The Next Stage

The next “stage of development”, Susskind calls it “re-sourcing”, was characterized by the re-evaluation of the way legal services are delivered. Companies began the quest for greater overall efficiency and an optimal balance between “make and buy” (not “make or buy”) of legal services.

Through the unbundling and modularization of services, our understanding of the production process, or assembly line, of legal services grew significantly. GCs today no longer accept the delivery of legal services in a black box, but only as a more or less bundled set of activities, like due diligence, contract drafting or negotiation. Thus they regularly use different sourcing options and no longer outsource bundled requests to only one law firm.

Disaggregation on the one hand requires technology that supports half human, half automated production processes and on the other hand leads to new technol­ogy, because when it is more and more possible to provide parts of the supply chain of legal services without the human factor, new IT-driven business models arise. Of course one has to recognize that standardized solutions are not perfect and not a 100 % solution, but quite often, an 80 % solution is sufficient.

These considerations lead to the first hypothesis:

Economic pressure and therefore the need for optimization will remain high (“more-for- the-same”). This leads to an increasingly disaggregated value chain of legal services, where everything that can be done with the help of IT will be done with IT - even if it is no longer a 100% solution. In combination with a modern IT infrastructure, legal knowledge itself will increasingly become a commodity.

4.1 Collaboration and Knowledge Sharing Remain a Driver for Efficiency

The need for efficiency in turn leads to a greater emphasis on collaboration and knowledge sharing in legal departments. The basic idea behind knowledge sharing and collaboration is to avoid duplication and superfluous work, especially with regard to external counsel, and thereby to considerably improve the use of resources.

According to the resource-based view in strategic management (see Barney 1991), intangible resources, such as legal knowledge, have the potential to become a primary sources of competitive advantage, as long as they fulfil the VRIN criteria (valuable, rare, inimitable, non-substitutable). Legal departments who understand the value of those resources and facilitate knowledge sharing and collaboration will not only avoid duplication, but, more importantly, provide benefits to the entire company.

The concept of the resource-based view will in the long-run foster a different perspective on the balance of legal services provided internally and externally. Whereas the decision on how to strike the “make and buy” balance currently depends, amongst other factors, on different production costs, in the future, the question will be whether or not the service is strategically important such that it could provide a competitive advantage for the company. Companies will focus on strategically necessary and important services and will mostly outsource non-strategic services.

Both knowledge sharing and collaboration are further driven by technology. Modern IT-platforms simplify knowledge sharing across borders and across differ­ent parts of a company. They also provide tools for collaboration, so called “collaboration platforms”. A major part of knowledge management in legal departments usually lies in the area of contract management. All types of contract can be part of a legal knowledge management tool. When assisted by IT, companies, especially large companies, can develop their own “automated docu­ment assembly” tools. Of course this requires investment, and many companies are still not used to investing in Legal IT. In the future, however, automated document assembly will replace handmade contract drafting. If GCs are not prepared to invest in bespoke solutions for automated document assembly, they can cooperate with providers of so-called “self-service platforms”, like LegalZoom, Rocket Lawyer or LawPivot.

Knowledge sharing and collaboration work not only within a company but also across different companies. There are providers of networking platforms, like Legal OnRamp or AdvanceLaw, that assist in-house counsel from different companies to share knowledge.

These considerations lead to the second hypothesis:

Modern IT platforms will further support collaboration and knowledge sharing among in-house counsel and also between companies. Contract drafting and management will be standardized and automated. Furthermore, legal department management will focus on strategically important resources.

4.2 The Trend of Centralization Will Reverse

For a long time, companies have centralized large parts of the legal function. Before that, companies used to have independent legal departments in each country and in each subsidiary. Today, all these departments are connected and run by GCs of the parent company.

The trend of centralization started when companies realized the savings potential of demand aggregation. Their combined buying power, and therefore position in negotiations with law firms, was a lot higher when their demand for legal services was combined. Another reason for centralization was to support collaboration and knowledge sharing. Furthermore, companies wanted to centralize legal risk man­agement to more effectively prevent non-compliant behaviour.

From an economic perspective, centralization leads to positive economies of scale and scope. Despite the positive effects of centralization, centralization also leads to higher coordination costs because all the activities of the legal function need to be coordinated and controlled. Decentralization, on the other hand, leads to costs of autonomy because decentralized units work completely independently from individual procurement processes and IT infrastructures. GCs therefore always need to manage the trade-off between the positive and negative effects of centralization and decentralization.

Albeit that many GCs, for the reasons mentioned above, have tended towards centralization, we assume that this trend will reverse in the future. A major problem for a centralized legal department is that in-house counsel are too far away from the day-to-day business of their internal clients. Lack of knowledge of the internal clients' business itself leads to increased coordination costs. In addition, companies have realized, or will realize, that centralized departments with no direct link to day-to-day operations are cost-intensive, and therefore it is in many cases more reasonable to mandate external counsel than to keep the work in-house.

We assume that companies will therefore differentiate between centralization and decentralization, and define which services should be provided within the centralized legal department and which services should be provided directly by lawyers working in decentralized units.

This will lead to more in-house lawyers working within the day-to-day operations of the company. With the help of centralized functions like knowledge management, IT and procurement, companies are able to combine the advantages of a decentralized legal unit, that gives advice on a day-to-day basis with a deep under­standing of the business of their internal clients, and centralized lawyers specializing in single fields of expertise. All this will be facilitated through modern IT-platforms, efficient processes and a centralized approach to legal services sourcing.

These considerations lead to the third hypothesis:

The concept of a large centralized legal department with sometimes hundreds of lawyers is out-of-date. In the future most in-house counsel (nota bene: not always lawyers!) will work with their clients on a day-to-day basis. In-house counsel acting like external counsel will no longer be the standard. Only a few lawyers, in addition to business functions, will remain in the centralized legal department where they act as trusted advisors to the board.

4.3 KPIs Help to Measure the Performance

Another trend which we have previously discussed is the growing interest of CFOs and CEOs in the overall performance of the legal department. There are mainly two reasons for the growing interest: (1) companies nowadays understand that the legal function needs to be completely integrated in the processes and operations of the company to ensure that its compliance needs are managed professionally.

This interest leads to a growing use of KPIs in legal departments. KPIs help the CFO or CEO to examine the efficiency, effectiveness and overall performance of the legal department. KPIs measuring the effectiveness of legal departments and KPIs measuring the efficiency are two very different means. The main difference is that KPIs measuring the effectiveness try to measure the output of the legal function, e.g. in terms of less litigation or lesser exposure to legal risks. KPIs measuring the efficiency focus on whether the legal department makes the most out of limited resources.

The performance of the legal department is not only measured by internal KPIs, but also by benchmarking data from other legal departments. Typical KPIs which are used to manage the legal department are: percentages of legal spending from revenue; outside legal expenses; percentages of cases successfully solved; or number of in-house lawyers per 1000 employees. Sadly, one of the most important contributions a well-run legal department makes is difficult to measure—the legal risks avoided in terms of dollars (see Morrison 2008).

For GCs, both types of KPIs, those measuring effectiveness and those measuring efficiency, are a valid way to measure their departments’ contribution to the long­term success of their companies. GCs who try to revolt against KPIs will increas­ingly come under question from the management board.

This leads to the fourth hypothesis:

Legal functions operating without metrics to measure their performance are no longer acceptable. Even risk management needs to be included in the key performance indicators in order to measure success and make the performance of the legal department visible to the CEOs or CFOs of large corporations.

4.4 The Future of Law Firms: Structure or People

Much has been said and written about the future of law firms: we seem to know everything about the future of the profession; we know a lot about the challenges brought forward through LegalTech and AI; we know which segments of the legal market are at risk; we have read about taxonomies of law firms, commentaries on recent figures and financial results year on year. If you want to, you could spend days going through literature. This book, and in particular this chapter, however, approaches the future of law firms from a different perspective.

This perspective comes purely from the client’s side, as we have described it above. No particularities of law firms or legal markets have been taken into account, we have simply taken the client or consumer’s point of view. That makes things different. Taking a story which was used in Richard Susskind’s “Tomorrow’s lawyers” as a starting point: the following considerations don’t focus on the product, i.e. the wonderful drilling machines of Black & Decker, but rather on the hole in the wall, which is the client’s interest.

When we talk about the legal function of a corporation, we mean everything that forms part of risk and legal management (incl. enabling business opportunities) with regard to the proper and successful surviving and thriving of the company.

The legal function, as described above (and in an ideal world), is a rational, transparent and measurable set of rules and procedures. The workforce consists of lawyers, paralegals, project managers, technical assistants and many other capable people who are able to fulfil certain tasks. Whether or not the legal function is managed by a lawyer is not the main point. The proper running of a legal function requires first and foremost structuring skills, then certain (legal, project, financial, economic and all sorts of other) management skills, and the ability to decide on the most appropriate resource for a certain piece of work (or a set of tasks), independent of your own capacity or role. We do not rule out that lawyers could head-up legal functions, but what they learn and how they think does not make them the first choice for these functions.

What about GCs? Nowadays, most GCs are lawyers. Is this a necessary prereq­uisite for a GC? Rather not. The GC has to advise the board on the best, or most appropriate, way forward with regard to risk and compliance management. Many legal and/or regulatory questions have to be taken into account. However, a GC who only focuses on legal issues would miss the point. Hence, being a lawyer can be one of the preconditions of being a good GC but it is not a conditio sine qua non.

Bearing in mind what we've said above about the structure of modern in-house legal departments (and assuming that companies are prepared to reorganize their legal function accordingly!), our hypothesis is this: in B2B and in “normal times”, only law firms that are prepared and ready to form a truly integrated part of the client's value chain have a chance to survive. For the rest, it will be rather difficult.

These considerations lead to our final hypothesis:

What is true for in-house counsel is true for external counsel as well. Generalists giving abstract legal advice will become rare, and most external counsel will be working in the value chain of their clients advising on day-to-day questions. Together with their in-house clients, they will be responsible for the effective risk management of their clients. Only a few generalists will survive in the marketplace and act as trusted advisors. On the other hand, specialists and lawyers focusing on project management will still find their niche in the legal market.

4.5 Between Normal Times and Times of Crisis

All our considerations are based on what we call “normal times”. By that we mean everything other than a crisis, or on a positive note, everything which supports the ongoing business of a company, like: producing and selling goods and/or services and keeping the operation up and running. We talk about a value chain, or the sequence of events which, at the end, turns effort into turnover for the company. The legal function, and external legal services, play an important role in this value chain as their task is to keep the (legal and sometimes non-legal) risk levels down.

Assuming that companies organize their legal and risk function along the lines described in this and in other chapters of this book, we can conclude that law firms have to align themselves with their clients. Their structure, their people, their processes, even their locations and office fit-out has to be organized with a view to clients' needs far more than it is today. Should law firms be big or small, global or local? The answer to this question very much depends on what is needed. Interest­ingly enough, this exercise has not yet been undertaken, bar some exceptions. Future considerations do not revolve so much around the questions of local pres­ence vs. global span, all-lawyers or diverse workgroups, but rather around what is needed to properly run a legal function, from a company's perspective.

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