Articles Posted in Showing Value

This enormous multinational, with revenue of $104 billion, operates globally in consumer electronics, mobile communications, home appliances, chemicals and more, according to strat.+bus, Summer 2011 at 44. Even so, “the corporate core limits its voice to brand-building, R&D expenditures, high-level human resources decisions, and capital investments.” Not a word at the top level about legal risks or litigation. Those concerns of lawyers, apparently, aren’t “core.”

LGE has plenty of lawyers in its many business units, but at the very top, other concerns are more important (See my post of July 15, 2010: efficiency moves of 5 lawyers at $6 billion US manufacturing arm; Aug. 22, 2010: contracts management at LGE US; and Aug. 25, 2010: more LGE legal practices.).

To sort out a number of strands of an important issue – the value delivered by in-house counsel – I took the propositional approach. I offer nine propositions about that value, such as how to measure it, what it consists of, the role of clients, and other points. It is beyond the scope of a 1500 word article to tackle the subject any other way, unless you wallow in the pabulum of platitudes (“In-house lawyers add immense value to their corporate clients, blah blah blah.”

The article should clarify some mushy points, corroborate some of your beliefs, and challenge some of your unexamined thoughts. Click here for

Could the compensation of general counsel, relative to their function peers such as the CFO, HR head, and CIO, give a clue to the relative value ascribed to law departments? In any specific company, not necessarily, because SVPs and EVPs arrived at different times, with different levels of experience, and different employment contracts. Overall, however, were there comparative metrics within industries, we might use this as a proxy of the relative internal value of a law department.

More broadly, the fully loaded cost per employee within the staff functions tilts heavily toward the law department. Law departments have relatively little leverage – one lawyer for every non-lawyer – and lawyers receive relatively high salaries and bonuses. If the investment in human capital by companies tells us what they value, then the higher investment in legal staff may complement the value ascribed to in-house legal teams through the pay of their leader.

These two indicators of value – leader pay and department costs — came to me when I read in Eduardo Porter, The Price of Everything: Solving the mystery of why we pay what we do (Portfolio/Penguin 2011) at 120, that “the sixfold rise in the pay of chief executives officers in the United States between 1980 and 2003 was due entirely to the sixfold rise in the market size of large American companies.” Revenue growth, not increased worth brought to the table, drove CEO pay. Lawyer pay may track revenue growth, to a degree, but implicit or explicit relative perceptions of value delivered might account for more.

Eastman Kodak makes hundreds of millions of dollars every year from its patent licenses. Its lucrative portfolio has more than 1,000 patents and in 2010 “it made an estimated $630 million from its licenses, according to Argus Research.” The quote comes from the NY Times, April 29, 2011 at B4, which adds that Kodak expects to generate $250 million to $300 million in revenue each year through 2013 from its licensing agreements (See my post of Dec. 31, 2007: intellectual property licensing with 12 references.)

In part, I was surprised that someone outside a company was able to estimate its patent licensing revenue. How the terms of license deals could be known and aggregated is beyond me (See my post of April 27, 2008: American Express’s patent licensing program; Feb. 24, 2009: primacy of intangibles for lawyers per billion; March 27, 2009: more on patent investors; April 9, 2009: AT&T sale of fallow patents; Sept. 21, 2009: patent trolls and licenses; Nov. 8, 2009: most patents make no money; July 15, 2010: Motorola’s licensing structure; Oct. 18, 2010: create separate corporate licensing team: and Dec. 16, 2010; pruned patents may create licensing work in-house.).

Second, wouldn’t it be good as a benchmark of comparative performance for law departments to know patent license revenue obtained per patent record or per billion dollars of revenue? My slide rule salivates!

One point made by Boris Groysberg, Chasing Stars: The Myth of Talent and the Portability of Performance (Princeton Univ. 2010) at 54, concerns job tenure and productivity. From his careful study of equity research analysts who were top-ranked by Institutional Investor, he confirmed what others have found: “Empirical studies have found close links between tenure and performance.”

It may be that sheer speed of thought declines as lawyers move into their 50s and older, but if they have been at a company for a long time their extensive on-the-job experience means they are likely to understand the company better, its mores, and its key managers. The firm-specificity of that knowledge pays off in greater effectiveness.

The average tenure of in-house lawyers in the United States probably being more than 10 years, it means they can bring to bear a tremendous reservoir of company knowledge. Think of it as tenure and talent in tandem (See my post of Aug. 27, 2005: 70 years in one law department; Nov. 11, 2005: years in position in-house; Nov. 28, 2005: average age of lawyers in one set of departments; Oct. 19, 2007: uses average tenure of 10 years; Nov. 28, 2007: average tenure of lawyers and years out of law school; Nov. 29, 2009: talent combined with tenure boosts productivity; March 30, 2010: beyond lawyers per billion; and Feb. 17, 2011: GC tenure does not relate to spending benchmark.).

During the past fortnight I have labored over an article on in-house value. The word value perplexes everyone who thinks about it and tries to articulate what it entails. I won’t pretend to breakthrough insights but here I can certainly be the Pied Piper to my posts on in-house value (See my post of May 1, 2006: definition of the term “value-added”; Jan. 2, 2009: one of two hardest questions for a general counsel to answer; and April 6, 2011: view that value has steadily trended upwards.). Some of the article’s germinal ideas have come from posts written on this blog about value produced by in-house lawyers (See my post of Oct. 18, 2005: in-house lawyers don’t want steady diet of rocket science; Dec. 20, 2005: train clients to get the most value from their legal team; and May 1, 2006: broad compass: company goals, or social responsibility.).

Value rises above skills and techniques (See my post of May 14, 2006: value when you manage projects that have legal ramifications; April 8, 2007: Robert Bosch and four ways to add value; March 26, 2008: writing boosts your value; July 15, 2010: simply arraying budget figures doesn’t add value; and Sept. 12, 2010: institutional knowledge creates in-house value.).

How to quantify value mystifies us all, but law departments keep trying (See my post of May 28, 2005: Telstra and value calculation; March 8, 2006: Northwestern Mutual and balanced scorecard; June 24, 2007: graphical depiction of valuable services; Jan. 21, 2009: value-indicator checklist is similar to SLA; July 4, 2009: report on value in legal services – clients set value.).

Since I will be speaking at Mitratech’s Interact Forum next month, I looked back over some earlier presentations. In one of them, Steve Harmon, Senior Director of Legal Services at Cisco Systems, spoke on a range of topics, including the law department’s ongoing efforts to spend the bulk of its attorney time on “core, mission-critical activities.”

What does that portentous term mean? “We define mission criticality in terms of the notion that if we perform one of these tasks poorly, it creates immediate risk to Cisco’s business.” Consider several aspects of that definition.

It is only reasonable that the term recognize some quantum of legal risk. An immediate small risk means nothing to a company the size and clout of Cisco.

It must be that legal work done in-house has steadily moved up the value curve much like the work done by outside counsel has elevated (See my post of March 11, 2011: huge productivity increases, plus quality.).

By “value curve” I mean the importance of the work done for the company per hour of lawyer time has increased, however we measure that. In general tasks have trended up on complexity (multiple inter-related issues), urgency (documents or advice needed quickly), relations (more people involved and requiring consultation), consequences (resulting profits or risks avoided are greater) and information (statutes, regulations, law reviews, cases, online information, press and commentary, internal documents). Value delivered is a function of those five components.

Both in-house and outside, commodity legal services – those of relatively less value as defined — have drifted away to other providers or become so standardized that they take less attention and have been delegated or have been handled by better informed clients. This upward migration of work may account partly for why the number of lawyers per billion of revenue has remained relatively stable for years. The lawyers are solving higher-level problems, doing more important work, as well as performing more efficiently.

I’m not trying to be silly or too clever. The heading of this post, borrowed from a phrase that has been applied to finance, conveys the proper notion that: in-house lawyers are more likely to be lubricants than propellants. They enable business to succeed, but they don’t drive the strategic direction. Lawyers pour in their specialized advice, which a business person mixes with other ingredients. In-house lawyers react to the problems that arise more than they hold them off at the pass. They play the second violin, but the orchestra would be less pleasing without their contribution. They smooth the way but don’t determine the path.