Articles Posted in Structure

An entropy index of diversification is an indicator widely employed in management research to quantify relative diversification among companies. It is based on the number and distribution of line-of-business activity in each company, which I think could be comparable to total lawyer-equivalent hours per area of law practice, both internal and external hours, and number of practice areas (See my post of Feb. 4, 2010: the meaning of “lawyer-equivalent hours”.).

The formula for calculating the index takes into account the number of each law department’s practice areas (excluding tiny, sporadic legal issues for the department, such as bankruptcy or maritime law) and the percentage of a department’s total legal services, measured by hours, in each area. This application of a mathematical technique comes from Admin. Sciences Quarterly, Dec. 2002 at 713. The formula normalizes for the size of a department because in general the more lawyers the more practice areas. The higher the index, the more diversified the department. The more diversified the department, the more complexity it has.

Jeff Kaplan, guest blogger, takes up the ongoing question “whether a company’s compliance and ethics officer should report administratively to the general counsel. (Informational, as opposed to administrative, reporting to boards by C&E officers is now fairly pervasive.) The critique of such reporting relationships is based, in part, on the perception that corporate counsel – because of their role as the organization’s advocate – often lack the independent spirit that is necessary for optimal compliance efforts.”

Jeff continues: “Undoubtedly this is the case in some companies. However, a fair accounting of what is entailed by the spirit of compliance should also include pessimism – a quality of thinking that in many areas of work (and life) can hinder success but which can in fact be essential to effectiveness for lawyers.

A strong connection between pessimism and success in the legal profession has been documented in research conducted by Prof. Martin Seligman of the University of Pennsylvania. Indeed, the tie is readily understandable: in identifying and helping clients avoid pitfalls in negotiations, litigation and a variety of other traditional legal practice settings, a pessimistic cast of mind can be invaluable. By the same token, in compliance-and-ethics related work (not yet a traditional legal practice setting, but becoming one), pessimism can be key to identifying and sufficiently mitigating the risks of unlawful or illegal conduct.

An intriguing article in Legal Strat. Rev., Summer 2010 at 14, describes how IBM’s legal team of 500 people has created a “legal delivery center” in Michigan and one in Dublin, Ireland. I can foresee at some time a center in Asia, but the article does not mention that. Each center has “several dozen attorneys.”

As I understand the change, the centers will consolidate virtually the entire range of legal services provided by the law department, thereby achieving greater consistency, control, and productivity. IBM will continue to have counsel based in many countries but the centralization of legal service delivery will alter the allocation of work significantly. For example, contract management – a significant portion of the work of a legal department – will divert to the global delivery centers. In fact, the article mentions that “IBM has hundreds of contract negotiators and support staff around the world” in the legal department – which has 500 members and “hundreds of lawyers” – so the change is massive.

Taiwan Semiconductor Manufacturing Co. (TMSC) is the world’s largest dedicated semiconductor foundry, with $10 billion in revenue in 2008. An American lawyer, Dr. Richard Thurston, heads its nearly 70 full-and part-time legal department employees, according to Legal Strat. Rev., Summer 2010 at 14. Of that group, 10 are US-based, two in China and one in Europe.

Aside from being only the second Taiwanese legal department to appear on this blog (See my post of Feb. 1, 2007: Hon Hai Precision Industry outsourced the law department of its Czech subsidiary), I mentionTMSC because its legal staff per billion – approximately seven – is quite lean, especially for a high-tech company that has a massive IP portfolio to protect and manage. Second, one out of five of its members work outside the headquarters country, which may be in line with a benchmark metric that has yet to be established. Third, with an American general counsel (a PhD no less), the company has an unusual chief legal counsel by both training and nationality.

An article in the Admin. Sci. Q., Sept. 2003 at 401, distinguishes “architecture” from “culture” in organizational design. The architecture of a law department consists of the formal structures for assigning work, such as a litigation group, a business unit group, or an intellectual property group. Hierarchies such as deputies, assistant general counsel and associate general counsel fall into “architecture” as does the physical location of offices.

Culture, by contrast, is defined in that article as what “governs how work actually gets completed, how members interact, how decisions are actually made, which units defer to others, and so forth.” Less formal culture looks at a law department in a different way than does formal architecture: ways of working and actual practices predominate. Culture resists change more than architecture.

“The first step in managing collaborative communities is to map the relationships within the community and look for patterns.” According to Olivia Parr Rud, Business Intelligence Success Factors (Wiley 2009) at 84, methods to describe these relationship patterns came from organizational network analysis, an approach originated in the 1930s with Jacob Moreno.

Moreno pioneered the sociogram, which is a tool that maps interactions among members of a network and describes those interactions quantitatively. For example, a typical map shows “network density”, which reveals the number of actual connections compared to the total possible connections. Another element of a sociogram could be “community cohesion”, which averages the shortest paths and the smallest number of connections between any two people, thus showing how close are the total connections overall. A sociogram would disclose more than the traditional org chart (See my post of May 11, 2010: social network analysis with 6 references.).

Richard Ogle, Smart World: Breakthrough Creativity and the New Science of Ideas (Harv. Bus. School 2007) at 238, introduces the term “space” which he uses “in the mathematical sense of a complex abstract entity characterized by very high dimensionality and therefore connectivity” (See my post of July 25, 2010: network theory extended.).

My gradually evolving sense of legal departments and how to conceptualize them partakes of such notions of a “space.” Dimensions of understanding include the people in departments, the expectations and views of clients, the processes the people rely on, the external resources they draw on, the technology and other infrastructure available to them. Each of those dimensions link to each other, which is the connectivity. Perhaps a tool for depicting all this will come from topology (See my post of May 26, 2007: topological depiction of management initiatives.).

My groping toward a theory of law department management stumbles yet I will continue. I will keep at it because no theoretical framework exists for describing, analyzing, or proscribing law departments. All we have are anecdotes, nostrums, bits and pieces of relationships, unexamined claims, and amateur and fragmented speculations.

Richard Ogle, Smart World: Breakthrough Creativity and the New Science of Ideas (Harv. Bus. School 2007) at 20, explains that the promulgation and exploration of network theory evolved from work on complexity theory. This blog has skimmed several concepts from network theory (See my post of May 11, 2010: network analysis with 6 references.).

This blog has not, however, attempted a synthesis. A network model of a legal department would point out nodes – people who link to other people as part of providing legal services – and the links between them (perhaps measured by frequency and importance). The network extends outside the department to clients and even farther out to all the vendors and law firms that supply goods and services.

But a depiction of the network of people and relationships between them only gives part of the picture for a legal department. A network of concepts and ideas exists concurrently. These include the values, knowledge, cultural expectations of the department, and its surrounding environment. Thirdly, in another dimension is the network of resources that enable the department to function, be they technological capabilities, physical plant, or other support functions. In other words, a network of networks.

My friend, Jeff Kaplan, offers some good ideas about how to assure the independence of a chief ethics and compliance officer (CECO) who reports to the general counsel.

“However, even where the analysis leads one to conclude that administrative reporting to the GC is best for the company the CECO should still report “informationally” to the audit committee of the board (and possibly the CEO), as well as to the GC. This should generally include regular reports on the operation and efficacy of the C&E program, as well as real-time reports of any allegations of wrongdoing made against senior managers. Finally, companies should consider enhancing the independence of CECO’s who report to GC’s by providing in program governance documentation that the audit committee must pre-approve any termination of employment or significant diminishment of duties or compensation of the CECO.”

The quote comes from Jeff’s article in Corporate Compliance Insights, July 19, 2010.