Articles Posted in Showing Value

Law departments want to generate value. What is the value of an acquisition? The amount paid to buy a company may be clear, but the worth of the deal depends in part on how far out you look. What is the value of a license agreement? Projected revenue? Possibly, but during what number of years? What value comes from a law firm obtaining a zoning variance? Tell me the number of years to cover in the estimate.

Just as value cannot be begun to be quantified unless you state a period of time in which to accrue returns, neither can risk be assessed, and for the same reasons of timing. How risky is filing a patent application? Depends on when you stop looking into the future. How risky is buying a company? Quantification of both value and risk depend ultimately on what must be an arbitrarily chosen time frame. As Keynes famously wrote, “in the long run we’re all dead.” (And this point about duration leaves out the discount rate you select.)

Value and risk are complements of each other. Future risk diminishes future value; the higher the potential value, the larger the possible risks. Both are suffused with Knightian uncertainty (See my post of Jan. 13, 2006: risk means the probability of an outcome is possible to calculate whereas uncertainty means the probability of an outcome is not possible to determine.). The period of time that we accept or assume for the projection of value obtained or risks run takes on great significance.

The NY Times, Oct. 28, 2011 at B2, reports that in 2009 audit fees averaged $569,000 per billion dollars of revenue. For U.S. companies that year, what they spent on their law department and outside counsel averaged something like $5 million per billion of revenue – on the order of ten times more. I know nothing about the benefits to a company of audits of its books, but the legal value delivered seems much higher than that ratio.

The same item mentioned that in the years after Sarbanes-Oxley, a statute that many cite as the epitome of increased regulatory burden, audit fees starting trending down. Wouldn’t complexity, globalization, and technology – the trio of forces often cited as increasing demands on law departments – have increased demands for accounting services and therefore have stabilized or increased fees?

Finally, if you are in a U.S. law department of three or more lawyers, the odds are very high that one of only four accounting firms audit your company and assess your litigation reserves. Of American companies with revenues over $1 billion (and I used a typical ratio of three or so lawyers per billion), 98 percent have their books scoured by Deloitte & Touche, Ernst & Young, KPMG or PricewaterhouseCoopers.

The Canadian Corporate Counsel Association (CCCA) published in its Autumn issue an article about measuring the value of a law department. It describes the considerable efforts of a large Canadian power company to depict what its legal team accomplishes. This blogger has some trenchant quotes in the article, to be sure, but the pièce de résistance is a photograph. There’s nothing like 200 shots taken by a professional to give one that casual, astute look.

The article makes for a good read and you can click here to enjoy some thoughts on value delivered and quantified.

A recent survey asked general counsel of UK companies how well their law department is valued by their company. One choice, the most favorable, was “The legal department is recognised as a valuable part of the organization.” Of the 124 respondents, 29 percent strongly agreed and 60 percent agreed; only 8 percent disagreed and 3 percent strongly disagreed. For three other statements, the percentages were favorable but dropped off. One was about the department as “strategic partner,” one about the department being “as integrated as I would like with other parts of the organization,” and one about prompt engagement of the department by clients.

The point I want to make is that only clients can say whether the legal department is perceived as a valued group. Heads of legal can’t possibly be objective. All of us over-rate our value or our team’s value.

If the question had been “Do you think clients throughout the organization [not just senior executives who get red-carpet service] would recognize the legal department as valuable” you might move a little closer to the truth.

Based on longitudinal data from a large group of U.S. law departments, it appears that the economic recession did not have all that much impact on them. My most recent article for the National Law Journal, published on Sept. 12, 2011, discusses the two-year changes and notes the slight increase in headcount and the flat – not at all demolished – budgets of more than 120 departments. Click here to register and download the article.

“82 per cent of respondents [to the survey referenced below] indicated that their organisation’s disputes are resolved by negotiated settlement. Five years ago this figure was 74 percent.” The quote comes from The In-House Perspective, April 2011 at 13, which cites Deloitte & Touche’s “Forensic Corporate Counsel Survey 2010: do today’s corporate counsels hold all the cards?”

How did those who responded have those figures at hand? Presumably Deloitte asked a similar question five years ago rather than asking respondents to guess at the earlier figure. Since fewer than five percent of all lawsuits in the United States go to trial, why is the figure not nearer 95 per cent? Does the term “disputes” cover more than civil litigation? Are there settlements that are not negotiated? What accounts for the increase of 10 percent in the proportion of negotiated disputes? In short, does this quote convince us of anything?

Every now and then an in-house lawyer may learn of proposed legislation and alert clients to its possible effects. Here and there a lawyer passes on advice based on a court’s ruling or experience from a deal. Lawyers can sometimes be ahead of the game.

And yet: mostly, law departments handle work when clients initiate it or fall into problems. A law department can try to be as prepared as possible, but shouldn’t jump the clients’ gun. The over-use of the term “proactive” stems more from wishful thinking than from reality (See my post of Sept. 17, 2006: proactive counseling criticized as a term; Oct. 16, 2006: attribute of outside counsel; Feb. 10, 2007: desired attribute of inside counsel; Feb. 14, 2009: clichéd term; May 21, 2009: Nestle and its claimed proactivity in the legal department; and Jan. 28, 2011: a jargon giant.).

Law departments are service functions; they serve when another function – the commercial side of the business – creates a need for their services (See my post of Sept.22, 2009: Peter Kurer’s comparison of business managers and lawyers.).

It’s probably not good for me, a consultant to law departments, to take law departments down a peg or two, but here I go. All the staff function, be they HR, finance, information technology, internal audit, facilities, PR, law, provide specialized input and support for business managers. Why lawyers should flatter themselves that their counsel outranks any other staff professional’s advice is beyond me.

Well, yes, lawyers have graduated law school and passed a bar exam. But so have medical doctors who work for a company (See my post of Nov. 9, 2010: professional standards for in-house physicians.) and CPAs. Lawyers have ethical obligations, but they are not alone in that regard (See my post of June 29, 2011: heightened expectations regarding integrity of the general counsel.). What blesses or curses employed lawyers with the halo of probity?

No self-respecting in-house attorney wants to be besmirched as a relay station to outside counsel. Client calls; inside counsel speed dials; partner does the work.

It is fine and proper to be the switch when you judiciously choose the external firm, frame carefully what they are to do, and translate their legalese into practical business-speak. But mechanical pass-the-potato adds zero value (See my post of Sept. 17, 2005: outsource work rather than just pass it on; Nov. 8, 2005: specialist lawyers turn most often to outside counsel; Dec. 9, 2005: add value, don’t just passively intermediate or gatekeep; Dec. 17, 2006: ADVO’s sole lawyer was to filter and direct questions; Feb. 4, 2007: first lawyer in company might be primarily a conduit; and July 13, 2011: sometimes clients should go straight to outside firm.). Clients may rarely voice the question that troubles them, but it’s there just the same: “If you are my lawyer, why do we need to pay wads to law firms?”

Regardless of your view of Rupert Murdoch, you have to be impressed by the physical boldness and quickness of his interim group general counsel.

Janet Nova was the first person at Murdoch’s recent hearing in London to react to a protester’s approach. As the NY Times, July 21, 2011, put it, “She leapt to her feet and, clutching her iPad, tried to block the man’s reach toward her boss.” Moments later the better known of the one-two punch was landed by Wendi Deng Murdoch, who lunged out of her seat and landed a haymaker on the pie-wielding protester.

Nova was perhaps not quite at the level of Cleitus, who saved Alexander the Great’s life at the Battle of the Granicus in 334 BC, but it is symbolic (indeed, actual) of the general counsel’s role to protect the CEO (See my post of July 11, 2008: general counsel of InBev in photo striding along with CEO.). Nova, a 14-year veteran of News Corporation now serving as the interim GC, deserves praise at least for this act.