General counsel are expected to operate dynamically within organisations and innovate their function from a cost burden to a source of value.
The next instalment in our General Counsel insights program looks at how innovation can create cost and output efficiencies.
In-house legal departments once existed in virtual isolation from everyday commercial imperatives. They were commissioned to provide strict legal advice and litigate disputes. Organisations tended to regard them as a necessary impost, as unavoidable as the office curtains. Increasingly, however, general counsel are being expected to operate dynamically within organisations and innovate their function from a cost burden into a source of value. This is an unpredictable journey that for many lawyers will involve new technologies and business processes: automating workflows, exploring new delivery models and even participating in the occasional hackathon or ‘sprint’.
The Association of Corporate Counsel (ACC) Australia recently published its 2017 Benchmarks and Leading Practices Report as an authoritative guide for high-performing and innovative in-house teams. In mid-2017, the ACC partnered with MinterEllison to continue the conversation in two fascinating roundtables with senior ASX200 general counsel, held in Melbourne on 18 July and Sydney on 2 August. The sessions were moderated by Carmel Mulhern, who as Group General Counsel for Telstra, has dramatically reduced legal costs through time-saving initiatives such as cutting meeting hours and refocusing staff on higher-value work. But how easy will it be to transform a stubborn profession that is renowned for preferring precision to experimentation? And are the benefits worth the risks for those organisations that try?
Introducing both sessions, Mulhern observed that pursuing innovation can simply be stated as the aspiration to do things differently. In-house legal departments are like any other team; needing to constantly adapt to challenges and explore new ideas. Above all, she suggested that lawyers must be jolted to focus on the future beyond the immediate tasks clogging their in-tray.
“As general counsel, how can we do something a bit better than the way things were done before?” “Do we even need to be doing that task – or can we automate it?”
“As general counsel, how can we do something a bit better than the way things were done before?” she asked. “Do we even need to be doing that task – or can we automate it? Perhaps we can create a new tool for clients to use themselves. Every day, the world-class legal teams are doing something a bit differently to what they were doing yesterday.”
Importantly, in a profession where some lawyers are challenged by technology while others are nimbly using the latest apps, innovation does not necessarily involve achieving a profound technological breakthrough. Digital capabilities such as data analytics, artificial intelligence, and cloud-based client portals and workflow tools are important enablers. However, innovation is a mindset that transcends the latest IT fad. Above all, in a profession historically focused on words and language, it is about developing the metrics to demonstrate continuous improvement to the rest of the organisation.
The need for legal departments to control costs is undoubtedly the chief driver of change. Since the early 2000s, the popularity of hiring in-house lawyers has soared. The ACC has found that the average total legal spend for Australian and New Zealand in-house legal departments rose from $3.1 million in 2008 to $4.3 million in 2017. Intriguingly, the fastest growing area of expenditure involves seeking complementary support from outside firms. External legal spend rose by 30% from $1.8 million in 2015 to $2.6 million in 2017 while internal legal spend rose by 15% from $1.44 million to $1.7 million.
Today, as businesses face an uncertain global political and economic environment, it is not surprising that in-house legal departments are coming under pressure to rein in headcount and shoulder more workload with less resources. According to the ACC’s 2017 survey of Australian and New Zealand in-house lawyers, 60% admit to feeling pressure to reduce legal costs, while 25% report pressure to minimise cost increases. Nonetheless, this is not yet translating into a widespread productivity drive. Among legal departments, more than three-quarters of average in-house internal spend is still devoted to lawyer salaries and related costs. This compares to just 4% on technology and 3% on workflow improvements.
Aligning with the organisation
In its Benchmarks and Leading Practices Report, the ACC identified the importance of in-house lawyers strategically aligning with the organisation’s overall key performance indicators (KPIs). This increases the likelihood of general counsel exerting influence within the C-suite. As one roundtable participant observed,
“What’s important to the Chief Executive Officer (CEO) should be what’s important to the Chief Legal Officer”
If the CEO wanders over into my office, that’s important. If he’s got a worried expression on his face, that becomes my problem immediately. Just solving the issues that the CEO is concerned about can score the legal team valuable points.”
Citing her experiences at Telstra, Mulhern noted that her department’s innovation activities are inspired by their ambition to be a “world-class legal team”. In particular, she described an annual performance management process in which senior leaders such as the CEO complete scorecards committing to specific goals during each quarter of the upcoming financial year, followed in lockstep by their direct reports. “Then we all sit in a room together and swap scorecards to make sure we are in alignment,” she said. “I might discover that the top priority for the head of operations is finishing Project X – if that’s the case, I make sure my best operations lawyer is assigned to it.”
The work of general counsel is largely qualitative rather than quantitative. Accordingly, innovation for legal departments must begin with getting to grips with their own cost drivers and developing meaningful metrics. One roundtable participant recalled an analyst from her organisation’s marketing group being seconded to reorganise the legal department. “A really critical part was helping us to talk in the language of the business,” she said. “Previously, during our annual appraisals, we’d say we helped this client or worked on that transaction. However, this person taught us to demonstrate through metrics and graphs and dollars the precise value we had contributed. When we first did that, our Chief Financial Officer turned to us and said, ‘Who are you people? You’ve totally turned a corner’.”
Streamlining low-value work
In-house legal departments have wide responsibilities, ranging from advising on high-stakes mergers and acquisitions to correcting typos on contracts. According to the ACC’s survey, Australian and New Zealand in-house lawyers spend about half of their time on work that is of low importance or low value (however urgent). By contrast, new digital legal capabilities promise to liberate in-house lawyers from tedious, repetitive tasks such as document discovery and approving standard form contracts. As Mulhern noted,
“We’re being asked to do more with less. I’m trying to flip that on its head to do less with less”
She added that moving lawyers up the value chain is essential to keeping work stimulating. It will also allow young lawyers to refocus on making the creative and strategic contribution to their organisation “that they probably went to law school for”.
Already, advances in data analytics and artificial intelligence are assisting lawyers to review large batches of procurement contracts and financial statements. This could help to potentially identify any red flags and ascertain whether the company is obtaining value for money. Eventually, this ability to detect patterns in structured and unstructured data will conceivably make it possible to instantly extract the relevant legal precedents from lengthy judgments or predict the outcome of a case that is before the courts.
Automating contracts is an especially fast-developing area of innovation. Telstra, for example, is saving its in-house lawyers thousands of hours a year by handling confidentiality agreements online. At MinterEllison, award-winning solutions such as Taskflow are being used to standardise processes for high-volume, repetitive legal matters – incorporating embedded document automation and digital collaboration platforms. Another roundtable participant noted that his business had recently introduced an online system to generate standard terms and conditions. “We had hundreds of different contracts, so if anyone asked about one particular contract, the answer used to be completely different each time,” he said.
Finally, smart contracts represent a novel mechanism to reduce paperwork and administration. These are digital agreements that execute automatically based on computer code – for example, through funds being deposited into a vendor’s bank account by a specified date.
Lawyers will always need to possess a basic understanding of the supporting technologies they use, consistent with their duty to deliver professional services competently. Yet there is no escaping the fact that introducing faster ways to process low-value work will require in-house legal departments to relax their personal attention to each document. This means developing a keen appreciation of the company’s appetite for risk.
During the roundtable sessions, the sentiment was frequently expressed that organisations cannot expect to operate in a risk-free environment. While businesses often experiment by putting new products on the market, they are less willing to take legal and operational leaps of faith even though only relatively few transactions wind up in litigation.
Mulhern cited Telstra’s experience of instituting delegated signing authority for contracts that are in pre-approved templates or have already been reviewed by the legal team. To cope with the huge volume of legal documentation coming in, the legal department is also pushing responsibility for low-risk items back to individual business areas.
“Risk is still a very high priority for us, but I challenge my team not to think of risk from a defensive bunker mentality – as in ‘we can’t do this’ – but to identify the risk as well as the mitigating solution”
Taking on risk is a necessary part of doing business. Ultimately, if the company makes an informed risk decision that is beyond what you expect, that’s their decision – unless it’s breaking the law.”
Sensibly defining their own scope is another important task for legal departments facing pressure to limit external spend. The ACC recommends that in-house teams establish a clear services charter that helps them make optimal use of scarce resources. This should identify what legal work they conduct, what work they outsource and to what extent legal matters are pushed back to other parts of the business. “We still do more than we probably should,” Mulhern said. “We’re trying to be better in saying, ‘We don’t look at that’ or ‘That’s not even a legal issue, that’s just grammar’.”
Another roundtable participant observed that in his organisation, in-house lawyers have set clear parameters with other heads of the business. “We say, ‘This is the top priority where legal will lead it and own it. This is the second priority where legal will have significant involvement but you as the business will lead it. Here’s the third priority, where we will help you as and when needed, but it’s your show. And then there’s ‘no-touch’. We might introduce you to lawyers, and help you manage that relationship, but you are the subject-matter expert so liaise with the lawyer and let us know if you run into trouble’.”
Mastering project management and outsourcing
A further best practice for in-house teams is having clear workflow and management protocols that allow legal issues to be unbundled into a series of tasks and, where necessary, outsourced.
Organisations once chose between retaining assignments in-house or engaging an external law firm. However, the sharing economy has resulted in a proliferation of alternative legal service providers. The legal industry is now a buyer’s market, with low-cost options extending to legal process outsourcing (LPO) firms and so-called NewLaw start-ups specialising in client-convenient delivery methods and cutting-edge IT and process innovation. The ability to purchase standardised legal documents on platforms such as LawPath, LegalVision and LegalZoom is ideal for smaller businesses with lower legal budgets and less complex legal needs. A recent Commission of Inquiry report by the Law Society of New South Wales noted that the online legal services industry in the United States (US) is already worth US$4.1 billion, having materialised in barely a decade.
Striking the right balance between insourcing and outsourcing requires legal departments to have a keen nose for where an alternative provider may offer the best value. Accessing third-party managed document services and e-discovery can be advantageous where the priority is cheaply churning through huge volumes of paper. Nonetheless, commoditised tasks must be rigorously scoped and managed to ensure they meet quality, time and cost objectives, and that clear communication occurs between relevant parties.
Mulhern noted that external lawyers should still be considered for more specialised matters.
“Where are your team’s skills? Are they suited to a particular job, or would it be better to break it into pieces?”
Sometimes our external lawyers can see the pain points better than we can.” She added that another benefit of engaging alternative providers is paying fixed fees or discounted rates for bulk work – a far more efficient option than billable hours.
Creating new innovation structures
In the years to come, Australian general counsel will likely be joined in the organisational hierarchy by legal operations managers with specific business expertise. These individuals will have overall control of the department’s budget, as well as responsibility to project manage tasks, negotiate deals with alternative service providers and incorporate digital technology. The trend of separating the business of legal services from substantive legal work is particularly advanced in the US where job titles such as ‘legal operations analyst’ and ‘director of legal administration’ are common. A recent survey showed that two-thirds of US Fortune 500 companies use legal procurement professionals to drive down in-house costs.
Recounting their own organisation’s experiences, roundtable participants were divided on the merits of making a single person responsible for innovation or even creating a separate standalone function. One attendee observed that imposing demands on the legal team from on high “has not worked particularly well in the past”. Instead, her team prefers a more organic arrangement where teams earmark areas for improvement.
Another attendee agreed that relying on one person to drive innovation “leaves the rest of the team to think that’s somebody else’s problem, not mine”. However, she cautioned that even collaborative approaches need to be well defined. “Every Thursday afternoon, we were meant to have two hours where you’d go away and think about doing things differently. That was fine for a while, but then it was like, ‘Well, what are we doing here?’” she said. “Unless you’ve identified the problem you’re trying to solve, you tend to talk in the abstract. It felt like a talkfest. My experience is that even the structures of how you to try to innovate need to be susceptible to the innovation because otherwise you don’t change anything.”
Reforming the culture
At both roundtables, there was widespread agreement that – more than any single solution – building innovative legal teams requires sweeping cultural reform to encourage lawyers to think creatively and be unafraid of making mistakes. Partnering older lawyers with young graduates who are savvier about technology was seen to be particularly beneficial. Mulhern cited Telstra’s experience in running eight-week sprints where lawyers of all seniority levels brainstorm ideas collectively. Most lawyers were up for the challenge, while a few needed to be coaxed along.
Of course, the engrained personality traits of general counsel that make them so successful in most areas of their work represent the biggest innovation hurdle of all. Encapsulating the mood at her event, one attendee summarised the urgent challenge for the future: “IT departments talk a lot about failing fast, and learning from failure. But lawyers don’t like failure, they like perfection. As a profession, we need to have a greater risk appetite otherwise we’re simply not going to be able to keep up with all the change that’s coming.”