The Evolution of Law Departments
June 4, 2014
By Bob Barker
With an increasingly competitive marketplace combined with a perpetually evolving regulatory landscape and increased enforcement efforts, it is imperative – now more than ever – for organizations to be navigated by trusted legal counsel. Historically, the legal department has been composed of a General Counsel, attorneys with specific areas of experience, and numerous outside counsel contracted as needed. However, in the last decade, organizations have begun maximizing the value of the legal department by significantly reducing dependence on outside counsel. We surveyed industry-leading General Counsel to understand exactly how in-house legal departments are evolving.
Reduced Reliance on Outside Counsel
Nationwide, companies are reaping huge benefits by having a competent in-house legal department. According to the Altman Weil 2013 Chief Legal Officer survey, 47% of legal departments surveyed reported a decrease in outside counsel spend in 2013, and 29% plan to decrease their use of outside counsel in 2014. Of those, 82% say they will shift the work to in-house legal counsel. For most organizations, it isn’t feasible to completely eliminate outside counsel – regardless of an organization’s size or complexity, there are always unique issues and litigation matters which require outside expertise. However, there is a definite increasing trend of hiring in-house counsel specialized in those issues which the organization encounters most often. “We aren’t going to revise our Delaware corporate bylaws frequently or train lawyers to stand at lecterns and make arguments in front of judges and juries – that’s expertise we’ll partner with outside counsel on, and we aren’t going to build internal muscle there,” says Tim Dordell, General Counsel of Toro, a leading worldwide provider of turf, irrigation and other outdoor solutions. “But we better have expertise on setting the right tone with our ethics program, structuring commercial arrangements with our dealer-distributor channel partners, completing basic M&A transactions, resolving product liability claims, and meeting product and packaging regulatory requirements.” While there is still value in hiring generalist attorneys to join the legal department, companies are becoming more inclined to protect themselves from common risks by hiring attorneys with specific expertise and a stake in the company’s performance.
One of the top motivators for organizations to move legal work in-house is cutting costs. With the high price of outside counsel, CFOs often expect immediate gratification when bringing on a new attorney, but the hire must be strategic. One of the first steps in the informed hiring process is thoughtful analysis of the services provided on a regular basis by outside counsel, followed by targeted recruitment. If a talent gap is accurately identified and resolved, outside counsel overheads will decrease accordingly. This calculated approach lowers variable costs, a huge portion of most organizations’ legal budgets, and ultimately reduces overall legal expenditures.
Mark Smolik, General Counsel of Exel Logistics, expands upon this concept, indicating both immediate and long-term upshots. “In-sourcing work that has historically been outsourced to external counsel has been instrumental in helping Exel lower the total cost of its legal function,” says Smolik. “The fixed cost of our department has gone up 24% over a four-year period of time, but our day-to-day external legal costs have gone down by more than 50% despite an increased work load. Recruiting experienced, business-minded lawyers to join our team has been instrumental in helping us reduce the overall cost of Legal.” Additionally, in-house counsel are able to save the company money in ways that can’t be easily measured. “There are things like litigation, which have absolutely no revenue impact – except when you get it wrong,” warns Rajesh Swaminathan, Senior Managing Director and General Counsel of PineBridge Global Investments. A robust legal department well-versed in the company’s corporate strategy is an organization’s greatest weapon in the court room.
Not only are companies striving to bring more legal work in-house, but with 47% of legal departments reducing outside counsel budgets, many organizations are adopting convergence models to consolidate the number of outside firms used. “We cut down a panel of 400 law firms that were being used willy-nilly worldwide to ten,” says Swaminathan. “We cut non-reimbursable legal expenses by 76% since 2010.” Additionally, many companies are expecting more from outside counsel, developing the attorneys to fit the company’s needs. At Exel, Smolik implemented an external counsel evaluation program consisting of, among other things, a scoring rubric to annually ‘grade’ performance of outside counsel. “We evaluate external counsel on multiple key performance indicators and openly communicate them to our external team members. As a result, we’re getting more from our external counsel as our expectations and objectives are made clear, and our firms work hard to increase their scoring and value to our organization, at a total lower cost,” notes Smolik.
Trusted Legal Expertise
With the threat of burgeoning regulations and enforcement efforts, organizations are looking for counsel with just as much vested in the guidance of the company as its executive leadership. Complex organizations are recognizing the need for lawyers who are dedicated to the needs of the company, not an outside lawyer with a docket full of clients. In the 2014 survey GCs in the Boardroom and Beyond, conducted by NYSE Governance Services, Corporate Board Member and BarkerGilmore, respondents indicated that the number of GCs considered members of the executive management team has increased from 55% to 86% over the past ten years.
As a result of this shifting perception, in-house counsel have the ability to become totally integrated into the business team – attending meetings and dealing directly with executive leadership on a day-to-day basis – while outside counsel are limited in that facet. “The lawyers in our legal department are well-versed in our businesses long-range strategic plans, so we have specific annual departmental and individual objectives that tie right to the business initiatives,” says Dordell. Corporate strategies that include counsel to mitigate risk in every step more often come to fruition, and the business team becomes more open to seeking legal guidance. In organizations that embrace integration of the legal department, the conversations between counsel and business executives become more open and productive. The lawyers’ expertise shapes business decisions in each step, instead of blocking progress in the last stage. “A legal department is able to help a company flourish from the standpoint of making decisions and not saying ‘no,’ but finding ways to say yes with caveats,” says Chris Kaitson, Vice President of US Law at Enbridge Energy Partners. “That’s what brings the legal department into the business side.”
Get the Most Out of your In-House Counsel
The legal department is one of the most valuable resources a company can have. An effective legal department is fully aligned with the business units, mitigating risk and providing creative solutions to help drive business forward. When hired strategically, in-house counsel are also typically more cost-effective than outside counsel. However, the greatest value a legal department adds to an organization is “the structured approach and discipline of legal reasoning in the evaluation of business issues,” says Swaminathan. “If you pass the litmus test of becoming a thought partner, then you’re no longer simply execution and risk mitigation. You become a part of the business decision…an ally for robust decision making.”
About the Author
Bob Barker is Managing Partner of BarkerGilmore, a leading executive search firm focused on the recruitment of General Counsel and Chief Compliance Officers, along with their high level reports. Bob can be reached at [email protected].