Four stages to describe the contributions of internal and external counsel make up the heart of a recent report: the legal value chain. The Executive Summary for “Leading the Way to Value in Legal Services,” a 35-page thought piece from Global Leaders in Law (See my post of Dec. 2, 2008: formation of Global Leaders in Law.), frames its analysis around four sources of value.
One is “service value,” with its focus on optimal service delivery. Next is “expertise value,” which brings to bear “risk management specialist knowledge and expertise.” Third on the value chain is “commercial value,” emanating from “understanding and enabling the business,” followed by “leadership value,” which means “driving commercial value and acting as a thought leader for the business.”
The five-page Summary amplifies each of these links in the legal value chain and emphasizes various measurements and other attributes of them. You can get a copy and study it from the link above.
“Value from external advisers can be dependent on the quality of instruction from General Counsel.” I agree with this quote from the Executive Summary for “Leading the Way to Value in Legal Services,” a recent report issued by Global Leaders in Law (See my post of Dec. 2, 2008: formation of Global Leaders in Law.).
If in-side counsel were strict in their instructions, if they carefully defined what they want done by the firm and in what manner and with what deliverable, the firm that conforms to the instructions should be deemed to have delivered value. It did what the client told it to do.
If the value falls short of the client’s expectations, it either means the firm didn’t follow clear instructions or the client held from inflated or unrealistic expectations.
A large legal department has claimed savings of tens of millions in a year by an interesting calculation. The calculation starts with the total hours billed to clients by the department’s timekeepers (both lawyers and paralegals). [Yes, the department makes its professionals track their time and charge it to clients.]
Those hours billed totaled what the department states are its internal costs. Simple division shows that the blended rate was about $200 an hour, meaning that lawyers alone were likely to be around $250 an hour.
The interesting twist is that the department matches its internal hours worked to the hourly rates of outside counsel and paralegals at what they deemed to be equivalent levels. By doing so, the department has made much of the claim that if the company had used law firms to do the same amount of work, the company would have paid scores of millions more. Stated differently, the differential between the blended hourly rate of its law firms and its internal, comparable rate, is huge.
The calculation and claim raises a host of Issues. Does the department include the full costs of its inside counsel, especially the reality of their asserted chargeable hours? Companies staff for valleys of work so a premium for overflow makes sense. If the department chooses expensive firms, the “savings” look larger. Are the lawyers actually doing the same work?
Some 240 general counsel responded to a survey conducted by FTI Consulting, the results of which are in Corp. Bd. Mbr., Vol. 12, 2nd Quarter 2009 at 50. When asked what area of risk their company most needs to work on, 45 percent of the general counsel picked “Understanding operational risk.” Another 18 percent of them picked “Understanding financial risk.” In the same survey, around 310 board members gave operational and financial risks 31 percent of their votes each.
By implication, bet-the-company litigation – the most cited legal risk – is not perceived by top lawyers and directors as nearly as dangerous as operational and financial risks. Then again, perhaps “operational risks” includes the litigation and law-related tar pits companies step into.
“The role of in-house lawyers has generally been less pronounced in large Asian corporations than their American and European counterparts. Relatively few companies have full fledged General Counsel, with the top legal role frequently filled by a vice president or director instead of a senior-level executive."
Corp. Counsel, Vol. 16, June 2009 at 35, honors Kim Hyun-Chong as "what may be the most senior in-house legal position to date at a major Asian Corporation." Samsung Group, the world’s largest electronics company, appointed Kim as its president and chief legal officer, reporting directly to the CEO.
Few and far between are the posts here about legal departments of Asian companies; perhaps the dragon will start to roar (See my post of June 13, 2006: Haier of China; April 27, 2008: growth of Haier’s department to 40 lawyers; May 5, 2008: NEC’s North American legal team; Dec. 11, 2008: Synnex of China; Feb. 12, 2009: Samsung’s GC in Europe; Jan. 23, 2008: ITOCHU of Japan and secondee; and April 2, 2009: HSBC in Japan.).
Several posts, however, refer to law departments generally in Asia (See my post of July 30, 2005: metrics on spending of Chinese law departments; Oct. 25, 2005: estimate of 50,000 in-house counsel in China; Oct. 19, 2005 #2: in-house lawyers in China; June 15, 2005: compensation of GCs in Asia; and April 27, 2008: law departments of Chinese companies.).
To the degree that law departments and law firms were to publicize their fixed fees for handling broad ranges of matters, such as “$500,000 a year for all employment-related adversarial relations,” in-house counsel will be better able to quantify their relative value to their company.
Comprehensive data regarding such fees for swathes of work are not yet publicly available, but as that information leaks out or is collected, some calculations will be possible (See my post of June 9, 2009: shared, online evaluations of law firms.). An entrepreneur might collect fixed fee information that does not disclose the firm or the company and put together a modest business that enables such comparisons (See my post of Feb. 9, 2009: business opportunities discussed on this blog with 12 references and one metapost.).
In other words, if there were a few data points of fixed fees for large amounts of what is done by a law department, a head of legal could start to say, “Were we to hire a suite of law firms on the average terms they have offered, as adjusted by our size and conditions, the cost would be $3.5 million. Our internal and external costs projected for this year are $3.2 million, so we look set to save the company the difference, $300,000.”
The title of an article in the Atlantic, Vol. 303, June 2009 at 54, provocatively asks, “Do CEO’s matter?” A groundbreaking study published 47 years ago found that “Industry effects,” such as the amount of available capital and the industry’s stability accounted for almost 30 percent of the variance between companies in profits. “Company effects,” such as the firm’s history in the industry, explained about 23 percent. “CEO effects” explained a measly 14.5 percent. Many scholars since then have “likewise concluded that external forces influence corporate performance far more than CEOs do,” often less than the original study. Do general counsel make all that much difference?
Some of the modest CEO effect has to do with the number of employees of a company, and the difficulty of inspiring people beyond a relatively small team. Compared to a CEO, general counsel mostly lead small teams. The article cites findings that “performance problems increase exponentially as team size [ideally, about six people] increases.”
Other researchers have found that CEO leadership matters relatively less in constrained industries, such as electrical utility industries, than in hotly competitive, fast-changing industries. A similar conclusion probably applies to general counsel: legal/business calls and tougher and more frequent in roiling industries so the top lawyer has more opportunity to make a difference.
I am quite sure that if similar studies were carried out on general counsel, their effect on the company’s fortunes would almost always be negligible, but the effect on the law department would be major (See my post of June 5, 2006 about general counsel and their influence on share price.).
The article closes with a discouraging caveat. A large “CEO effect” need not imply a positive impact. We read all about heroic corporate heads, but more than a few dunderheads have led their company down the slippery slope. Likewise, I think general counsel make all the difference in the world to the legal department, but the difference can be heaven or hell.
Hans Peter Frick has been group general counsel at Nestlé for 17 years. An article by him in Legal Strat. Rev., Spring 2009 at 18, offers four tasty morsels.
Trust the work of your external counsel. He writes that "we focused on reducing the amount of duplication in the work that we do; for example, in the checking of work that has been outsourced to external counsel.” I would hope that law departments trust and rely on the services of their external counsel and do not think of reviewing the work other than occassionally for specific reasons. Applying the research and analysis of outside counsel to your client’s problem is one thing; checking their footnotes, cases and legal analysis is quite another.
Formally assess legal risks. The department introduced "new legal risk assessment protocols, making as much more proactive in our approach." The article offers nothing more. Perhaps his staff have developed red-flag indicators, tiers of matters or tasks by estimated legal risk, or risk guidelines.
Very low total legal costs. “[W]e succeeded in reducing our legal spend to 0.12% of Nestlé's net proceeds of sale.” Most importantly, that figure is extremely low; law departments are usually quite happy to come in at or below 0.3 percent of revenue. Second, as a methodological observation, I always use the term “revenue”, as in “lawyers per billion of revenue,” but there are many kinds of revenue figures.
Loyalty to firms. Nestlés has stuck with its core panel of law firms. Frick writes that "we are still using the law firms that we selected seven years ago” (See my post of Aug. 4, 2008: loyalty to law firms with 6 references.).
Sainsbury’s general counsel Nick Grant has challenged the eleven firms on his legal panel to compete against each other in a novel way. He asked the firms introduce their other clients to Grant so they can pitch a new product or service to be sold on the supermarket’s shelves. Five of the companies will present their ideas to a group of Sainsbury’s directors, who will choose one winner.
In total, Sainsbury’s reviewed 16 pitches. Ideas included a fizzy drink called Carbonaid, which would put a portion of profits into carbon reduction schemes, a business selling designer chairs, an IT company and an entrepreneurial school.
Grant said that the initiative, which he intends to run annually, is more than just a distraction from the serious business of solving legal issues. “[The question is] how does our legal community add to Sainsbury’s?” he said. “Community is about the flow of ideas, not just me sucking value out of a firm then dispensing with it. Firms will hopefully be proud of [having referred] clients in these hard times.”
A general counsel who asks the department’s primary law firms to help build the company’s business gives a new twist to the notion of the department as a “profit center” (See my post of April 27, 2008: profit center with 18 references.).
Hats off to Patrick McKenna who passed on this interesting item from Legal Week.
We need a sniglet (a made up word for a common situation) for the idea that specialist lawyers can usually find one of their arcane issues tucked into any set of facts. A knowledgeable tax lawyer can find subtle tax implications in any business transaction; an anti-trust specialist spots collusions and combines lurking everywhere; a litigator anticipates risks of future causes of action. For a carpenter every problem is a nail; for a highly trained lawyer, business transactions resonate with specialized risks.
Let’s call this experteyes.
Experteyes saves us if the specialist peers ahead and avoids a significant risk; experteyes complicates life, delays business and expands into a heftu bill for outside counsel.
This may be a variant of Say’s Law: the supply of goods in an economy creates its own demand. Says Lawyer Law holds that a supply of legal expertise in a company creates its own demand, in the form of risks and opportunities identified by specialists. Worse, a corollary is the possibility that the more in-house lawyers collaborate, the more likely a sharp-eyed specialist among them will touch off a controversy about some conceivable risk.
