“Let my dataset change your mindset” – Hans Rosling, TED Talk
The Australian and New Zealand in-house legal community stands at a pivotal point in the history of the legal industry. As recently as the early 2000s, when a company had a legal need, it essentially had two choices: first, to turn to its in-house legal department and second, if needed, law firms were engaged. Today, however, that same organisation has a plethora of legal service providers to choose from. It is also hard to escape the fact that corporate legal departments are under increasing workload and time pressures with limited resources and budgetary constraints in a legal environment that is increasingly complex.
The 2017 Benchmarks and Leading Practices Report sheds light on some of these issues. Two-thirds (60%) of ANZ in-house lawyers reported pressure to reduce legal costs while one-fourth (25%) reported pressure to minimise cost increases. As pressure on external legal expenditures mounts, the internal pressure to reduce internal legal spending has also intensified. Nearly 80% of ANZ in-house lawyers reported they are under pressure to reduce external legal spend while close to half (49%) reported they are under pressure to reduce spend on internal staffing. Most of the cost pressures are driven by general cost reduction program within the organisation (67%), operating environment / general market conditions (58%) and economic conditions causing the business to operate more cautiously (32%).
In the face of the mounting pressure on legal expenditure, ANZ’s corporate legal departments have seen their total legal spend increased from $3.16m in 2008 to $4.30m in 2017. A breakdown of this legal expenditure reveals external legal expenditure outstripped internal legal expenditure as legal bills ballooned to $4.30m in 2017. Some of this increase is contributed by a greater proportion of unbudgeted external legal expenditure (6% reported spending $1m+ on unbudgeted external legal spend compared to 1% reporting an unbudgeted internal legal spend of $1m+). Recognising the need for better cost certainty, only 1% (compared to 7% in 2015 and 4% in 2012) of general counsels reported that charging by the hourly rate is the best approach.
This article highlights some of the key findings from the 2017 Benchmarks and Leading Practices Report, and introduces a framework developed to help general counsels future-proof corporate legal departments. So, let’s have a look at the dataset.
Improving the role of legal in business
General counsels have inherited a business model with a remedial approach to legal issues, relegating the legal function into fire fighters to put out legal fires with not much time allocated to strategic issues. This is changing as a paradigm shift is underway, high performing corporate legal departments are shifting from a remedial to a preventative approach to legal issues. Our study reveals high performing corporate legal departments have a clearly defined role in the business that promotes strategic alignment by setting KPIs in line with organisational KPIs. Once the role of the in-house legal department is crystallised, it is important for the head of legal to have direct access to the c-suite. This is an important indicator of the corporate legal department's ability to influence the organisation.
The 2017 report reveals 74% of ANZ’s general counsels (up from 65% in 2015) believe their CEO or equivalent would consider corporate legal departments to be well aligned - the legal priorities are set in line with organisational priorities. In addition, 67% of corporate counsels report that the legal team’s KPIs are aligned with the organisation’s KPIs, although this represents a decrease from 75% in 2015. Meanwhile, direct access to the c-suite has improved as 50% of the respondents’ head of legal report to the CEO or equivalent. See infographic below for a snapshot of these results.
Defining and refining the legal department’s service portfolio
High performing corporate legal departments excel at instilling the right demand management principles to satisfy the internal constituents and to manage legal costs. Our research reveals high performing in-house legal departments have a well-defined service portfolio that sets out their service levels on the type of legal work they conduct, type of work they outsource and have an ability to focus on what is strategically critical to the organisation. The service provided by high performing in-house legal departments are also technology enabled.
The 2017 report reveals that 82% of ANZ’s corporate counsels (down from 85% in 2015 and 95% in 2012) will determine whether external expertise is required when determining whether matters should be insourced or outsourced. In addition, respondents reported their heads of legal spend 51% of their time on high importance / highly strategic work that is urgent. The in-house legal community continue to be technology laggards, with only 4% (or $68,000) of the $1.7m internal legal budget allocated to technology. See infographic below for a snapshot of these results.
Fine-tuning the legal department’s operating model
Legal operations has become du jour in the in-house legal community. For high performing corporate legal departments, an optimal operating model is characterised by the adoption of a formalised workflow management system to automate service and legal project management to dissect matters into its constituent components to ensure the right internal or external resources are leveraged. This will enable the in-house legal function to adopt flexible work arrangements to create a leaner function that utilises secondment service during peak periods.
The 2017 report reveals only 14% of corporate legal departments in ANZ (an improvement from 8% in 2015 and 5% in 2012) adopt specialist legal workflow software based systems. About two-thirds (61%) of the respondents reported that they do not have formal workflow management systems. Furthermore, only 16% of in-house legal functions use project management in their practice management system. Meanwhile, 32% of in-house legal departments use contract labour (insourced or outsourced). This points to a need to improve legal operations at ANZ’s corporate legal departments. See infographic below for a snapshot of these results.
Optimising the legal department’s sourcing model
Unlike other support functions in the corporate sphere, the legal function has always embraced outsourcing; this is best illustrated by the fact that 60% ($2.6m) of the $4.3m legal wallet is spent with external legal service providers. For high performing corporate legal departments, a sophisticated sourcing model uses a triage system to strike the right balance between insourcing and outsourcing components of the legal work and to determine the optimal mix of external legal service providers. It also means the pool of external legal service providers expands beyond law firms to NewLaw firms, LegalTech firms and Big Four firms. High performing in-house legal departments also adopt alternative fee arrangements for cost certainty and to maximise value.
While the study does not ask whether corporate legal departments adopt a triage system, it asks respondents whether they adopt procurement management software. The 2017 report reveals only 14% of ANZ’s in-house legal departments (an improvement from 8% in 2015 and 5% in 2012) adopt procurement management software. The study also reveals 78% of corporate legal departments (an improvement from 76% in 2015 and 77% in 2012) are outsourcing matters to different providers based on type of work and cost. Adoption of alternative fee arrangement is also on the rise as 40% reported using such arrangements (an improvement from 34% in 2015 and 28% in 2012). See infographic below for a snapshot of these results.
Corporate legal departments of the future
In a more-for-less world, the new reality for general counsels and in-house lawyers is the increased pressure to reduce legal spend and the need to work smarter. So what can general counsels do to future-proof their corporate legal departments? The insights on legal departments of the future can already be found in this study. The following is a framework that sets out the role of the legal function in the business, the legal department’s service portfolio, operating model and sourcing model - crucial cogs within the in-house legal function machine.
The self-diagnostic tool is the first place to start for in-house lawyers looking to transform the corporate legal department. For general counsels and in-house lawyers reading this article, you can use this tool to take stock of where your corporate legal departments are today and to identify crucial deficiencies requiring improvement. As the late Hans Rosling of the TED Talk fame once put it, “the first way to think about the future is to know about the present”. High performing corporate legal departments are those that outperform on all attributes, whereby their ratings are skewed towards the right of the scale.
The insights from this paper is derived from Association of Corporate Counsel Australia’s 2017 Benchmarks and Leading Practices Report.
Eric is a co-author of the 2017 Benchmarks and Leading Practices Report. Eric works with senior management in law firms on corporate strategy, mergers & acquisitions, market entry strategy, Asia strategy and business model innovation across Australia, New Zealand, Hong Kong, Singapore, USA and other major markets in the Asia-Pacific region.