makes it easier to build the business case for a technology enabled and workflow optimised legal department.

The same digital and efficiency trends that transformed the corporate world have, finally, settled their sights on legal departments as well. In-house lawyers are evolving from simple legal service conduits into strategic procurement experts whose decisions, as they battle to preserve their employer’s bottom lines, are increasingly data-driven.

Table 1: The eras that shaped the legal industry

To understand the structural changes in the practice of legal counsels, we need to rewind the clock back to the early 20^th century (1890s to 1930s), to a period known as the golden age of corporate counsel[1]. This was an era when corporate counsels were both business and legal advisers; powerful positions held in high repute that were filled by ex-judges in post-Civil War America.

This prominent position began to erode somewhat from the 1940s – the golden age of private practice – as the corporate sphere came to be dominated by a new breed of MBA-holding marketers and financiers. During this period, we also saw the emergence of local inter-generational private practice firms that had successfully nationalised into national partnerships. It was in this golden age that law firms like Baker McKenzie began their globalisation efforts.

Legal advice as a strategic tool reclaimed the limelight during the Wall Street takeover battles of the 1980s as ‘Mr Takeover’, Joe Flom of Skadden Arps Meagher & Flom and ‘Mr Defense’, Martin Lipton of Wachtell Lipton Rosen & Katz, helped publicly listed companies navigate the leverage buyout boom of that decade.

Globalisation and growth during the 1990s increased corporate participation in the global economy through cross-border mergers and acquisitions. This, in turn, made the legal department an increasingly complex function, as newly international organisations now had to ensure compliance with local regulations. The increase in compliance-related legal spend saw companies bringing legal expertise in-house as a means of controlling costs.

The 2000s ushered in an era of multinational conglomerates that required still further growth of corporate legal departments. This kick-started the migration of lawyers from law firms to legal departments, with corporate counsels put in place to either control or replace outside legal spend. During this period we also saw the arrival of outsourcing. First as business process outsourcing it would touch all corporate functions. Soon thereafter, the first legal process outsourcing services and lawyer secondment firms started to emerge.

By 2010 the legal industry had shifted to the market we know today; the buyer’s market. Procurement is now the practice du jour and its fixation on cost reduction has extended to legal departments. General counsels must apply the same buying principles adopted by the rest of their organisation. This means disaggregating legal services – both across and within matters – and right-sourcing each component to the most appropriate provider (cost is not the prime metric for all legal service components). We have also seen, for the first time, the introduction of corporate legal department-focused (LegalOps) LegalTech firms like Brightflag, Lawcadia, LawVu, Plexus Legal, Xakia and Yarris to name a few, hit the market.

The business case for legal departments

In an increasingly complex and highly regulated corporate environment, Chief Legal Officers are now more alive to the risks of data breaches, regulatory changes and information privacy (see table 2) than ever before. These risks are making general counsel input to business decisions a crucial contribution as the corporate sphere navigates a shifting and competitive macro-environment.

Table 2: The top three issues keeping Chief Legal Officers up at night[2]

The line of sight from legal department to company bottom line is, however, still obscured. This makes it difficult for Chief Legal Officers to build the business case to invest in LegalTech and LegalOps even though internal clients now expect better, faster and cheaper service and support. ACC Australia’s 2017 Benchmarks and Leading Practices Report[3] revealed that legal departments were under-investing in technology and workflow as general counsels struggled to tap into internal budgets to fund those investments.

 

The role of legal departments To help organisations navigate the regulatory environment in a way that facilitates business outcomes.

So, how do we build that business case for corporate counsels? One place to start is by reviewing your organisation’s revenue and cost drivers. To do this, you will need to think broadly about the role of the legal department in your organisation.

Our view is that the legal function’s role is to help organisations navigate the regulatory environment to facilitate business outcomes, and that this should as readily apply to increasing revenue as it does to minimising costs.

By broadening our view to include more than just cost containment, we begin to uncover that a legal department actually facilitates commercial outcomes for an organisation.  In order to improve a legal department’s impact on an organisation’s bottom line, however, we need to first understand it, and the profit equation of an organisation is our starting point.

An organisation’s profit is determined by its inflow of money (read: revenue) minus outflow of money (read: cost). Those inflows and outflows of money are executed in contracts. In essence, the lifeblood of a commercial organisation is in its contracts.

If contracts are an organisation’s lifeblood, then measuring and reviewing these contracts builds a picture of the health of the organisation’s circulatory system. We have identified the following variables for legal departments to measure:

• Proportion of contracts that contribute to revenue generating activities
• Proportion of contracts that contribute to cost of running the business
• The internal and external stakeholders involved in creating those contracts
• The monetary value of those contracts

Figure 1: Building the business case for legal departments through contracts

Once we have traced and analysed an organisation’s contracts for the financial year, we can map them against the framework in figure 1. This creates a baseline understanding of the value that a legal department contributes to the overall business for both revenue-generating and cost-incurring activities.

Measuring the value of legal departments

 This is a good start, but only a start. In order to maximise the strategic benefit that a legal department can deliver to a business, we next need to understand how the contributions of a legal department impact revenue-generating and cost-incurring activities.

We can start to unpack the following information to identify legal department contributions and opportunities for improvement:

• Terms within each contract that are negotiated
• Terms within each contract that can be standardised
• Iterations required to get contracts from creation to execution
• Time required to get contracts from creation to execution
• Different workflows and processes for each revenue-generating contract
• Internal client input
• Ratings on risk
• Ratings on strategic value to the organisation
• Duration of each contract
• Monetary value of each contract

Table 3: Framework for contract analytics to measure the value of legal departments

This analysis will help measure how legal departments contribute to the company’s bottom line and will also identify opportunities for no tech, low tech and high tech solutions that the legal team can implement. Armed with this information, we can start to modify the way that a legal department provides legal services, and measure the impact of those changes.

Measuring how the legal function defines success for each category of contract lets us refine the level of service provided. In some cases, a self-service tool for contracts in the low value and low risk quadrant will be sufficient. In other cases, a highly bespoke service from the legal department will be required for contracts that are high risk and high value.

Line of sight achieved

Once we know how the legal department’s work impacts the business units it serves, we can measure the impact that improved legal service delivery has on the business.

For example, simplifying a contract is a worthy objective in its own right, but what is the impact of that work?  It’s not something that gets pondered too often, or at least, not measured.  What if your work to redesign the company’s standard sales contract brings time-to-close of your company’s main product down by 15%?  What if it brings it down by 50%?  Does the reduced cycle time impact sales for the year? Almost certainly. Because you have measured a baseline, you are positioned to identify and claim the quicker sales cycle that is creating an increase in sales as your win!

For revenue-generating activities, the goal is to reduce the iterations and time required from contract creation to execution. For cost-incurring activities, on the other hand, your goal is to reduce the risk and cost to the organisation.

Return on investment for legal departments is measurable. When contemplating investments in people, process and technology, our framework will help you build a data-driven business case.

Note: this paper was first published in The Australian Corporate Lawyer Magazine by the Association of Corporate Counsel Australia.

 

References

1. Liggio Sr, C D, 2002, A look at the role of corporate counsel: back to the future – or is it the past?. Arizona Law Review, Fall / Winter, pages 621 to 624.
2. Association of Corporate Counsel, 2013 2014 2015 2016 2017 2018 2019 ACC Chief Legal Officers Survey, Association of Corporate Counsel.
3. Association of Corporate Counsel Australia, 2017, Benchmarks and Leading Practices Report, Association of Corporate Counsel Australia [ONLINE] Available at: https://acla.acc.com/resources/benchmarks-and-leading-practices-report [Accessed 20 October 2019].