Articles Posted in Structure

As described in the ACC Docket article (June 2011 at 154), the legal department at Rosetta Stone has grown in five years from three to 19 – including currently seven lawyers and a dozen non-lawyers. Among the latter are some who combat piracy of the company’s software.

My basic belief is that counterfeiting and anti-piracy work should fall mostly to the business units, who should seek legal guidance as needed. It is an operational function not well-suited or appropriate for a legal department. In smaller companies, however, perhaps law is the best niche (See my post of March 16, 2010: counterfeit and piracy of goods with 6 references.).

The Rosetta Stone department also has contract administrators. My view is the same as with anti-piracy staff and functions (See my post of March 2, 2010: contract administrators and managers with 9 references.).

Canadian Lawyer gathered salary data from 117 Canadian in-house counsel. One sentence about the budgets for those participants set me to calculating. “In terms of average legal spends budgeted for 2011, 36 per cent said their corporate legal department would come in under $500,000, 26 per cent said $500,000 to $1 million, 15 per cent said $1 million to $2 million, 14 per cent said $2 million to $5 million, five per cent said $5 million to $10 million, and five per cent said over $10 million.” I assume these are Canadian dollars.

If “average legal spends budgeted” means total legal spend, then one out of three departments could have had only one lawyer. After all, if total spending tends toward 40 percent inside and 60 percent external counsel, that would leave no more than $200,000 for the inside staff, which barely covers one lawyer. On similar reasoning, the 26 percent of respondents in the next larger budget bracket ($500,000 to $1 million) would be unlikely to have more than two lawyers. My reasoning is that if we take the midpoint of $750,000 and allocate 40 percent of that to the internal budget, the resulting $300,000 would be skinny for two lawyers.

Who knows if these one-hundred plus respondents are representative of Canadian law departments, but it appears from this data and the calculations that almost two out of three are small law departments (See my post of Dec. 27, 2008: small departments with 7 references cited.).

A chronic complaint of business unit lawyers is that the mandarins off at headquarters pursue their own agendas on their own time and pace. They are out of touch with the rough-and-tumble of making a dollar. HQ doesn’t feel the same urgency and pressures as the lawyers at the coal face, in the hinterlands where real work gets done to make money. It’s all well and good to issue policies and gather data, imposing requirements without letting us add staff or get funds, your ivory tower, your “lawyers’-lawyers” attitude can be really galling.

From the other end of the looking glass, lawyers in the central headquarters group feel they are surrounded by mavericks, myopics, and “me-onlys” (going native). Most of the time they are red-lining indemnifications, dealing with crises of miniscule importance, flogging product and services, and cuddling up to clients. More business mongrel than legal beagle, the lawyers “out in the field” are farm hands, hardly capable of finely reasoned legal magic. Face it, they barely have to deal with smart partners at big, expensive firms! They don’t bump into the hot-shots of executive management and have to finesse razor-sharp consultants and strategic planners! Life is balmy out in the provinces, unlike the hot-house pressure of MBAs and PhDs at headquarters.

When legal departments have six or fewer lawyers, not counting the general counsel, it is my impression that the predominant structure is flat. More often than not at that number, all the lawyers report directly to the general counsel. By “report,” I mean the general counsel sometimes assigns them work, evaluates their performance, and expects to be consulted with fair regularity and certainly on important decisions.

Above a half dozen lawyers in a department, one of the direct reports may have his or her own reports. I consider that the third level of lawyers: general counsel, direct reports to the GC, and third level reports to one or more of those direct reports. There may be empirical findings on this tipping point for reports, but I am not aware of it.

I doubt that the Board of Directors of companies care one whit about how the law department runs. To them, it’s a black box. Unless there is a problem such as an anti-trust investigation or a gargantuan lawsuit, where for a bit they may wonder about how the problem is being handled, all they care is whether the advice they get seems sound, useful, and timely (See my post of March 24, 2011: too much of an assumption of involvement by Board.).

When the total cost of the legal services hovers around a half percent, even if that fruit were thought to be low hanging, it is tiny fruit. Moreover, if you cut either inside or outside, the other will likely rise and wipe out some of the savings. Beyond cost, the knottiest risks and unknowns a company faces are not in the lawyers’ purview. The company-crushing risks of poor products, expensive manufacturing or distribution, lousy marketing and other quintessential business concerns matter far, far more than legal stumbles. When legal swords flash, only extremely rarely do they cut to the company bone or need to come to the attention of the Board, and never do the operations, structure, and costs of the legal team.

In a study of 47 companies, mostly insurance, a recent survey found that about a third of them maintain a staff counsel operation. Of those, about half (57%) the time staff counsel for claims “reported structurally through the chief claims officer as opposed to through the legal department.” Among the larger companies, the trend for staff counsel to report to claims was dominant.

The Council on Litigation Management commissioned Revere Advisory to conduct the study. This finding is on page 4 of the report. If you would like to obtain a copy of the full report, write Taylor Smith.

Every year legions of lawyers and the claims specialists who work with them handle tens of thousands of claims. Insurance companies especially care about this onslaught, what with the billions of dollars they spend each year on claims coverage, defense, and resolutions. Other companies also have claims functions when they face a relatively large and constant flow of allegations or suits..

A fair number of posts on this blog have addressed claims management, although not nearly in proportion to their impact. In part this is because the claims group often operates outside the legal group (See my post of Aug. 21, 2005: tension between lawyers and risk managers on notification of claims; Nov. 14, 2005: partner with law firms on claims management; Nov. 15, 2005: $1 billion+ annual legal spend on claims and performance management at AIG; April 23, 2006: metrics on claims that result in litigation; May 21, 2006: NYC and management of tort claims; April 6, 2007: McDonald’s and management of claims; June 26, 2008: self insurance by large US companies has moved claims to law; March 13, 2008: Council on Ethical Billing; Feb. 11, 2010: publication oriented toward claims management; March 22, 2010: legal privileges and separation of claims from legal; March 29, 2010: Home Depot and changes in claims management; and Sept. 1, 2008: insurance with 12 references.).

The legal department of WellPoint, the nation’s largest health benefits company by enrollment, supports operations in 14 states. Only ten of WellPoint’s 97 lawyers work in its Indianapolis headquarters. The rest work from 28 different locations.

To attempt to bind together that dispersed assemblage, the general counsel, John Cannon, started holding quarterly town hall meetings for the whole legal group by means of teleconference. The meetings were interactive and relatively nominal cost; they helped keep the group in step and in communication (See my post of April 27, 2008: video conferencing; June 22, 2008: preferred methods of communication; Aug. 28, 2008: telepresence; Oct. 3, 2008: ethics training at Lockheed Martin by videoconference; Dec. 22, 2009: candidate interviews by videoconference; April 27, 2009: benefits of video-conferences beyond cost control; and June 25, 2010: Coca Cola and video conferences.).

Practical Law, May 2011 at 80, interviews Michael Fricklas, the General Counsel of Viacom. Several points pertinent to law department operations come from that interview.

Most strikingly, the $13.5 billion entertainment company has “approximately 240” lawyers. At nearly 20 lawyers for every billion dollars of revenue, Viacom would top the charts for that metric. Possibly the contracting function, which dominates in such an agreement-intensive industry, swells the ranks of the department. Possibly there are groups of lawyers overseas who are paid much less than their US counterparts. Perhaps compliance lawyers are plentiful and included in the rolls of the law department.

The interview also mentions that the department has “14 lawyers at the corporate level, including two Deputy General Counsel.” Whether all 14 of them report to Fricklas isn’t said, but if the dozen report to the Deputies, then who reports to Fricklas? If they all report to Fricklas, that is a daunting span of control.

Guest blogger Jeff Kaplan of Kaplan & Walker LLP writes:

A recently launched benchmarking survey (prepared by Dick Cassin of the FCPA Blog, my partner Rebecca Walker and me) asks respondents to indicate whether the general counsel is the senior official who has been designated to oversee their companies’ anti-corruption compliance program. Thus far more than half have answered no to this question.

Senior management oversight is only one of many anti-corruption compliance program topics covered by the survey. Also included are such challenging areas as board reporting, training third parties, monitoring and compliance incentives, among others.