How Can Small Companies "Run Legal as a Business”? Legal Tech!

How can small companies and their legal departments deal with the challenges described above and run their legal function as a business? For answering this question, we will first describe what “Running Legal as a Business” means for small companies (A).

A. What exactly does it mean to run Legal as a Business? It means that the legal department is measured up to the same level of scrutiny as other corporate functions, is using similar processes and tools like other corporate functions, and applies comparable metrics as other corporate functions. This will only work if there are no structural differences between the legal function and other corporate functions, so that the same scrutiny, tools and metrics can apply. There are some undeniable differences between the legal function and other corporate functions: the legal function is not a profit center, it deals with many different types of issues relating to legal, risks and compliance on behalf of the entire company, and its members usually require a highly specialized education which makes it almost impossible to regularly exchange employees with other departments. However, other corporate functions like Finance or Information Technology have similar characteristics, yet they are usually much more integrated into the company system of measurable business standards. Since characteristics like specialized knowledge, dealing with (ad hoc) company risks and the lack of profit-generation are not exclusive for Legal but also apply to other corporate functions, these characteristics cannot serve as convincing arguments for a structural difference of the legal function.

B. So, if legal departments can generally be treated similar to other corporate functions, which specific problems do especially small companies need to solve when running their legal department as a business or when they do not have a legal department at all?

(1) The first thing small companies will have to do is applying meaningful metrics to the operation of their legal department or legal affairs. Measuring the performance of the legal department, the quality of work of outside counsel, the price of outside counsel, the total workload, the sources of legal issues in the company, the time it takes for matters to be processed, the common deviations from standard contract templates, or the correlation between complexity of contract negotiation and total contract value (just to give a few examples) is crucial for management’s ability to scrutinize the functioning of the legal department or of the legal processes, and to make decisions on targets, budgets or headcount.

(2) Metrics and KPIs can only be obtained when there is data that can be analyzed. Therefore, small companies will need to store and organize their relevant legal data in a way that it can be effectively accessed, standardized and analyzed. This can be done with services that are comparable to data room providers like High Q—cloud-based and secure storage that is intui­tive and easy-to-use.

(3) Furthermore, in order to gain more control over the legal budget, an effective vendor management system for managing legal services providers should be used. Small companies use external counsel proportionally more often due to their limited inhouse legal capacity, which increases the need to effectively choose, engage, control, monitor and manage their outside counsel.

On the one hand, vendor management is usually done very effectively by procurement departments, but small companies may not have a dedicated procurement department with the appropriate processes in place. On the other hand, legal departments are reluctant to introduce processes which were not specifically designed for Legal. Procurement departments choose vendors based on clear metrics like price and performance. Clients, how­ever, usually choose specific attorneys (and not law firms) based on trust. Such a trusted relationship might not be considered to fit into a system which chooses service providers based on a catalogue of metrics. However, much of the work of small companies is commoditized work for which the trust factor is less relevant than the measurable performance indicators. An effective system to help with choosing, monitoring and managing external counsel would, therefore, help aligning legal departments with standard business practices. This effect can already be seen in larger legal departments which use detailed panels of preferred providers from which they choose their legal services providers, ranging from small boutique firms to big law firms.

Also, small companies without legal departments often have even more difficulties to find a suitable lawyer and—once they have used one legal service provider—tend to stay with it. Here again information asymmetry is the key issue: for a non-lawyer, it can be very difficult to judge the quality of a lawyer and the appropriate time to spend on a specific matter. Monitoring and managing external counsel is also difficult for them for the same reason. A system for managing external counsel would, therefore, be needed to overcome this information asymmetry in order to effectively help small companies without legal departments. Such a system would need to suggest a lawyer to the company based on relevant information like area of exper­tise, price and experience. It would also need to provide trust for the company that this lawyer delivers high-quality work.

(4) When planning the budget for the legal department or for legal affairs, it has to be taken into account that legal costs often arise out of unplanned events like litigation, compliance issues or other legal problems that were not foreseen. That is why a simple correlation between target budget and actual spend is often not helpful. Budgets, therefore, are planned more effectively if the support function of the legal department is adequately taken into account. That means, calculation of the legal budget should not simply consider the spending of the previous years, but the costs for legal affairs need to be calculated on the basis of the companies’ type of business and the legal risk of every corporate function. This is relevant for small companies, because they regularly have longer periods with little or no legal spend. Nevertheless, also companies with a small or no legal department should ensure that enough accruals are set up for legal costs.

All of these challenges need effective systems in place—which is why technology will play a crucial role for small companies when dealing with legal affairs. Metrics, data storage and analysis, managing external counsel and controlling the legal spend can be done with IT systems that are tailored for the legal needs of small companies. Technology for the legal market is usually branded as Legal Tech. Legal Tech will be the driver for change in the legal services market.

C. What kind of solutions are already on the market for small legal departments? There are solutions available for different aspects of these problems. One category can be summarized as “lawyer-matching” services, i.e. connecting clients, who seek for legal advice, to lawyers. The effective use of such services enables SMEs to find suitable outside counsel and manage them better. Other solutions on the market support legal departments in specific tasks, like legal billing, contract analysis, legal document creation, contract negotiation or claim management.

D. This leads to the question which attributes a perfect solution for small companies would need to have. Small companies need a one-stop-shop for all their legal needs, a digital legal department. This service would be targeted at companies without a legal department, but could of course also be used when there is a small legal department in place. A crucial point is that it needs to be designed to be usable for non-lawyers, so that the information asymmetry barrier is removed. The whole user interface needs to take into account that non-lawyers, who do not know the legal jargon nor want to dive deep into legal theory, are using it. This can be achieved by allowing the users to create a request with their own words, even by speech. Also, a graphical interface will be used without detailed questions in “legalese”. Natural language processing (NLP) and speech recognition will enable the system to understand the customer’s request and contact the customer for additional details. The system needs to focus on providing seamless help for their customers.

(1) The digital legal department will handle all legal topics for the customer. This will be done through a combination of technology and human exper­tise. The technology will enable the system to automate requests whenever possible. At the same time, human expertise will make sure that customers receive a high-quality advice. A customer request will first be processed by the system, categorized and standardized. The more standard the customer request is, e.g. topics like incorporation of a company or drafting of General Terms and Conditions (GTC) for a web shop, the more effective an autom­atization will be.

(2) An important barrier for small companies to seek advice from outside counsel when facing legal issues are the intransparent and unforeseeable costs of lawyers. Therefore, an alternative pricing model must be applied instead of the traditional hourly rates model. The solution could be a monthly subscription fee for legal advice, or service packages with fixed fees for certain topics (e.g. creation of standard GTC, incorporation of a company with standard incorporation documents). Customers will be invoiced by the digital legal department, but the revenue will be shared between the platform and the involved partner attorney.

(3) A third aspect to such a solution will be the effective management of the legal data of the company. Legal data includes all data that is relevant for legal or regulatory purposes. The benefit of an effective legal data manage­ment is that external counsel are in turn enabled to provide a better and more effective service, because they can access the relevant and standardized legal data and communicate with the client through the service. If the company, for example, needs GTC for its web shop, the external counsel can access the data of the company to see what other terms and conditions already exist, where the registered seat of the company is, if and which open source licenses apply, if contracts with vendors are in place, etc. Identifica­tion of the relevant legal data will be done with the help of AI technologies such as machine learning and deep learning. Of course, data protection legislation will have to be taken into account, and data may, for example, only be stored and handled on servers in the customer’s country. With a structured data base of all legal data, small companies can also be provided with metrics on all aspects of their legal affairs, or they can be benchmarked against the competition or market. Using and analyzing the legal data will also help inhouse lawyers or decision-makers in a company to judge whether legal support is required.

(4) The service may also offer legal project management tools to effectively manage projects that may involve different legal service providers. Legal service may be provided by lawyers with different specialization who contribute to a specific project. Especially when mandating smaller law firms or sole practitioners, it is likely that not all legal fields are covered by one firm or one person. In order to make sure that all participating professionals work together without friction (even if they come from differ­ent firms and have not previously worked together), such legal projects need to be managed effectively. This can be organized with IT tools; such tools already exist for general project management in the market. Not only lawyers with different specialty fields may be involved in a project when tasks are unbundled; different legal service providers including non-lawyers, professionals from other jurisdictions or even software could also be involved. This diverse supply chain needs to be managed by an ideal solution for small companies.

(5) Finally, there may also be interfaces to other IT systems of the company, e.g. the Enterprise Resource Planning (ERP) like SAP or Customer Rela­tionship Management (CRM) like salesforce.com. This way, not only legal risks may be detected early, but also smart contracts may be implemented that perform certain tasks automatically, like contract renewals and terminations or supply ordering.

(6) But even if the digital legal department as a one-stop solution for SMEs’ legal needs is not (yet) on the market, SMEs need tools to help them tackle specific legal tasks and processes. An automatization of as many processes as possible enables SMEs and their GCs to concentrate on tasks that require human expertise. Dedicated tools for automatization should be used for tasks like analyzing contracts or deciding if legal action should be taken in a specific case. These tasks can be automated with the help of AI technologies to perform work that used to be done by paralegals or junior inhouse counsel. IT tools can perform such tasks faster and even with more reliabil­ity than human experts. When using such tools, SMEs and their legal functions can balance the disadvantage they used to have against large corporations and large legal departments: The difference in size between large and small legal departments becomes less relevant when more and more tasks and processes are automated with affordable IT tools.

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