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The Rise And Impact Of Empowered Chief Legal Officers

Posted in Deal Strategy, Law Practice Management

As put bluntly by Kevin O’Keefe, an expert in the legal marketing field, a lot has changed since he graduated from law school 30 years ago.  A recent post by John Grimley of International Business Development accurately assessed the current reality that “law firms need to end the internal culture of seeing clients as purely a source of revenue, and instead … align their services to advance the commercial objectives of clients – one of which is to reduce their clients legal fees” (If you have not been reading John Grimley’s posts on this subject matter, you really must start).

How to best align professional legal services with companies’ business objectives goes to the heart of the inside‐outside relationship “crossroads” law firms and in-house legal departments face:

  • What is the division of professional legal services as between in-house legal departments and outside law firm?; and
  • How is the professional legal services predominately managed (i.e. project management)?

As general background, I use the title “Chief Legal Officer” in this post as opposed to “General Counsel” because I believe that title more accurately describes the role discussed in this post, but many in-house attorneys with the title “General Counsel” have also taken on the same substantive role.

THE SOPHISTICATED CHIEF LEGAL OFFICER’S NEW MANDATE

This new reality for law firms is being significantly impacted by a concurrent development that has also evolved since Mr. O’Keefe and Mr. Grimley graduated law school: the emergence of sophisticated and empowered Chief Legal Officers with in-house legal teams who far more often have skills equal to their peers in outside law firms than they historically have had.  I believe the empowered Chief Legal Officer trend has been accelerating these past few years and is not only here to stay, but is an advantageous development for the legal profession meeting the needs of businesses.  As put in an excellent “Blue Paper” titled “The General Counsel As Lawyer-Statesman,” “in the course of a generation, General Counsels’ prestige, status, compensation, power and position at the core of major transnational corporations have been transformed.”  The author also aptly characterized the growing role of the sophisticated and empowered Chief Legal Officer and other in-house lawyers as “extremely broad, involving three distinct functions: acute technical lawyer, wise counselor and lawyer as leader.”  The end result is that Chief Legal Officers are not only being authorized to do so, but are being directed as one of their “Key Result Areas” to manage the direction of a wider range of sophisticated legal and business matters as well as perform and execute upon a greater share of the company’s substantive legal service needs.  This development is one that law firms need to understand and respond by adjusting their business model and “marketing” approach.

PERSONAL CONFIRMATION: MY BARCLAYS NORTH, INC. EXPERIENCE

I became convinced of the wide-ranging value of an “inner circle” Chief Legal Officer during my experience in 2007-2008 when I left a “Big Firm” job to serve one client — real estate developer Barclays North, Inc. — as its Interim General Counsel and Chief Restructuring Advisor during the real estate crisis.  I experienced firsthand the contrast in the value-added proposition that sophisticated in-house legal counsel can create when it comes to furthering a company’s business objectives, as compared to outside counsel (especially when it came to the delegation and execution of legal tasks that involved ongoing third-party business relationships).  This is because by being a part of the inner circle of the company and its day-to-day business flow, the empowered and sophisticated Chief Legal Officer has a “constant pulse” on a company’s rhythms and peculiarities.  This is turn results in superior legal guidance, more effective management of and practical solutions to complex business and legal situations.

The lessons from my Barclays North experience hold true even more today: at a time many law firms are undertaking internal “survival tactics”, as a result of being empowered by the above-described three distinct functions, forward-looking Chief Legal Officers are driving a redefinition of the role outside law firms play and how a company’s legal affairs are handled.  By doing so, new structures of true strategic partnerships are taking shape.

THE HISTORICAL BIFURCATION OF THE ROLES OF IN-HOUSE COUNSEL AND OUTSIDE LAW FIRMS

The rise of the empowered Chief Legal Officer has been and continues to be driven by many factors.  The most significant factor is the “Work-Role” Gap that has led far-to-often to an inefficient over-bifurcation in the delivery of professional legal services between the:

  • In-house “company attorney”, whose primary role became farming out the challenging and complex legal work to outside counsel while focusing on internal legal risk management instead of first and foremost being a strategic “business law advisor” to the company; and
  • Law firm “situation-specific attorney”, who in the over-specialized legal world has taken on the role of delivering myopic deal-specific documents or taking near full-ownership of litigation matters, without in either situation providing the long-term “big picture” legal guidance that a properly empowered strategic “business law advisor” should continuously delivering.

The ideal situation is one where the Chief Legal Officer can serve both sides of the “business law advisor” and “situation-specific attorney” equation for a company, delegating and managing internally what can best be performed in-house, with outside counsel serving as a supplemental or situational-specific resource when appropriate.

BEYOND LEGAL COST REDUCTIONS: INCREASED LEGAL AND INTERNAL BUSINESS OPERATING PERFORMANCE

Surely the pre-recession hourly rate “bubble” driven by the increased focus on “Profits Per Partner” caused many companies to re-evaluate the budgetary impact of the over-bifurcation of inside-outside roles.  But the impact of this over-bifurcation goes beyond mere budgetary costs and instead gave a major boost to the new Chief Legal Officer legal paradigm, whereby:

  1. The CLO is now more often the “go-to” legal strategic advisor to a company’s top management instead of a senior partner at the company’s historic outside law firm;
  2. The CLO is a core member of senior leadership and helps shape the debate and has a voice as to the company’s current and future business affairs; and
  3. The CLO has the power (and financial leverage) to redefine the company’s relationship with preferred outside counsel by addressing the “Work-Role” gap.

In many ways, the rise of the empowered Chief Legal Officer and its legal team may most accurately viewed as simply a market-driven corrective response that serves the company’s best business and budgetary interests.  Whatever the reasons and driving factors, the rise of the empowered in-house legal counsel was long overdue.  This is because the business value of a strong in-house legal team working closely with top management has been an underutilized source of tangible and intangible operating efficiencies, beyond just substituting cheaper inside legal resources for what had become increasingly expensive outside legal services.  If properly utilized, the result is that a company’s legal needs are delivered:

  1. More cost-effectively; and
  2. With the same or greater level of high-performance that top law firms claim only they can always provide.

Achieving one of the above does not have to come at the expense of the other (this is where better project management of an entire legal project comes into play by the Chief Legal Officer and its team leveraging the most appropriate professional resource for a particular project task or undertaking).  Moreover, the risk of unexpected legal troubles can be better planned for and – if and when they arise – can be addressed earlier and more effectively managed in a way that usually reduces higher litigation costs down the road.  This does not mean that outside law firms will no longer provide ongoing and substantial professional legal services for companies — as that need will continue, albeit with new dynamics.

FINAL TAKE-WAY

The end result for in-house legal teams, if led by an empowered and sophisticated Chief Legal Officer, is the opportunity for that team to add value in more ways to their company’s distinctive business objectives than historically has been the case.  Law firms, as businesses that also operate in a market system, who fail to adjust to this trend will find themselves truly left on the outside.