General Counsel with Power? A Study of Internalizers and Externalizers

Over the decade up to 2007, the majority of organizations I interviewed increased the number of in-house company lawyers, reflecting general business

Table 1 Size and shape of in-house legal departments in 2010

Source: M.

growth. In financial services in particular, corporate legal departments grew enor­mously, reaching a peak in 2007 before the financial crisis led to a contraction in lawyer headcount. Despite a common aim to cut costs, my study revealed a wide- ranging variation in how the general counsel were responding to the “more for less” challenge (see Table 1), reflecting different logics of action co-existing in parallel. The study captured these different logics by classifying general counsel into three types.

First, “Internalizers” brought legal work back in-house, with at most 20 % reliance on external legal resources. They developed a strong in-house legal function that conducted most of the legal work for the corporation. The key advantage of this approach lies in in-house lawyers' intimate knowledge of the business. Transacting with many outside counsel, constantly keeping them up to speed on what the business was doing, was considered very expensive. Internalizers advocated fit-for-purpose lawyering, which involved staying very close to internal clients in business operations, and keeping tight control over external legal resources. Some corporations reduced reliance on external lawyers by increasing the size of the internal legal department, but others did so whilst cutting back also on the size of the internal legal department. On first reading, this appeared counter­intuitive. However rather than merely shifting legal work from external to internal lawyers, the general counsel in a small number of cases achieved heavier reliance on in-house legal resources at the same time as reducing in-house lawyer headcount. These Internalizers therefore took seriously the following dictum by the management guru Peter Drucker: “there is nothing more wasteful than doing more efficiently that which need not be done”.

Second, “Mid-Rangers” are more even-handed in their reliance on internal and external lawyers. They typically work for financial services firms, including invest­ment banks and commercial banks, which are the biggest spenders on big law firms in absolute terms. Their even-handed reliance on internal and external lawyers might conflate clear patterns in different lines of work, for example, heavier reliance on external lawyers in corporate finance than in sales and trading due to large amounts of complex documentation and the use of syndicates in the former. Nevertheless, apart from “big ticket” items such as major litigation cases, internal and external legal work was considered fungible. As a general counsel at an investment bank asked rhetorically:

What has to be done in-house? Nothing! A few years ago, I said to my bosses when we were having a debate about the structure of the legal department. I said we can hire another 200 lawyers and bring more of the work in-house, or we can fire all in-house lawyers and you two can manage all the outside counsel. Those are the two ends of the spectrum. The question to me is where do you want to be in the middle.

However, apart from consideration for managing the existing capacity and internal lawyers' careers, the general counsel admitted to not being able to “articulate where on the spectrum we should be”.

Third, “Externalizers” depend on external lawyers for 90 % or more of their legal resource needs. These externalizers fall into two types with different logics. Type 1 externalizers do not have an active legal department of their own and use external lawyers in place of in-house general counsel. For example, a US retailer did not have an in-house lawyer at all until recently. Another retailer in the UK had a small in-house legal department that was often bypassed by the CEO and business managers who went direct to external lawyers for advice. According to the general counsel:

Our legal function was a little bit like an outside law firm dropped in here, and we sort of sat and waited for people round the business to come and talk to us, and then we’d give them some advice and then they’d go away.

Type 2 externalizers rely heavily on external legal resources but take a proactive stance to managing them. Typically, the general counsel hosts an annual conference of major law firms, and encourages lateral communication amongst the law firms in what they call a “legal community”, a “legal network”, or a virtual law firm. These general counsel are adept at balancing collaboration and competition, in order to induce law firms to work effectively and efficiently for the corporate client.

Besides classifying general counsel into these types, I was curious what power they were exerting in order to bring about sustainable change, hence the study title General Counsel with Power?. One measure of GC power is with respect to external law firms, which we might call external GC power. Another is GC power inside the corporation; let us call this internal GC power. The most tempo­rary of external GC power lies in being in the buyer’s market during an economic downturn. Much of the bargaining power resulting from an adverse economic climate is likely to erode when the economy picks up. This implies that to exert sustained external GC power, making law firms compete with each other in a buyer's market may be necessary but not sufficient. External GC power for the long term is based on proactively managing a network of law firms, so that they are made to collaborate as much as compete. This is consistent with the way Type II Externalizers think.

GC power inside the corporation depends on the capabilities of the GC and his or her staff in the legal department. More specifically, the general counsel may enhance his internal power to become a sustainable force for change by proactively investing in capabilities such as project management and risk management. In relation to top management, the test of internal GC power lies in the general counsel's ability to influence CEO's strategic decisions.

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