Around the world, employees are increasingly pressed for time and grappling with jobs that have become far more complex – involving more change, more information, and more people than ever before – and that require them to make independent decisions and use their judgment at a far more junior level than they once would.
This creates twin problems for a company’s lawyers: first, employees have little time for assurance functions asking them to do what seems like “extra work,” and second, they have to deal with far larger numbers of employees making legally sensitive decisions with no concomitant increase in legal budgets.
But when corporate scandals break out – from Wells Fargo’s aggressive sales practices to Volkswagen’s false diesel emissions tests – the legal department will shoulder a lot of the responsibility. When unethical behavior is exposed, the most obvious defense is that compliance policies and safeguards were not enforced properly.
The way corporate lawyers should think about their work, and accomplish it, is changing rapidly. Dispelling these six myths will help them understand how.
Direct legal intervention always improves business decision making: On the contrary, it can slow things down. In a world where 80% of employees make legally sensitive decisions, there is simply no way for the legal department to cover everything. Even without legal intervention, 42% of business decisions experience drag and operational delays due to management uncertainty. Adding more people into the decision making process would slow business down even further.
A better alternative to policing every business decision would be for legal departments to equip managers with necessary information and tools (guidelines, training, or playbooks) so they can handle low-risk decisions and work on their own.
Strength of relationship drives law firm behavior: Contrary to popular belief, contractual incentives or personal relationships do not have a lot of influence on the performance of outside counsel.
Instead, legal departments should look for other ways to support outside counsel. In fact, execution-focused management (e.g., specifying how to execute matters, providing trade-off tools and decision rules, establishing milestones to revisit matter strategy) improves law firm performance far more than personal connections or monetary incentives. Legal teams that improve their execution based management can reduce the rate of incorrect work by 71%, according to CEB data.
Corporate legal teams should focus on law firm rates: Most companies make the mistake of only focusing on law firm rates when the total cost of engaging outside counsel is actually much higher. The total cost involves various choices and tradeoffs (e.g., cost effective versus accurate, timely versus comprehensive as seen in chart 1 below) about work quality. An exclusive focus on rate alone can create incorrect trade-offs, thus significantly increasing the total cost.
To control total cost, legal departments should look beyond law firm rates and establish clear priorities to help outside counsel handle important trade-offs as they occur. Reducing overwork and rework that arises from incorrect tradeoffs can alone drive savings up to $2.3 million for the typical legal department.
Chart 1: Common gaps in work-quality alignment Source: CEB analysis
Growth in outside counsel rates remains flat: The average year-to-year lawyer rate increases have climbed back to their highest levels since the recession of 2008. In fact, rates for staff lawyers have increased by 5.4% from 2010 to 2015 (see chart 2).
Legal departments should compare their rates to the industry average to ensure they are paying a fair price for outside counsel. If the rates are unfavorable, companies should consider negotiating alternative fees or shifting to a different law firm.
Chart 2: Average year-to-year lawyer rate changes Source: Walters Kluwer ELM Solutions, Inc; CEB analysis
The relative cost of legal support is decreasing: Even though legal budgets have remained flat, total costs for the legal department (relative to other functions) is increasing. After years of flat growth, median legal expense as a percentage of company revenue rose 9% in the past two years (see chart 3).
To be more competitive, legal departments should review the reasons for higher costs (outside counsel and in-house), and identify opportunities to reduce them.
Chart 3: Corporate legal expense as a percentage of company revenues Source: CEB analysis
Legal departments are hiring more non-lawyers: The number of lawyers in legal departments has increased compared to their non-lawyer counterparts as seen in chart 4. This is true even for administrative positions.
Limited budgets and an increasing pressure to do more with less have led legal departments to adopt a safe stance on hiring. In such cases, legal departments should review staffing plans and hire individuals who are the best fit for the role even if they are not lawyers.
Chart 4: Ratio of non lawyers to lawyers in legal departments n=135 Source: CEB analysis