Articles Posted in Showing Value

Some general counsel might conclude that if they undertake an innovative, daring, and massive restructuring of their economic relationship with outside counsel, they should keep it quiet. One reason might be that a competitive advantage should not be bruited about. Another reason could be caution; new ideas often go blooie, so why advertise a potential misstep?

Not so with Amy Schulman, the general counsel of Pfizer, who seems to have held back nothing in Corp. Counsel, Vol. 17, Jan. 2010 at 66. The article pours out facts, dates, and specifics. It is a recipe for one technique to “slash its domestic legal spending by 15-20 percent.

Here is the whispered question. Is Pfizer altruistically becoming the poster child for change? Is Schulman courageously trying to drive industry-wide change?

In the thoughtful General Counsel Survey 2009 from the Belgium-based consultants, FrahanBlondé (at 19), the authors discuss how general counsel decide the services their departments should provide as compared to the services external counsel should provide. They distinguish between “core and non-core,” on the one hand, and “core mission” on the other.

We may be talking semantics here, but someone could say that core services are the most common ones needed by the company (See my post of May 23, 2008: core competence with 12 references.). Hamburger and french fries are core.

In contrast, services that most advance the “core mission” of the company could be cutting edge, long-range, and much less frequent (See my post of Dec. 23, 2009: Carillion legal staff focus on four core business units.). Some filet mignon and double-baked potatoes are core mission. The report suggests that the term applies to work that only in-house counsel can do, but I find that hard to follow, since many companies have no in-house counsel and get along just fine with outside counsel.

An article in Legal Strat. Rev., Winter 2009/10 at 24, describes several management points made by Richard Tapp, company secretary and director of legal services at Carillion plc. The nearly $10 billion company has 27 in-house lawyers focused specifically on “the company’s four core business areas of corporate, construction, private finance and outsourcing.” Tapp is very clear about the need to restrict the scope of responsibilities of his team to those primary client needs.

All legal services outside the boundaries of the four core areas are “diverted to one of the specialist firms or legal services providers on the Carillion Legal Network. All general counsel should discipline what services the legal team provides on its own and build deep capabilities in those areas. Make the core but buy the rest.

Int’l In-House Counsel J., Vol 2, Summer 2009 at 1188, has an article about the plight of UK in-house counsel, who, the author claims, are too commonly “still perceived as draftspersons because traditionally that is what lawyers did” – their “job is to read and draft contracts.” The author, a senior lawyer at Pitney Bowes in the UK, repeatedly claims that US in-house counsel have shed that pejorative straightjacket and attained exalted status at the right hand of executive managers.

Maybe; sometimes. At the root, many in-house attorneys spend much of their time with contracts. For example, at the 27-lawyer department of Carillion, the chief lawyer notes that “The legal department’s time is primarily taken up by one-off, often bespoke, contracts for the group’s external clients …,” as reported in Legal Strat. Rev., Winter 2009/10 at 24.

The role is hardly that of a passive scrivener, an over-paid amanuensis. Contracts let companies buy, sell, and compete, so in-house counsel are profoundly in the fray.

In a reversal of the normal argument that external lawyers are more objective and forceful since they can walk away, Int’l In-House Counsel J., Vol 2, Summer 2009 at 1344, puts an opposite spin. In-house counsel are not muzzled and tethered by their employment position (See my post of Jan. 22, 2009: objectivity of in-house attorneys with 11 references.).

“We note that the most in-house legal do not have to compete for legal work (at least not in the way that external counsel do). Furthermore, the in-house counsel is typically paid a salary. Being in a salaried position and employed, the in-house counsel has some security of tenure, a security that is generally not available to external counsel. This can allow the in-house counsel to confidently give legal advice, even unpopular advice, secure in the knowledge that providing such legal advice will not necessarily compromise the in-house counsel’s income stream.”

The argument for internal objectivity, because of employment status, may stand up better in countries with fewer at will employees. Still, the notion that in-house lawyers are hobbled and obsequious rankles, and I doubt that outside lawyers are any less pliable under pressure.

An attitude I warmly applaud, the speaker was Elisse Walter, a Securities and Exchange (SEC) commissioner. She was interviewed before she spoke at a recent conference. Her point was that in light of Sarbanes-Oxley and heightened regulatory scrutiny, companies should not pare back on activities “that are not profit centers but rather are functions, like the legal counsel that keep you on the straight and narrow.” The remark is in the ABA J., Vol. 95, Dec. 2009 at 28.

It is too rare to find high-level support for the vitality and contribution of the internal legal function (See my post of Feb. 23, 2009: Google CEO — “have a large number of lawyers.”). The best praise for a legal department comes from the CEO (See my post of Oct. 28, 2009: with 27 references.).

The Harvard Bus. Rev., Vol. 87, Dec. 2009 at 72, mentions Royal Philips Electronics and that it is “capitalizing on the more than 60,000 patents in its portfolio to earn hundreds of millions of euros annually from licensing.” I have mentioned patent licensing fees in several contexts (See my post of April 27, 2008: patent licensing by American Express; Sept. 21, 2008 #4: Director of IP licensing at 3Com; Oct. 7, 2008: three strategic objectives of an IP group; Feb. 24, 2009: intangible assets of a company drive lawyers per billion; and Sept. 21, 2009: Qualcomm, Philips Electronics and Thompson flourish, but few others with patent licensing.). The HBR author claims that “Many businesses recover from 10% to 20% of their annual R&D spending in this way.

If R&D spending is six or seven times legal spend (See my post of Dec. 3, 2009: benchmark data on R&D intensity.), that means licensing patents for “many businesses” almost covers the entire legal budget! With that benchmark in mind, general counsel might devote more attention to generating revenue. The effort, however, increases workload and requires much coordination with R&D, marketing, and business units.

Schumpter’s column in the Economist, Nov. 14, 2009 at 80, speaks to the “cult of the faceless boss.” It discusses some of the reasons for why there are so many bland CEOs who mouth platitudes, keep their heads down, and make no waves. But it concludes that “the corporate world needs its flamboyant visionaries and raging egomaniacs rather more than its humble leaders and corporate civil servants.”

If blandness besets many CEOs, even more so does it grey out general counsel. A subordinate should not outshine the boss, you might say. But even within the limited sphere of the legal industry, we could benefit from more general counsel with star power who take tell us what they think that differs from the soporific susurrus of tame technocrats. Being a lawyer squashes them into low profiles. As Schumpeter vividly writes, “Few people pay any attention to the identikit bosses who keep popping up to hum their corporate muzak about doing well by doing right.” Where are the energetic, outspoken chief legal officers daring to transform the legal world?

“A particular bugbear of mine is the application of financial metrics to nonfinancial activities. Anxious to justify themselves rather than be outsourced, many service functions (such as IT, HR, and legal) try to devise a return on investment number to help their cause. Indeed, ROI is often described as the holy grail of measurement — a revealing metaphor, with its implication of an almost certainly doomed search.” This view comes from the Harvard Bus. Rev., Vol. 86, Oct. 2009 at 99-100, as part of an article about performance measurement.

Often have I written about the slipperiness of calculating a return on investment for specific programs, but never about the ROI for the legal function as a whole (See my post of Oct. 22, 2008: ROI with 17 references.).

A fortiori, if individual initiatives can’t support an ROI calculation, neither can the entire department.

General counsel may seek to drive some revenue as a result of their department’s patent licensing efforts, but the imagined returns are four leaf clovers. An article in MIT Sloan Mgt. Rev., Vol. 51, Fall 2009 at 72, states that for only a few companies does patent licensing pay off. True, Qualcomm, Philips Electronics, and Thompson generate from $500 million to $2 billion per year in patent licensing. They are exceptional leprechauns. “Indeed, 99% of patent-licensing revenue in the United States is generated by companies that own 40% of all U.S. patents; that is, the remaining 60% of patent holders receive just 1% of the revenue.”

Patent licensing only benefits a portion of companies (See my post of Dec. 31, 2007: intellectual property licensing with 12 references.). Apparently it is blarney to think it will be the pot o’ gold for general counsel who would like to move their department more toward a revenue generator. (See my post of April 27, 2008: profit center with 18 references.).

More generally, the article points out that “Siemens … and Proctor & Gamble Co., for example, recently reported that they use a mere 10% of their patents but nevertheless pay millions in annual renewal fees for the remaining 90%.” Patent activities remain problematic in terms of profit.