Backstory: Reconnect Redux

Saturday, January 7, 2017 - 14:31

The Association of Corporate Counsel’s 2016 Law Department Management Report has a bit of a good news-bad news flavor to it.

The good news is that law departments continue to gain “greater access to the inner sanctums where decisions are made,” as ACC puts it in its executive summary. The bad news is that their hard-won seat at the table derives, first and foremost, from the perception that a law department is cost-efficient.

That’s the message at the heart of ACC’s management report, which the organization positions as an effort to “reconnect the cost of legal services to their value.” That’s precisely the language ACC used in September 2008 when it launched its Value Challenge, which it ties to this report.

Patrick Lamb, who founded his innovative Valorem Law Group in 2008 – noting that valorem in Latin means value – was encouraged by the ACC effort even with Lehman (and the world financial order) collapsing around our ears. “The success of this effort, won’t be able to be judged for several years,” he wrote, “but if the launch reflects the future, the legal profession will look back to Friday as a watershed moment.”

The 2016 report can be seen as both a check-in call on the cost-value reconnect and a call to continuing action. It is based on a survey of 299 general counsel, chief legal officers and legal operations professionals from law departments across 37 industries in 25 countries who largely hail from smaller departments: More than half work in shops with fewer than 10 employees (employees, not lawyers), and almost 20 percent are in departments of 10-24 employees. Only one in four is in a law department with more than 25 employees. As in most things, size matters.

Regardless of whether you have that seat at the table yet or not, all departments are getting the same message: costs matter. That means doing more with, if not less, then not a helluva lot more despite ample evidence that law departments continue to face more of almost everything – litigation, regulation, investigations, frighteningly determined hackers – with less of almost everything needed to manage the mounting piles of risk. Just look at the issues GCs and CLOs say are keeping them up at night: ethics/compliance, regulatory challenges, data protection, privacy regulation, information governance. This isn’t because legal chiefs are a bunch of worry warts. There is more to worry about, and there’s more to do without much more with which to do it. Could getting a seat at the table turn out to be a game of musical chairs?

To give one telling example, ACC asked respondents to describe their department’s technology on a scale from “minimal” to “comprehensive.” More than half said “minimal,” defined as Microsoft Office (or its equivalent) and nothing more. Add the 19 percent who said “basic”– e-billing and/or matter management – and the 23 percent who said “adequate” – e-billing, matter management and maybe a document system – and we’re left with a miniscule 6 percent who said “comprehensive” – the best tools available to work efficiently.

When it comes to battling risk, GCs and CLOs are bringing a butter knife to a gunfight.

Bigger departments are somewhat better off – that 6 percent climbs to 15 percent. But that still leaves a startling number of in-house counsel struggling to work more efficiently – a key to keeping that seat at the table – with the  equivalent of a Univac and a stack of punchcards.

Admittedly, it may be unfair to – switching metaphors – take a glass-half-empty view when much of the data support a glass-half-full interpretation. That’s how ACC positions the findings. “This ACC Law Department Management Report,” it says, “yields remarkable evidence that the transformation in the power and prestige of in-house counsel is neither theoretical nor anecdotal.”

That opens the door for the association to tie data in the report to the “recurrent theme of value” and to position the report as another step in the “ongoing effort to define and achieve value.”

“More than just a discussion,” ACC says, “this focus on value has changed behaviors both in-house and among law firms. It is an ongoing and compelling trend in which ACC hopes to have played a helpful role.”

The organization draws a direct connection between a well-run law department and the rise of in-house counsel in their organizations. “[T]he data clearly show that when law departments are cost-efficient, innovative, and value-driven in their traditional functions, they simultaneously gain (and justify) even greater access to the inner sanctums where decisions are made as to the company’s future and how that future will be secured.”

Getting and keeping a seat at the table starts with defining and delivering maximum value. ACC identifies four markers of a well-oiled in-house team: adherence to certain management practices that drive efficiency and effectiveness; adoption of innovative approaches such as use of AFAs and creative staffing; sound budgeting and spending; and organizational influence, which is a direct result of the other three.

Oganizational influence increases as management practices drive efficiency,” it says. “It increases as innovative approaches enhance departmental performance. And it increases as the overall budget and spend numbers meet expectations.”

Managing legal spend looms largest. ACC spells it out in no uncertain terms: Law departments that consistently hit their budgets are much more likely – statistically – to get that seat at the table than law departments that do not hit their budgets.

That is no doubt true, but it’s a nuanced picture. Large law departments are less likely to hit budget than their smaller counterparts, according to the report. Nevertheless, they are more likely to have that seat at the table in one or more of the three areas of contribution and influence ACC calls out: input on business decisions, discussion of operational issues, and contributions to strategic planning.

Much depends on your definition of large. Based on company revenue, large departments have significant input into business decisions, but the opposite is true if size is based on headcount. When it comes to strategic planning, the higher the company’s revenue, the less influence for the law department. But if you key off of other factors in the survey, such as the use of efficiency-focused management practices or its technology, the strategic influence of the department grows.  

One area where larger departments have a clear advantage is the growing use of legal operations professionals – an ongoing trend that highlights the gap between the haves and have-nots. According to the survey, fewer than one in four law departments overall has a dedicated legal operations manager. That number, however, shoots up to two out of three if we look solely at departments with 50 or more employees.

But it’s in the use of specific management practices that drive efficiency where larger departments seem to widen the gap. ACC identifies these as value-based staffing (assigning work based on complexity and risk); work-process automation; unbundling work; and formal project management, process improvement and knowledge management. It’s shocking how few smaller departments engage in such practices, according to the report, but even more shocking how few departments overall, large and small, go beyond the basics – value-based staffing and automation – to what have become mainstays for many organizations.

Ditto for alternative fees arrangements. While many departments use plain-vanilla blended rates, the bigger law departments are much more likely to use more advanced AFAs such as success fees, contingency fees and flat fees. Outside legal spending based on AFAs is 18 percent for all departments; for departments with 500 or more employees, that jumps to 50 percent.

Most interesting is whether respondents anticipate increasing, decreasing or maintaining their current use of AFAs. The good news is that fully half say they anticipate an increase, and 11 percent say they will maintain current levels of usage. The surprising news is just how many law departments – 30 percent – expect a decrease in AFA usage. ACC wonders aloud why they would turn a cold shoulder given the “demonstrable and tangible economic benefits” of AFAs. It can’t be the “stubborn resistance” of outside counsel given the leverage in-house counsel now enjoy. Instead, ACC speculates, hourly billing alternatives may be facing a serious design challenge.

“AFAs entail at least as much art as science,” ACC says. “With caseloads we can expect to increase in volume or severity – as well as immediate urgency – a fairly sizable minority of departments may now be falling back on an easier if ultimately more expensive reliance on traditional hourly rates.”

When it comes to the cost-value equation, that’s cause for at least a whiff of concern amidst the celebration of undeniable progress.

“If, in the past, law departments were isolated back-office functions,” ACC says, “today they are . . . strategic planners inextricably woven into every function that feeds the organizational bloodstream.”

That’s great. It’s not, however, the end of the story.

 “No matter how high they climb in the corporate hierarchy,” ACC warns, “in-house counsel must never stop maximizing the value of their core departmental competencies.”

Maybe it’s time to upgrade that old version of Microsoft Office.