Winter is coming and many legal departments will be left in the cold.
Let’s get a difficult conceptual issue out of the way. This is a long post that some might construe as a criticism of large corporate legal departments. It’s also a preview of LexFusion’s Second Annual Legal Market Year in Review. See Post 280 (First Annual Review). So it’s fair to ask, “why is LexFusion’s Chief Strategy Officer spending so much time delivering a difficult set of truths to his company’s largest category of customers?”
My answer is two-fold. First, the LexFusion model does not work over the long run, or nearly as well as it could, unless we are helping solve significant operational and strategic problems. See Post 203 (discussing LexFusion business model). Second, as a lawyer counseling other lawyers, I owe them my honest assessments. And more so than any of my prior legal jobs, the LexFusion perch, with literally thousands of industry meetings per year, lends itself to root cause analysis. Root causes can be difficult to communicate and even more difficult to hear, but they’re also the ground floor of virtually all sustainable solutions.
With two years under my belt at LexFusion, I have more to say than last year. Hence, Bill has been kind enough to publish this preview essay. Taking advantage of the elongated Holiday weekend, tomorrow we’ll publish our co-authored Second Annual Legal Market in Review. See Post 348. Many thanks for your readership.
* * *
This preview essay is about the organizational and business problem of complicatedness, which afflicts most of the world’s large and growing companies. See Reinhard Messenböck, et al., “How Complicated Is Your Company,” BCG, Jan 16, 2018. More pointedly, however, the complicatedness inherent in running a large business interacts with legal and regulatory obligations in ways that create
very serious existential risk management problems that lawyers are supposed to spot and head off.
None of this is anyone’s fault. That said, as professionals, we need to get this problem into focus.
Trust is a good thing, but it rarely exists at scale
When I went in-house at an automobile company and first made the rounds introducing myself to business stakeholders, I employed self-deprecating humor to break the ice:
I’m from legal, and I’m here to help.
[pause for sighs and groans]
I know, I know. If finance and legal ran the company, we’d simply shut down. Zero cost. Zero risk. It would be perfect!
[pause for modest laughs]
I recognize I need to earn your trust. The burden is on me to convince you I share your interest in selling cars.
I can’t promise I will never tell you “no.” But I can promise I will not only explain these irrational constraints in practical, actionable terms, I will also work with you to devise how we might operate within these constraints to execute on the mission: sell more cars.
This worked, a little. My stakeholders chuckled. They were more open in subsequent interactions. But earning real trust took real time. Day after day, I had to prove my commitment to making the company money and advancing stakeholders’ personal careers, despite often being impelled to deliver disappointing truths about how external regulatory complexity frustrated otherwise sound business logic.
I never uprooted the deeply ingrained operating assumption that legal was, at best, the department of slow, and, more often, the department of no. The best I could achieve was individual exception status.
I was not alone in being an exception. Indeed, exceptional in-house legal professionals are everywhere. Truly exceptional in-house departments, however, seem to exist mostly in the imagination. Great people. Good intentions. Bad systems. Structural barriers to change.
This is not to dismiss many worthwhile achievements in legal and operational excellence, especially outstanding individual contributions and elegant, department-level innovations in service delivery. But it is to say, bluntly, that most of what exists at the enterprise level is painfully insufficient. The delta between the business demands on law departments and the capacity for law departments to meet those demands is only increasing, as are the consequences thereof.
For completely comprehensible reasons, most law departments are poorly calibrated to meet the current needs of their business at scale or pace. Most law departments are even more ill-prepared for the wars to come, large portions of which they will observe from the sidelines.
I cannot emphasize enough how well I recognize that what follows sits stubbornly at the extreme end of the easier-said-than-done spectrum. That some things are hard, however, does not make them any less true.
The 0.03% cul-de-sac
In September, ACC Legal Operations shared a LinkedIn post I found perplexing.
Per the below screenshot, the typical legal ops team is dropping ~0.03% of revenues to the company bottomline–a finding that is unsurprising as it is underwhelming. More befuddling than the post was the excited, celebratory comments that followed—along the lines of, “This is remarkable! Should be on every Legal Ops deck.” and “What a powerful finding!” Of course, I chimed in with my typical tact and restraint.
It is easy enough to reframe the same finding more compellingly. For example, 0.03% represents an annual savings of $12.6m for the median Fortune Global 500 company ($42.1B in revenue). This translates to almost $160m in savings if the lower cost basis is maintained over a decade of modest growth. The larger the company, the longer the time horizon, and the more aggressive the growth projection, the bigger these numbers become—which, is to say, significant in raw terms.
If the objective was to advocate for legal operations based on savings impact, many alternative presentations of the same finding produce more persuasive numbers. Indeed, I regularly deploy similar figure to support my counterargument that savings on legal spend is too inconsequential to be considered a rounding error. See, e.g., Stephanie Corey & Casey Flaherty, “Saving is a not a strategy,” ACC, May 12, 2022 (noting that “a fractional amount of a fractional amount” is not enough savings to help the business).
My advocacy on this point sits comfortably outside the Overton Window (i.e., the range of socially acceptable opinions). A demonstrable reduction in near-term spend is not necessarily a marker of success. But more to the point, successfully integrating legal operations should often result in more fiscal resources being directed to legal—at least, in the near term, where investment is required to fund long-term projects designed to solve for scale. Part of our skillset as legal operations professionals is the ability to frame our ask for incremental resources in the language and metrics of the business. And in every case, we use value storytelling to show how modest investments in legal operations are going to create and preserve business value. See Casey Flaherty, “Value Storytelling – Summary,” 3 Geeks, Oct 21, 2021.
Because “savings” on legal spend is mathematically uninteresting from a business perspective, it is problematic that savings is law departments’ sole standard KPI (spend, rates, and hours are data points in the savings calculus). Yet, per the 2021 Blickstein Group survey, that appears to be our focus:
Overcoming our origin story
Law departments center savings in their value narrative because this is what the business expects. “We can, and should, spend less on legal” is a hyper-palatable partial truth.
It is important to remember that virtually every corporate law department came into existence because legal bills seem too high for the attendant service levels. That is, the origin story of most law departments is not a happy one. Frustration with outside counsel is endemic. Expensive. Nonresponsive. Inadequately familiar with the business. In-house counsel emerged as an alternative to outside counsel. More embedded (better). More accessible (faster). More affordable (cheaper).
Cheaper, however, is the only benefit quantifiable in a manner most business stakeholders will ever care to understand. Responding to organizational incentives, law departments over-index on savings while operating on the truncated time horizons of annual budget cycles and intermittent cost-cutting manias. The 2021 EY Law Survey found that 88% of general counsel are planning to reduce the overall cost of the legal function over the next three years, with 50% saying those reductions will be 20% or more. (This is, in short, bonkers, but more on that later.) And that was before recessionary fears took hold.
As we all known, the quickest path to savings is to demand discounts from law firms. Performative cost savings—“rack-rate kabuki”—has proven an effective stop-gap measure to fend off the internal cost-cutting authorities. Thus, law departments are inclined to double down on discounts and their frequently misguided mutations (e.g., outside counsel guidelines, panels, RFPs, most AFAs). See “Trust Fall: the limits of discounts, panels, billing guidelines, etc.,” 3 Geeks, Dec 5, 2022.
But slowing the growth rate of external spend leaves the savings craving unsated. Because of the mutual failure to forge true strategic partnerships, see Post 069 (discussing Microsoft’s efforts in this area), most law firms remain too expensive for business-as-usual work. In contrast, over the years, insourcing—the captive law-firm alternative—has delivered substantially more savings impact than tinkering around the edges of legal buy.
While associate salaries and hourly rates garner consume much of the oxygen in the legal press, Varsha Patel, “General Counsel are Unwilling to Pay the Price of the Industry’s Latest Salary War,” Corp Counsel, Feb 4, 2022 (familiar headline for anyone with 20 years in legal), insourcing has been the story for several decades.
As noted in Post 262, there are now more lawyers working in legal departments in the US than the domestic office of AmLaw 200 firms–partners included! Indeed, over the last three decades, in-house legal departments have more than tripled in size while law firm headcount grow significantly trails government. According to the most recent ACC Benchmarking Survey, 54% of corporate legal spend has moved in-house. See Phillip Bantz, “In-House Spending Eclipses Outside Spending in New Legal Department Benchmarking Survey,” Corp Counsel, June 14, 2022.
The insourcing saving math
The insourcing savings math is not as simple as discounts, but it is simple enough, and more defensible. While baselining eventually becomes a subject of fierce debate, the initial pitch is intelligible and digestible: “we are currently spending $X on this externally; we will save Y% if we insource.“
The pitch is appealing. Insourcing moves relative spend in the preferred direction and reinforces the expectation that legal spend should decrease over time. Moreover, as shown below, this statement is generally true when cost is expressed as a percentage of overall company revenue.
While many factors drive down relative spend, insourcing plays a starring role. Insourcing delivers immediate, measurable savings—until it doesn’t, because savings stop being sufficient.
In the above chart, let me draw your attention to two salient points. First, when I made my crack about saving on legal spend being “too inconsequential to be considered a rounding error,” I fudged a bit, as that statement is technically limited to right side of the chart, or companies with >$3 billion per year in revenue. Albeit, my observation has a lot of practical meaning because the companies on the right side of the graphic (approximately 1,500) make up nearly 50% of the total US GDP and account for roughly a quarter of the total spend with law firms. See Post 286 (Bill pulling helpful data from the US Census Bureau).
Second, note how precipitously the precentages fall. Obviously, between “less than $250m” and “$250m-<$500m”, the savings as enormous. Yet, as a percentage of company revenue, the $3b-$6b band is spending less than a third of companies in the $500m-$1b band.
Modeling out these numbers reveals that, early in a company’s lifecycle, law departments can achieve meaningful reductions in raw spend.
In a very short window in a company’s lifecycle, the percentage of revenue figure shrinks to almost nothing (from the perspective of business impact) but never reaches zero. It’s what statisticians call an asympote. As a result, legal spend eventually returns to a mostly inexorable upward trend congruent with business needs.
A fleeting sense of happiness and safety
The saving math becomes less compelling even when the raw dollars remain significant. Sure, you’re saving money, which appeals to the cost-cutting obsessions of senior management. But you’re also proposing to add quite a few expensive FTEs, which sets off the corporate allergy to headcount. Irresistible force. Immovable object.
For a variety of reasons, there are limits to the number of human persons corporations are willing to employ at a given time. And the same preferences that inform not allocating infinite fiscal resources to legal extend to not allocating infinite FTEs to legal.
As legal headcount swells, the savings math loses its potency, and legal is pressed to explain why it cannot get by with all the heads it already has. That is, inquiring minds want to know what these growing ranks of in-house legal professionals actually do.
To contextualize the perilous position of most legal departments that serve large organizations, scroll back up to the Blickstein law department metrics and endeavor to identify that which might be used to support a business case not centered in savings. Examine the number next to potential candidates—see e.g., cycle time, 24.6%—to internalize how few departments are positioned to make anything that resembles a business case based on business impact.
Exclude savings and most law departments are not positioned to say much of anything. Meanwhile, the monomaniacal focus on saving only reinforces the enterprise view of the law department as an inefficient cost center—rather than an effective value center. This entrenched perspective makes the hard job of securing resources even harder, especially because many law departments struggle with self-awareness.
Although some readers may find this characterization harsh, untrue, and unhelpful, the industry data is overwhelming on this point.
According to the Onit Enterprise Legal Reputation Report, 95% of law department respondents considered their department efficient in managing service requests and 75% feel the strength of their relationship with the business is solid. The business does not concur. 73% of enterprise employees perceive legal as a “bad business partner” and 65% admit to intentionally bypassing their law departments to get their work done. See also Post 040 (John Grant getting identical findings in a large corporate legal department to the dismay of the in-house lawyers who hired him).
The poor perception of lawyers among their business colleagues is partially driven by the reality that the business and the law department are often misaligned. According to Gartner, when legal guidance is too conservative, business decision-makers are 2.5x more likely to forego or suffer delays in capturing business opportunities. They are also 4x more likely to scale back the scope of an opportunity in response to legal guidance. As a result, “overly conservative legal guidance—in other words, guidance that does not align with the business’s risk appetite—creates a loss of $672,000 in value per lawyer annually.” Bryan Jordan, “Legal Must Help the Business Take Smart Risks to Grow,” Gartner Insights, Oct 18, 2019.
Most law departments are poorly situated to capture hearts and change minds. They cannot explain why their current resource allocation is optimal (spoiler: it isn’t) and are at even more are of a loss to justify why additional investment in legal is a prudent use of finite funds and headcount (hot take: it is), especially once savings stops being persuasive.
The resulting delta between demand and resources is reaching crisis levels. Indeed, consider the following headlines, all from 2022:
- “Legal Departments Are Eager to Do More with Less But Are Fuzzy on the Path,” Corp Counsel, Fegb 14, 2022
- “‘We Will Have to Do More With Less’: Pressures From All Directions to Test Legal Departments in 2023,” Corp Counsel, Oct 11, 2022.
- “Chaos, Complexities Overwhelming In-House Lawyers,” Corp Counsel, Sept 28, 2022.
- “In-House Lawyers Are Stressed and Want to Walk Out,” Corp Counsel, Oct 12, 2022.
- “Legal Departments Report Swelling Workloads—but Without Budget Increases,” Corp Counsel, Oct 13, 2022.
- “Weak Earnings Reports Add to Legal Departments 2023 Anxieties,” Law.com, Oct 27, 2022.
- “‘Collision Course’: Rising In-House Workloads Run Up Against Cost-Cutting Mandates,” Corp Counsel, Dec 12, 2022.
We’ve got a complexity problem
The chronic underfunding of law departments tends to worsen over time, as does the fallout therefrom for the business.
What is true, underappreciated, and unquestionably annoying is that even businesses that have entered cost-cutting mode may experience a net increase in legal needs because the complexity of the external operating environment continues to explode.
As Professor Noel Semple observes, “We live in a law-thick world. To secure a benefit or avoid a loss in this world, we often find that we must somehow use the law. This is as true for global corporations as it is for ordinary individuals[.]” Legal Services Regulation at the Crossroads at 3 (2015).
It ought to give us pause that the world’s richest corporations want the benefits of law yet are simultaneously underfunding their own legal department. Why is this happening?
Nearly a decade ago, during the Legal Whiteboard days, Bill Henderson published the chart below, which makes the simple but important point that in a rapidly globalizing world, every unit of economic growth carries with it an ever larger burden of legal complexity. Thus, over time, assessing the benefits and protections of law becomes corresponding more expensive.
Our law-thick world thickens by the day, and to the extent we failed to invest in new systems to keep pace with the growing cost and complexity of properly managing our legal affairs, operational risks accumulate. Today, Regalytics, a regulatory update provider, estimates “there are over twenty-five thousand regulators in the US, and more than five million globally.”
Regulators regulate. Further, regulations don’t merely accrete–they overlap, intersect, and, often, as you cross borders, conflict. Professor Dan Katz and his collaborators have quantified the resulting complexity in a variety of ways (see here, here, here, here) with my favorite being citations to regulations in corporate 10-Ks, the best available artifacts of what businesses themselves identify as materially affecting their economic performance:
Jae Um summed up her own work on “the silent in explosion of demand” thusly, “It’s up. Like, a lot.” See Posts 216, 218, 279.
Consider the new hotness: ESG (environmental, social, and governance). The term was virtually unknown a few years ago. In a blink, ESG became a fertile ground for regulatory expansion, resulting in shareholder activism, litigation, fines, and all manner of net-new complexities that demand deft navigation.
Corporations must navigate new regulatory landscapes that introduce new risks for the business and generate new work for the law department. Yet, as mentioned earlier, 88% of general counsel are planning to reduce the overall cost of the legal function over the next three years, with 50% saying those reductions will be 20% or more. Because math is a harsh mistress, it is unsurprising that ESG is both labeled a “high priority” and yet represents an area where corporations suffer from a substantial “lack of readiness,” per an August 2022 survey. See Susan Reisinger, “Companies Call ESG A Top Priority But See Lack Of Readiness,” Law360, Aug 30, 2022.
ESG is the latest in a long line of complexity-increasing regulatory expansions that overlap, intersect, and conflict. The meteoric rise of ESG looks strikingly similar to the fines under GDPR, as tracked by CMS. Fines are a lagging indicator of the emergence and impact of data privacy laws.
Like ESG, data privacy was not actually a thing—from a business regulatory perspective—until it was. And then it went parabolic. Recent data from the IAPP provides an example very close to home.
Meta: when legal risk begin to swallow the business
To get concrete on the business impact, contemplate the journey of our friends at Meta, who faced minimal regulatory resistance as a startup but ultimately encountered “regulatory headwinds” that led to a $251 billion single-day drop in market valuation, the largest in history. Since January of 2022, Meta’s market cap is down 75%, or $750 billion. See “Does A $750 Billion Decline In Meta’s Market Cap Make Sense?,” Seeking Alpha, Nov 15, 2022.
This seismic stock market nosedive occurred long after a $5 billion settlement with the FTC, which should not be confused with the pending $7 billion class action in California or the $3.2 billion class action in the UK—all of which inform, but are distinct from, the $20 billion derivative action against the Facebook board in the Delaware Chancery Court, which has been called “the mother of all lawsuits.”
Big as these numbers are, fines and damages can be far less damaging to Meta’s core business than the regulatory climate’s impact on the larger ecosystem—like being forced to jettison advertising tools (how Meta makes its money) in a settlement with the US Justice Department related to allegations of discrimination, or being blocked from making strategic acquisitions (a primary path to growth) by the Federal Trade Commission due to anti-trust concerns. To compound matters, Apple’s new privacy features will likely cost Meta $10 billion in lost sales. See Katie Conger & Brian X Chen, “A Change by Apple Is Tormenting Internet Companies, Especially Meta,” NY Times, Feb 3, 2022. Is that itself a potential antitrust violation? Expect no one in Washington to care.
There is an entire “Lawsuits involving Meta Platforms” Wikipedia page. The page starts in September 2004 with the film-inspiring allegations from the Winklevoss twins, one of only 3 entries for the 2000’s. The 2010’s were more active, with 32 lawsuits identified as wiki worthy. Despite only being 30% into the decade, there are already 35 lawsuits listed for the 2020’s, including 16 in 2022.
Given the unprecedented valuation drop–again, largely attributable to an unfavorable regulatory environment’s impact on earnings potential–and a general economic slowdown that has rocked big tech, it is completely understandable if Meta executives would prefer to slash what must be astronomical legal bills in order to allocate increasingly scarce resources to the technical and marketing challenges of their massive bet on the Metaverse, currently costing ~$3 billion per quarter. See Nelson Wang, “Facebook Parent Meta Loses $2.8B on Metaverse Division in Q2,” Coindeck, July 27, 2022.
The business implications of a $12b per year—that’s billions with a “b” —investment make traditional legal spend metrics look like chump change. Saving $100m on legal would be impressive but also only 0.8% of the annual Metaverse investment and 0.1% of Meta’s FY2021 revenue. Critically, as shown in the below chart, legal considerations appear far more material to the success of the Metaverse than 0.8%.
Work not getting done, business units bypassing legal
Given flattening/declining resources, the insourcing allergy, and exploding regulatory complexity, 75% of general counsel recognize that growth in workloads will outpace budget. See Cornelius Grossman, “The General Counsel Imperative: how do you turn barriers into building blocks?,” EY, Apr 7, 2021 (citing results from EY survey).
A persistent delta between work to be done and the resources available will result in work not being done.
In the normal course of business, the most conspicuous impact of insufficient legal resources is lengthened response times resulting in reduced business velocity (Dept of Slow). Being underwater can also amplify legal’s risk aversion due to the lack of time to perform analysis and engage with stakeholders (the Dept of No; because “no” feels like a safer default setting). While manifesting as a superficial restraint on business activity, the natural friction of insufficient legal support can actually increase the business’s overall risk profile because unresponsiveness further activates the natural desire to circumvent legal in the first instance.
Despite negative internal perceptions, calibrated legal expertise becomes more valuable with every passing regulation. And the most critical impact of insufficient legal guidance is the accumulation of operational risks. When balls get dropped, bad things happen, eventually.
As latent regulatory risks become persistent business pain, sophisticated corporations respond. They begrudgingly direct more fiscal resources to the strategy-enabling expertise required to better navigate an increasingly law-thick world.
But many of the newly allocated resources are not routed to the law department, which is viewed as having not been up to the task in the first instance.
While I regularly cite the inconsequential nature of legal spend as a percentage of revenue and the resulting microscopic ROI of “savings” on legal, I am convinced the spending numbers are significantly larger than reflected in the survey data. Rather, extensive market listening (LexFusion met with 435 law departments last year) suggests that corporate spend on what would be traditionally considered legal advice is much higher than what is reported because what is reported mostly comes from law departments, which represent a shrinking share of legal-related spend.
Unfortunately, I lack the stats to fully substantiate our impressionistic sense. But law departments, too, are in the dark. Nonetheless, they know some of what they don’t know with respect to the other functions whose remits involve a substantial level of navigating legal complexity. From the same ACC 2022 Law Department Benchmarking Report that found the 0.03% savings impact of legal operations, consider the following graphic:
On the one hand, I don’t care whether a particular chief legal officer or general counsel expands their corporate dominion. On the other hand, none of this is about the law department, let alone any individual therein. The raison d’etre is, as always, the business.
Redundancy can increase the reliability of a system. Redundancy, however, comes at a cost. My core concern is not the stature of law departments but the creeping complicatedness of business.
Complicatedness as a general business problem
Several years ago, some very talented business consultants at BCG started publishing some very useful analyses on the business problems of the modern world, particularly as applied to very large organizations that are attempting to do business on a global basis.
The core issue underlying their analysis is “complicatedness,” which they define as the increase in organizational structures, processes, procedures, decision rights, metrics, scorecards, and committees that companies impose to manage the escalating complexity of their external business environment.” Reinhard Messenböck, et al., “How Complicated Is Your Company?,” BCG, Jan 16, 2018.
Specific to the present discussion, “organizational structures and processes typically increase in complicatedness as new units and functions arise.” Most critically, “complicatedness hampers growth by slowing innovation and the deployment of new products and services. And it cuts margins by injecting inefficiency and cost into operations.” Id.
Counterintuitively, the size of an organization does not appear to be an influential factor. Completely intuitively, greater levels of regulation do correlate with higher levels of complicatedness. As the BCG consultants characterized it, organizations that “face daunting levels of external complexity … seem to have mimicked that complexity within their own organizations.” Id.
BCG is responsible for the landmark analysis of complicatedness, the fabulous Six Simple Rules (2014)(h/t to the fabulous Jae Um for putting it on my reading list). When they released the book in 2014, BCG calculated that while business complexity had increased 6x, organizational complicatedness had increased 35x—i.e., unchecked, internal complicatedness tends to increase at a multiple of external complexity. The resulting demotivating labyrinth is one of the reasons, as I once observed far less eruditely, that “[e}very institution, no matter how venerable, looks like a goat rodeo from the inside.” Flaherty, “The Legal Department Goat Rodeo,” 3 Geeks, July 15, 2018.
One driver of complicatedness is that those responsible for creating it—and addressing it—are often insulated from experiencing it:
Every organization’s top leaders have a substantial impact on its degree of complicatedness. Yet as a rule, they fail to perceive just how much their company’s complicated activities, processes, and interactions reduce employee productivity. They are not regularly in the trenches, so they rarely feel the painful effects of complicatedness.
Moreover, they typically don’t need to live by the many rules and procedures they create and instead can work outside the systems that apply to their workers. Our findings suggest that many managers take little responsibility for how complicated life is for their employees. Many of them even believe they are quite successful at reducing it.
But if company leaders and senior managers don’t have an accurate view of the degree to which complicatedness affects their companies, then any effort to simplify it becomes much more difficult.
Messenböck, “How Complicated is Your Company?,” supra.
[Editor’s note: If you think that all this focus on complexity is just MBAs trying to sell their services, consider Post 321, which reviewed Joseph Tainter’s seminal book, The Collapse of Complex Societies (1982). Although complex societies generate massive increases in output, the process of always getting more from less necessarily requires ever greater levels of planning and ingenuity. Eventually, the costs of one more unit of “solution” outweigh the benefits. With no more options to save itself, the polity collapses under its own weight. To me, it seems eerily similar to BCG’s complicatedness thesis. wdh]
Another driver of complicatedness is that organizations do not typically converge on optimal outcomes but, rather, choose satisficing paths of least resistance. Herbert Simon won the Noble Prize in Economics for developing the concept and explained in his acceptance speech, “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world.”
In a simplified world, it is less burdensome in the immediate to add new functions to address new problems than it is to properly transform, align, and integrate existing functions. But in a realistic world, new functions, like all functions (in no way limited to legal), focus on fulfilling their narrow mandate to solve for a specific local optimum, often at the expense of the global optimum, including at the cost of increased complicatedness.
When the law department does not appear to be on top of legal issues that impact the business, the business to stand-up a separate function to address issues that need addressing–at least that is how I make sense of the growing number of corporate units that touch on legal but stand on their own. .This may in fact be an operationally sound decision—specialization is foundational to productivity at scale—but requires deep work to ensure alignment and avoid the trap of complicatedness that comes with adding another layer. See Herman Vantrappen & Frederis Wirtz, “Making Silos Work for Your Organization,” Harv Bus Rev, Nov 1, 2021.
Unfortunately, the strongly siloed nature of in-house legal work is a root cause of the predicament in which we now find ourselves.
Steering clear of labels placed on people
Finally, it is time to set up the actual LexFusion Legal Market Year in Review.
If there is one thing I have learned by listening to, and trying to help my clients, it is that no one is a caricature. Even those who give caricatures credence are rational actors. People behave rationally according to the incentives and constraints of their context. In-house professionals are people. If their behavior appears irrational to us, the most probable conclusion is we lack sufficient understanding of their context.
“Not being yelled at” is an incentive. Alternatively, “being busy” is a constraint.
This context explains a substantial percentage of workplace behavior. People are busy doing that which needs to be done in order to minimize the frequency and severity of unpleasant interactions, especially with their superiors and others who hold positional authority. In most enterprises, operations (getting work done) take precedence over projects (changing what work is done, and how). As result, our professional aspirations to build proactive systems are constantly subordinated to the backlog of “real work.” This was a core observation from last year’s LexFusion Legal Market Year in Review. See Post 280 (discussing inherent tension between operations and projects).
Particularly pertinent to in-house lawyers is that “mastery” is also an incentive while “perspective” is another constraint. In-house lawyers have mastered lawyering, and this shapes their perspective. Their perspective is further informed by the narrow mandate for most law departments to operate as lower-cost, more-accessible alternatives to law firms. Law departments, and the people within them, solve for this local optimum by performing the legal work the business sends them as well, quickly, and cost-effectively as they can—i.e., just like a law firm. These professionals are busy doing what they are trained to do, what they are hired to do, and what they are asked to do. See Casey Flaherty,” Scary Stories About Our Wicked Problems,” 3 Geeks, Oct 31, 2022 (discussing the mismatch created when we’re asked to solve wicked problems).
Indeed, the joke that opened this contemplation could apply to any function. Yes, Finance is obsessed with controlling costs. Yes, Legal is militant about mitigating risks. Take either mission to the extreme, and closing shop is the conclusion. But, unchecked, Marketing will spend like drunken sailors and say things not worth the lawsuits they generate. Unconstrained, Sales will move product at a loss, make impossible commitments, and agree to terrible contracts. Et cetera. Balancing competing incentives and constraints in a large enterprise is not easy—and there is little reason to believe lawyers are outliers in this regard, good or bad.
What the lawyers do is mission-critical. It also is not enough.
Cost discipline is essential business hygiene. But, in most mature corporations, “savings” on legal are too minuscule to be meaningful, especially relative to the business impact of successfully navigating an increasingly complex operating environment.
Instead of savings, the better framing is spend optimization. Spend optimization is concerned with maximizing the yield from every dollar allocated in order to fund long-term investments that serve the needs of the business. The actual LexFusion Legal Market Year in Review (348) explores the disconnect between where investments are being made (legal labor) and where investments should be made (scaling legal expertise to enable better business outcomes).
If you’ve been paying attention and are a Game of Thrones fan, you will recognize that all the grey boxes, like the one to the right, are quotes from the show. Much of the brilliance in that wonderous piece of storytelling is how it deployed common fantasy tropes to create expectations that it then violently subverted.
Tomorrow’s Legal Market Year in Review will be more positive in the narrow sense of being more prescriptive, not merely descriptive. See Post 348. But do not hope for hope.