Strategy | Summer 2016
Let’s start with an assumption: we will reach peak in-house. Though the in-house profession has hugely expanded over the last 15 years – those in the private sector growing threefold since 2000 to over 16,000 solicitors in England and Wales by 2015 – in-house legal teams cannot keep growing forever.
At some point companies will tire of employing more lawyers. At some point lower cost providers than law firms will make such expensive recruitment harder to justify. At some point the money for expanding legal budgets (and the available data in the US and UK shows they are still expanding) will run out. And, as the joke goes, when the money runs out, it is time to start thinking.
This article is an attempt to contribute to that thinking. While the talent pool of the in-house sector has improved materially since this professional revolution began 25 years ago, evidence of evolving notions of how to run or measure an in-house legal team are hard to find. Lawyers, largely recruited from law firms and culturally ill-disposed to management and structure, have not focused much on building – and building upon – ideas and models to run a more efficient, more imaginative and, yes, more valuable legal team. A smarter legal team. In truth the tendency has often been to focus on being individually good lawyers – the personally trusted counsel – rather than building a stronger unit to provide the legal, strategic and risk services that the client – the company – needs.
As LBC Wise Counsel chief executive Paul Gilbert notes: ‘We have a generation of in-house lawyers that have swallowed an ethic that says: “We’re here to do what business needs and whatever the constraints are, we’ll find a way.” That only works to a certain point.’
Gathering information on what the team is doing is the most difficult part of introducing change.
Kerry Phillip, Vodafone
But a growing number of senior general counsel acknowledge that throwing more in-house lawyers at the problem is a response that only takes you so far. ‘There is definitely a lot more talk on the conference circuit about how you manage a legal function than there was five years ago,’ says Chris Fowler, GC for UK commercial legal services at BT. ‘GCs have traditionally resisted having to work within well-defined processes, so the fact that it is discussed suggests they are being leaned on heavily by their businesses to change.’
In this article we canvassed GCs, consultants and professionals working in law to come up with eight practical ideas to improve and develop legal teams. The ideas in this article are primarily focused on teams working at major corporates, particularly in regulated sectors. But many of our ideas would have some relevance to smaller teams.
At IHL we take the view that the huge progress made by the
in-house profession is to be celebrated. But there are some persistent blocks in its development that are holding the GC community back from reaching its potential.
1. Time to take benchmarking and metrics seriously
Quantifying what lawyers do is often rejected by invoking the snowflake principle: there is so much that is unique in the lawyer’s role that measurement is too crude to demonstrate value.
There is some truth to that but the in-house profession’s resistance to benchmarking and metrics is excessive and self-defeating. Just because common yardsticks cannot tell you everything, it does not mean they cannot tell you a lot. One of the reasons that major law firms in the UK have rapidly evolved is because they are far more transparent than in-house counterparts and global rivals and have established yardsticks to measure performance.
The development of common benchmarks would be a big step forward for the in-house profession, giving GCs a better dashboard and a basis for a more convincing conversation with the business regarding their value.
The following are our suggestions for a basic set of metrics that would allow an in-house team to gauge ongoing performance. Some are obvious and already common but are still mentioned for context. Others less so. Our core metrics are:
- Total annual legal budget.
- Legal budget as a proportion of company revenue.
- The split of budget spent internally and externally.
- Total spend on litigation, fines and settlements.
- The number of lawyers employed per £1bn of company revenue.
- Total staff costs for legal.
- Total staff costs for qualified lawyers.
- Total staff costs for other professionals in the legal team.
- Proportion of legal budget spent on technology, systems
We argue that this group of metrics provides a working dashboard that would allow GCs to gain a broad sense of how their team ranks on efficiency and how they parcel up their legal spending. The addition of figures on litigation costs gives a balancing metric to indicate if a company is effective at managing risks or if cuts in legal spending are increasing the company’s risk profile. GCs will inevitably want additional metrics relevant to their business but the above measures would be our starting point to assess operational performance.
Will it happen?
Cranfield School of Management’s Paul Hughes notes the lack of progress on this front: ‘The first article I have found that talked about how in-house lawyers can add value was from 1987. Nearly 30 years later most of the points raised in that article are still things that haven’t been addressed.’
However, BT’s Fowler forecasts change: ‘GCs used to focus a lot on narrative-based reporting but with each passing year that is becoming more of an outlier in terms of how a business function is expected to demonstrate its value.
‘We have to be clear about the inevitability of change. All corporate functions have gone through fairly radical transformations over the last few years. If you talk to those function heads, they will all say the same thing: when business suggests it’s time for change you do it or it gets done to you. Better to start thinking now than to wait and have it done to you.’
Making legal tech work – three GCs discuss their experiences
Keith Austin, head of legal UKIEEMEA, DHL: We all work for organisations where there is continual pressure to be more effective and efficient. It is clear that we will be pushed into using tech whether we like it or not. It will be driven by the in-house fraternity and arguably driven by internal business and customers if the GCs are not prepared to take the leap of faith.
In the next five or ten years there will be significantly more technology used in-house than now, but it is imperative to have a strategy and not get seduced into deploying technology without asking: is it right for me? And does it address risks or needs that I have?
Vanessa French, GC, Wolseley: Around two in three technology projects fail. The point is: do not rush in. It is really important that we all know what our workflow is before we try and automate it. Right now, lots of people think they know what their workflow is but try mapping it; it is hard.
Ned Staple, GC, Zoopla: We are seeing disruption in the legal services market but I suspect it is the incumbents that will be empowered by it. A lot of the artificial intelligence and automation tools will be most useful in acquisition, litigation or competition scenarios; less so in day-to-day work. That does suggest it is the big law firms that could benefit from it.
Vanessa French: We will all start demanding of law firms, ‘You have your databases, you know your systems, you know what other clients do, what is market in this scenario?’ They should have that big data in terms of how others are behaving and they should share it.
Keith Austin: The good thing about technology is that it does allow the lawyers to achieve what we all strive for: clarity. My experience is that any disputes we have are not the result of a poorly-drafted contract in the front-end T&Cs, it is in the schedules. We have either over-promised and under-delivered or we have our commercials completely wrong.
Vanessa French: A really interesting piece of data to know would be the causes in a contract that caused a dispute and which were truly legal provisions versus the ones that were about the schedules at the back. We probably do not litigate on boiler plate [often enough].
This discussion came from the Legal Business event, AI and the Law Tools of Tomorrow – Bringing Clients and Technologists Together, which was held on 17 March in Central London.
2. Getting networked – a model for sharing good ideas
Building on point one, metrics are of limited use if you cannot compare them to something relevant. Moreover, the fragmented and opaque nature of the in-house profession means GCs often struggle to share good ideas. Forget the overblown claims at the amazing depth of in-house counsel’s professional networks. Most in-house lawyers struggle to share ideas for reasons practical and cultural. There is obviously a role for sharing ideas at conferences but one reason such debates have not moved on is that GCs struggle to get baseline information from peers.
An online network that allows members of the profession to share ideas and benchmarking data. Our proposal is for a network that would require all members to list the core metrics they are using and submit at least one idea or experience that they think would benefit peers. Information would be shared with agreed templates and criteria to make it as comparable as possible. Members could list information without specifying their company. There could also be scope for members to upload and share case studies that would help peers to avoid reinventing the operational wheel.
Will it happen?
Concerns over compliance and data protection law may prevent some lawyers from joining such a network, but there is support for this idea. In the US, the Corporate Legal Operations Consortium (CLOC) has shown that in-house can be receptive to such knowledge-sharing if the proposition is made relevant and practical.
Unless we tell law firms exactly what to do, we can’t complain about inefficiency. When the firm knows the expectations, added services become irrelevant to the discussion.
Maaike de Bie, Royal Mail
Silvia Hodges Silverstein, executive director at the Buying Legal Council, has established a working group with GCs and legal operations professionals to help address the issue. ‘The issue GCs have faced is knowing whether their legal spend is in line with other organisations, because data has been difficult to come by. For most in-house lawyers it’s a bit like putting your fishing hook out and seeing what sticks but in a year or so we will have a much better understanding of what works.’
Catherine Alman MacDonagh, CEO and founder of the Legal Lean Sigma Institute, says such knowledge-sharing platforms are already having an impact on how legal teams are structured in the US.
Perhaps the biggest issue in terms of practicality would be finding the right third party to facilitate the network, whether an industry body, academic institution or information provider.
3. A C-suite for the legal team – create a COO to lead a team of non-lawyer professionals
Increasing responsibilities for GCs, globalisation, tougher enforcement and regulation – all these trends have pushed legal chiefs to handle larger and more complex teams working across borders. Increasingly the legal element of the GC role is marginalised by strategic and operational duties. But the infrastructure has not kept pace.
‘There are too many people in the in-house legal world who don’t get operations or KM,’ says Cranfield’s Hughes. ‘The dangerous thing with lawyers is they don’t realise what they don’t know. It is the most dangerous form of ignorance. There is too much hubris and not enough humility.’
Large companies should appoint chief operating officers (COOs) for the legal department, reporting to the GC. The COO would be tasked with overseeing operational issues and managing senior staff in areas including knowledge management, technology, compliance, pricing and finance. The COO role would also recognise that the in-house team of the future should be staffed as much by experienced and talented non-legal professionals as lawyers, allowing for complementary areas of excellence. Having a defined career track for operations staff will increase the calibre of professionals in such roles.
Will it happen?
There will be considerable resistance at many companies from both in and outside the legal team but non-legal staff are becoming increasingly common within the legal teams at larger companies. In the US a defined class of senior legal operations professionals has emerged, with CLOC launching back in 2009.
Kerry Phillip, legal director at Vodafone Global Enterprise, says: ‘There is a big benefit to introducing things like matter management systems that track whether work is being sent to the right place, along with document templating and contract lifecycle automation tools. Gathering information on what the team is doing is the most difficult part of introducing change. Once you have a strong operations team you can establish who is working on what and how long it takes to go from sale to cash in various types of contract. That information helped us set up two offshore teams to take away low-complexity work.’
Neil Hodges, UK legal head at insurer Zurich, comments: ‘Knowledge sharing in legal departments is years behind the game compared to other parts of a business. You often have brilliant lawyers who have spent their lives with a company, who know the business inside out. That’s great, but unless the lawyers’ knowledge circulates around the company it is useless. We created a specific operational role to act as a conduit for legal and make sure that knowledge gets to where it is needed.’
Royal Mail Group general counsel Maaike de Bie has worked with director of operations for legal Sarah Barrett-Vane and is looking to introduce a knowledge management head to standardise and improve processes across the team. ‘My ideal is to get to a legal platform that allows business divisions to generate their own documents and address questions without needing to go to lawyers. To get there, I first need good management information, for which the operations and knowledge management workers will be essential.’
BT’s Fowler has a similar take: ‘We are definitely waking up to the benefits of dedicated operational staff in legal. This year I moved one of our lawyers from casework to improving our management information and processes. Five years ago I would never have considered such a thing; now I see it as critical.’
AIG – how operations saved $1bn a year in legal costs
In 2012, US insurance giant AIG was working with around 1,200 law firms globally and managing an annual legal spend approaching $2.5bn. Aaron Katzel, then the company’s chief of staff to the general counsel, was asked to establish a new function as head of global legal operations, working alongside AIG’s senior vice president for process and information, Brian McGovern.
‘The way we work meant the function had to become very process and data-oriented and very scalable,’ says Katzel. ‘There is no way to effectively manage relationships with that many firms without some sort of process.’ By 2015 the legal spend had been reduced by $500m on a like-for-like basis. McGovern believes that AIG has now passed a savings milestone of $1bn annually.
AIG has some unique attributes: it is reportedly the biggest spender on legal services in the world, giving it immense buying power and pricing data. However, the results achieved through legal operations, says Katzel, can be replicated by companies with far smaller budgets. ‘The tools we use are not unique to a company of our size. Legal operations is driven by the fundamental question of what’s important to our business lines and thinking about how legal services get delivered. As long as that leads to a process that can be carried out in a consistent way, you will add value through legal operations.’
Key to this is creating a blueprint for the legal function. ‘Having a plan to deliver incremental progress in skills, systems and processes is tremendously important to making operations work for legal. The result won’t be instantaneous, but that plan shows the legal team you are aware of their needs.’ The second key element of successful legal operations is to maintain constant communication with the legal and business functions, says Katzel, who is currently AIG’s global head of legal operations.
‘Life moves so quickly at modern companies, regardless of their size, that you can’t assume a conversation you had six months ago is still relevant to how the business wants to operate. If you’re coming into the operations role in a new company or a new geography the formula is pretty simple: spend time with the GC and understand what drives the need for legal in that organisation. It may be managing costs, being more effective at managing legal services, or having better data and systems. As long as you are constantly communicating as you build toward short-, medium- and long-term goals, they will respond. It all comes down to thinking about what you have.’
AIG is aiming to spread the word through the launch this year of a new business, The Legal Operations Company, to help other companies improve their operations and procurement by leveraging its data. Alongside the day job, Katzel is chief executive of the new venture.
4. Meeting in the middle – bringing procurement into the legal team
Our proposals for procurement are obviously linked to an expanded legal operations team but bear discussion on their own. Attempts to bring procurement professionals into legal buying have had mixed results, largely due to turf wars and GCs protecting their own patch.
Even some of the most commercially-minded and hard-nosed GCs report that procurement can be one-dimensional to the point of being counterproductive in legal. Given the scale of legal services being bought, ending the stalemate would have huge benefits.
The ideal solution with procurement would be to have professionals who have built up a specialised knowledge of legal services. We suggest that large legal teams either begin to recruit their own dedicated procurement professionals in senior roles or at least move towards building closer links with part of central procurement. Having a dedicated operations team under a high-calibre COO would also help to build bridges between legal and procurement, even if procurement ultimately sat outside the legal team and its line reports.
Will it happen?
The dynamics around procurement are heavily dependent on the size of the company. According to Hodges Silverstein, the Buying Legal Council data shows that procurement functions tend to kick in when legal spend reaches around £15m a year.
There will remain huge cultural tensions between legal and procurement in many organisations, particularly in less-regulated industries where legal is more likely to feel marginalised. However, recent years have seen the emergence of procurement and pricing professionals with considerable experience of law, while a number of GCs have themselves applied more sophisticated buying techniques.
Microsoft, for example, has moved over 90% of its work to a fixed-fee basis following a review of providers that led to a smaller panel. US insurance giant AIG has, according to global head of legal operations Aaron Katzel, managed to save around $1bn in costs by implementing procurement practices that were commonplace in many other business functions (see box opposite).
There is clearly a move towards efficiency and tighter relationships more generally. According to research by BTI Consulting, the number of law firms regularly used by clients in the US is shrinking year on year. Further, alternative fee arrangements now account for over $20bn of external legal spend in the US following three years of nearly 20% compound growth.
However, it is not simply a case of cutting the number of suppliers. ‘Law firms have innovated for a long time but it has been drowned out by entrenched relationships,’ says Marty Harlow, procurement director of global legal operations at pharma giant GSK. ‘It is the GC’s call which firm they use, but we will do the groundwork and make sure some of the new ideas from firms are brought to their attention.’
GSK has been a leader in the adoption of sophisticated legal procurement. ‘Corporations like ours are outsourcing more legal work to law firms and becoming more demanding on what we get,’ says Harlow. ‘80% of our global legal spend is now on alternative billing arrangements, but if you look at the Fortune 500 companies that have a legal procurement team you will see that they typically average a 20-30% alternative billing spend. There is a lot of room for progress.’
The once-gaping chasm between legal and procurement has narrowed and will narrow further in future.
5. Time for mature pricing – goodbye to the ‘value add’
It is an irony of the modern profession that attempts to de-bundle legal work have come as in-house teams have increased demands for parcelled goods via value-added services. The model is common: either free or deeply discounted services given in return for work. The problems are obvious. While in-house teams value some elements – notably secondments, especially in the banking sectors that several years ago had become addicted to such arrangements – in other cases, such as the provision of training and briefing material, they often see little merit. Yet secondments are hugely expensive for law firms to provide and distort the buying process, as to a lesser extent do all complementary services.
If you value it, it is better to set a market price and pay for it. If you don’t want value adds, stipulate that and ask for lower rates. Because one way or another you will be paying for it. While there is a role for secondments, the model can easily cause perverse results.
There is also a strong argument that in-house teams should focus more on services that law firms can provide cheaply: help with technology, infrastructure and knowledge management.
Will it happen?
There has been some anecdotal evidence of secondment demands easing, in part because law firms have pushed back and also because of more supply from specialist providers such as Axiom.
More constructively, clients are tapping law firms’ scalable knowhow, rather than staff. Tony Williams of consultants Jomati says: ‘You see more panel reviews where clients expect firms to give them access to technology or software rather than secondees or helplines. Maintaining databases and assisting with knowledge management is deemed important and firms are being asked to provide that in return for tender.’
The dangerous thing with lawyers is they don’t realise what they don’t know. It is the most dangerous form of ignorance.
Paul Hughes, Cranfield
BT’s Fowler agrees: ‘Law firms have access to document management and assembly systems that are desperately needed by in-house. Firms in what you might call the second tier are getting pretty sophisticated in knowing what tools a particular in-house team needs and discussing them in a pitch.’
Royal Mail’s de Bie argues that bundled services often result from a lack of clarity on what GCs are buying. ‘I trained my team so they know how to approach law firms and get what we need from them. Unless we tell them exactly what to do then we can’t complain about inefficiency in the relationship. When the firm knows exactly what the expectations are, added services become irrelevant to the discussion.’
6. Build to blueprint – set out your strategy and operating model
In an age of much discussion about business models in law firms and alternative providers, there has been little corresponding debate about how an in-house team should be built beyond loose ideas of outsourcing or retaining legal work. That day is passing.
Create a short mission statement or outline that lays out the legal team’s operating model, duties, priorities and strategy.
This would cover:
- The team’s balance of in-house and outsourced work.
- Reporting lines; centralisation/embedding of lawyers in the business.
- Balance of legally-qualified staff and other professionals.
- Stance on automation, tech-assisted tools.
- Attitude to new models of service delivery and alternative providers.
- Priorities in terms of services, quality, cost and risk.
This would give the senior legal team clearer benchmarks and a better view of priorities. It would also aid the GC to plan long term for technologies that will change the face of the team.
Will it happen?
Culturally, this may be one of the hardest shifts for GCs. Set against that, advances in automation and the growth of low-cost providers will provoke increasingly urgent questions that in-house counsel will struggle to answer without more structured thinking.
Connie Brenton of Fortune 500 data service firm NetApp spells out the benefits of broader thinking: ‘GCs should not confine themselves to [legal] tech. Most software can span the whole enterprise and you can achieve impressive results by drawing on readily available [tools]. There are two technologies that every in-house and outside counsel should leverage: electronic signatures and workflow tools. It is not that uncommon for these technologies to be developed in legal departments and go enterprise-wide.’
PayPal’s UK and Ireland head of legal Tom Brown adds: ‘Legal is linked more to core business functions on a level of corporate architecture. The business systems will be linked to the contract systems and the document management systems, which is making it much easier for legal to pre-empt a lot of issues by introducing standard templates for sales teams. More than 70% of our contracts are not negotiated, firstly because we don’t have the bandwidth but more importantly because there are only a minority of clauses [that] will ever be contested. We have outsourced a huge amount of legal work to templates.’
Kerry Phillip spent the last 18 months building an operations team at Vodafone and says having a blueprint was essential. ‘I made a careful business case outlining how document management systems were going to bring benefits. I got the CEO and CFO on board and pitched in terms of value to the business, not the legal team. It also makes it clear to the lawyers that you’re not just time-sheeting or looking to shed jobs. It’s a process of change that will help the core team do more interesting work.’
Gilbert argues that a more strategic view will become a mark of successful teams: ‘A maturing team is beginning to realise it can drive efficiency through investment rather than extracting cost. Extracting cost is like a game of corporate KerPlunk – you keep pulling out sticks until the marbles fall. You need to spend time developing a narrative of the legal function aligned to its purpose in the company. The key is building a strategy and an operational model to suit that strategy.’
Benchmarking – one GC’s experience
‘Good quality data and metrics have taken a lot of the pointless friction out of the legal team’s interaction with other departments. We have focused on measuring and reducing cycle times and the results have been very interesting. We found delays in legal cycle times were a result of the clarity of instructions coming to us. Contracts would come to us with either no note attached or a note saying, “Can you look at this?”, without specifying what we were expected to do, which leads to a lot of back-and-forth and pointless delay. That data we collected showed us only around 15% of the total elapsed time in contracting was due to contracts sitting with legal, which allowed us to dispel the notion that the team had become a bottleneck. More importantly, it allowed us to introduce substantial improvements.’
Chris Fowler, general counsel for UK commercial legal services, BT
7. Pyramid your legal team
It is the issue that plagues the career of all experienced legal counsel: the flat structure beneath GC or team head level that leaves little room for progression. The structure is increasingly out of touch with the realities of bluechip legal teams handling complex work across sprawling organisations and borders.
As major in-house teams come to resemble law firms, it is time to apply more of private practice’s staffing models. That means evolving towards a structure in which in-house teams have more junior ‘associates’ – and arguably take on some of the heavy lifting of training their own solicitors – and put their lawyers into a more hierarchical structure with defined career progression. It would be a useful exercise for in-house teams to consider how many ‘partners’ the team needs, how many mid and junior-level ‘associates’ and how many non-lawyer professionals and what it takes to build succession into that team.
In some contexts that may lead to smaller teams staffed with more senior lawyers and, conversely, more juniors at the other end, rather than the bulging middle that characterises many plc teams.
Will it happen?
The industry has moved tentatively in this direction given its growth, though many teams remain heavily focused on middle-ranking lawyers rather than building a ladder moving from junior staff to more senior roles.
PayPal’s Brown comments: ‘You can’t promote a lawyer every year and it’s difficult to find ways to keep hold of the best staff. In the long run we will have to move toward broader teams with more non-lawyers and clearly defined progression points.’
Royal Mail GC Maaike de Bie agrees: ‘Legal teams are growing but in a weird way. Half of the growth is just a step above paralegal, the other half is really specialised, and legal is never in line with corporate growth. The trend will be to have much broader teams with a mix of admin, IT and specialist legal knowledge.’
It would be easier for GCs to move in this direction if they had a clearer strategy they could sell to the company rather than act as reactive problem-solvers (see point six).
8. Tailored policing and support – time for professional bodies to reflect a changing profession
The in-house profession has been undersold by regulation and representation lagging far behind the realities of commercial practice. In the corporate sector, more than a third of legal services are provided by in-house counsel, while more than one in five lawyers in England and Wales work in-house. Yet this is hardly reflected in the work of bodies like the Solicitors Regulation Authority (SRA) or The Law Society (see ‘Lost in translation’) which still act as if the profession is dominated by private practice.
Most importantly, the SRA should create a dedicated team focused on covering in-house counsel modelled on its previous efforts to develop specialist staff to handle large commercial law firms. The SRA should also appoint a respected, retired senior GC to act as a liaison and point of contact to build links with GCs, similar to its appointment of former Linklaters veteran Nick Eastwell to bolster its work with the City. This would be the ideal time to build on the SRA’s ongoing initiative to update the solicitors’ code of conduct to make it more reflective of in-house. Smarter oversight should also mean more proactive regulation. It is not credible that companies never have their right to employ solicitors revoked.
Similarly, the Law Society should build up a dedicated team focused on the in-house community and increase funding and resources to the sector. If the Law Society proves unwilling to do so, representatives of commercial lawyers should assume that role.
Will it happen?
Stronger regulation may meet resistance from GCs, who have become used to being effectively self-policing. However, the status quo is becoming increasingly untenable as more work is handled by in-house counsel. With a growing number of corporate scandals having impacted in-house counsel, it is time for the profession to put its own house in order.
With the funding of the Law Society and SRA also currently up for debate amid an on-going government review and both bodies pledging to improve their engagement with GCs, it is the perfect time to act.
Stepping out of the shadows
If there is a common theme to our suggestions, it is that transparency and openness, while sometimes uncomfortable in the short term, will help the in-house profession to develop more quickly and build on the considerable progress already made. Though some of these ideas and trends will be resisted, in truth GCs have often been inclined to retreat to their comfort zones and the anonymity of working in-house. As they assume a greater place in business life, it is time for a new approach.