Articles Posted in Showing Value

OpRisk & Compliance, Vol. 10, April 2009 at 29, makes the point that risk management is not like compliance and it is not like audit. One person interviewed for the article offered this view: “The other two [compliance and audit] are about policing. They are about looking backwards and ticking boxes. But risk is forward-looking and is a partnership with the business.”

The legal function should also be forward-looking and aligned with clients, not reactive and “sweeping up after the elephants” (See my post of April 15, 2006: the metaphor used by one general counsel.). In-house lawyers who are shunned as “police” do a disservice to their companies. Partners, not police, I say (See my post of March 23, 2008: risk management with 18 references; Nov. 22, 2008: “control functions”; and Jan. 2, 2009: don’t charge legal with responsibility for risk management.).

By guest author Jeffrey M. Kaplan

How would your compliance and ethics (C&E) program fare if evaluated under the Department of Justice’s corporate criminal charging standards or the Federal Sentencing Guidelines for Organizations? This one-minute self test – based on applicable legal standards, best practices and lessons learned from major C&E failures – may give you a sense of the likelihood of “passing” what could be a life-or-death test for your company.

1. Does your board oversee compliance with key substantive areas of law (e.g. antitrust)?

Whirlpool “has more than $4 billion of new ideas in its innovation pipeline,” according to an article in talent mgt., Feb. 2009 at 46. The rest of the article looks mostly at how the company has fused technology and talent management, but my thought was “This is certainly one way to quantify the value of the patent lawyers at Whirlpool.

My next thought was, “How did Whirlpool come up with such a figure?” How can it say what its patents pending and its invention disclosures will eventually commercialize and bring in as revenue? I have written to the author but heard nothing back about Whirlpool’s methodology April 12, 2006: three accounting methods to value a patent portfolio.). However they arrived at the figure, it certainly makes the patent group look like a bargain.

Four stages to describe the contributions of internal and external counsel make up the heart of a recent report: the legal value chain. The Executive Summary for “Leading the Way to Value in Legal Services,” a 35-page thought piece from Global Leaders in Law (See my post of Dec. 2, 2008: formation of Global Leaders in Law.), frames its analysis around four sources of value.

One is “service value,” with its focus on optimal service delivery. Next is “expertise value,” which brings to bear “risk management specialist knowledge and expertise.” Third on the value chain is “commercial value,” emanating from “understanding and enabling the business,” followed by “leadership value,” which means “driving commercial value and acting as a thought leader for the business.”

The five-page Summary amplifies each of these links in the legal value chain and emphasizes various measurements and other attributes of them. You can get a copy and study it from the link above.

“Value from external advisers can be dependent on the quality of instruction from General Counsel.” I agree with this quote from the Executive Summary for “Leading the Way to Value in Legal Services,” a recent report issued by Global Leaders in Law (See my post of Dec. 2, 2008: formation of Global Leaders in Law.).

If in-side counsel were strict in their instructions, if they carefully defined what they want done by the firm and in what manner and with what deliverable, the firm that conforms to the instructions should be deemed to have delivered value. It did what the client told it to do.

If the value falls short of the client’s expectations, it either means the firm didn’t follow clear instructions or the client held from inflated or unrealistic expectations.

A large legal department has claimed savings of tens of millions in a year by an interesting calculation. The calculation starts with the total hours billed to clients by the department’s timekeepers (both lawyers and paralegals). [Yes, the department makes its professionals track their time and charge it to clients.]

Those hours billed totaled what the department states are its internal costs. Simple division shows that the blended rate was about $200 an hour, meaning that lawyers alone were likely to be around $250 an hour.

The interesting twist is that the department matches its internal hours worked to the hourly rates of outside counsel and paralegals at what they deemed to be equivalent levels. By doing so, the department has made much of the claim that if the company had used law firms to do the same amount of work, the company would have paid scores of millions more. Stated differently, the differential between the blended hourly rate of its law firms and its internal, comparable rate, is huge.

Some 240 general counsel responded to a survey conducted by FTI Consulting, the results of which are in Corp. Bd. Mbr., Vol. 12, 2nd Quarter 2009 at 50. When asked what area of risk their company most needs to work on, 45 percent of the general counsel picked “Understanding operational risk.” Another 18 percent of them picked “Understanding financial risk.” In the same survey, around 310 board members gave operational and financial risks 31 percent of their votes each.

By implication, bet-the-company litigation – the most cited legal risk – is not perceived by top lawyers and directors as nearly as dangerous as operational and financial risks. Then again, perhaps “operational risks” includes the litigation and law-related tar pits companies step into.

“The role of in-house lawyers has generally been less pronounced in large Asian corporations than their American and European counterparts. Relatively few companies have full fledged General Counsel, with the top legal role frequently filled by a vice president or director instead of a senior-level executive.”

Corp. Counsel, Vol. 16, June 2009 at 35, honors Kim Hyun-Chong as “what may be the most senior in-house legal position to date at a major Asian Corporation.” Samsung Group, the world’s largest electronics company, appointed Kim as its president and chief legal officer, reporting directly to the CEO.

Few and far between are the posts here about legal departments of Asian companies; perhaps the dragon will start to roar (See my post of June 13, 2006: Haier of China; April 27, 2008: growth of Haier’s department to 40 lawyers; May 5, 2008: NEC’s North American legal team; Dec. 11, 2008: Synnex of China; Feb. 12, 2009: Samsung’s GC in Europe; Jan. 23, 2008: ITOCHU of Japan and secondee; and April 2, 2009: HSBC in Japan.).

To the degree that law departments and law firms were to publicize their fixed fees for handling broad ranges of matters, such as “$500,000 a year for all employment-related adversarial relations,” in-house counsel will be better able to quantify their relative value to their company.

Comprehensive data regarding such fees for swathes of work are not yet publicly available, but as that information leaks out or is collected, some calculations will be possible (See my post of June 9, 2009: shared, online evaluations of law firms.). An entrepreneur might collect fixed fee information that does not disclose the firm or the company and put together a modest business that enables such comparisons (See my post of Feb. 9, 2009: business opportunities discussed on this blog with 12 references and one metapost.).

In other words, if there were a few data points of fixed fees for large amounts of what is done by a law department, a head of legal could start to say, “Were we to hire a suite of law firms on the average terms they have offered, as adjusted by our size and conditions, the cost would be $3.5 million. Our internal and external costs projected for this year are $3.2 million, so we look set to save the company the difference, $300,000.”

The title of an article in the Atlantic, Vol. 303, June 2009 at 54, provocatively asks, “Do CEO’s matter?” A groundbreaking study published 47 years ago found that “Industry effects,” such as the amount of available capital and the industry’s stability accounted for almost 30 percent of the variance between companies in profits. “Company effects,” such as the firm’s history in the industry, explained about 23 percent. “CEO effects” explained a measly 14.5 percent. Many scholars since then have “likewise concluded that external forces influence corporate performance far more than CEOs do,” often less than the original study. Do general counsel make all that much difference?

Some of the modest CEO effect has to do with the number of employees of a company, and the difficulty of inspiring people beyond a relatively small team. Compared to a CEO, general counsel mostly lead small teams. The article cites findings that “performance problems increase exponentially as team size [ideally, about six people] increases.”

Other researchers have found that CEO leadership matters relatively less in constrained industries, such as electrical utility industries, than in hotly competitive, fast-changing industries. A similar conclusion probably applies to general counsel: legal/business calls and tougher and more frequent in roiling industries so the top lawyer has more opportunity to make a difference.