Corporate Counsel Seek Ways To Demonstrate Value

By Jocelyn Allison

Law360, New York (October 12, 2009) -- The value of a legal department can't always be quantified. But in a time of belt tightening, it's crucial for corporate counsel to take time to demonstrate how they're contributing to the bottom line, experts said.

“Lawyers are not the most process-oriented group in terms of trying to track and trace their work, but as costs have become more and more important, law departments are increasingly asked not only to demonstrate that they are controlling outside counsel costs but also that they are providing value,” said Mary Clark, vice president for law and deputy general counsel at LexisNexis.

Certain metrics can be useful to demonstrate how a legal department has improved its performance or how it stacks up against its peers, such as total legal expenses relative to corporate revenue, the average time it takes to resolve a dispute or the number of matters that are handled within budget.

But the first step for corporate counsel looking to justify the work of the legal department should be to identify what the department means by value, said James Wilber, principal at consulting firm Altman Weil Inc. Then come measurement and communication.

“Defining what value is really comes down to answering the question: Why do we even have a law department in the first place?” Wilber said. “Why do we have inside lawyers? Some executives even ask us this: 'Couldn't we just outsource all our work to a law firm and not have any inside lawyers?'”

Wilber recommends building the law department's value proposition around the main reasons companies have inside lawyers: they can do certain tasks more cost-effectively, they have more knowledge of the business, they're more accessible and they can manage outside legal costs better than the typical business manager.

“My recommendation is to analyze those four factors within a given company, make sure that indeed these are advantages that you're providing and then set about trying to determine how to build your value case around these four major components,” Wilber said.

At Sprint Nextel Corp., general counsel and corporate secretary Charlie Wunsch is working on developing a standardized method to track the department's litigation results so they can be compared from one period to another. Right now, he said, he's considering the best way to set up the comparison.

“The question you get is, do you measure the result against the plaintiff's complaint, the plaintiff's first offer, the plaintiff's last offer, those kinds of things,” he said. “We're looking at that and are probably going to do a spectrum of approaches.”

Wunsch also has established a calculation to determine the hourly cost for his attorneys so he knows how much it costs him to get something done in-house. The information can be useful in explaining to internal clients why he's not sending a given matter outside to the law firm.

But not everything is quantifiable. Wunsch has yet to come up with a way to determine the dollar value of a soundly drafted contract provision, though sometimes he'll use anecdotal evidence from reported cases with large judgments to show executives what could happen without it.

“It can be indicative for the client, [who then says], 'OK, I get it. There really are tens of millions of dollars at stake if I don't negotiate out the right intellectual property indemnity,'” Wunsch said. “Sometimes anecdotal evidence like this is good for clients to understand why you're doing what you're doing.”

At LexisNexis, the legal department keeps track of the time lawyers spend on various tasks and allocates the time to the company's individual business units so business managers understand what and how much the legal department is doing for them, Clark said.

“[When law department attorneys] sit down and work with the business leaders in those departments, they can have a better opportunity to explain the services that are being provided, and then the business team has a better understanding of the breadth of services and can better budget for their department as well,” she said.

A growing number of law departments have started charging back to individual business units both the time in-house attorneys spend on a given matter and the time outside counsel spends, though at this point it's more common for them to charge back the law firm costs, Wilber said.

“No general counsel wants to unduly inhibit anyone from seeking out a lawyer when they should be seeking out a lawyer, but on the other hand it's probably true that people seek out legal help more often than objectively they might need to do,” Wilber said.

“The more users of legal services understand the cost implications of hiring outside counsel, the more likely they're not going to abuse outsourcing work or ask outside counsel to do work because they're aware it's more expensive to the company,” he said.

Law departments that have a charge-back system can set aside time to answer general questions or practice “preventative” law without charging it to the individual business units in order to avoid discouraging clients from seeking advice when they should, Wilber said.

As corporate counsel come up with ways to track their work and quantify their worth, it's important for them to keep in mind the big picture. Robert Kirtley, a managing director and head of the legal management consulting practice at Duff & Phelps Corp., offered a case in point.

Two companies he worked with spent about the same on legal expenditures, but one company outsourced everything to make its litigation go away quickly and quietly. The other company built up its in-house litigation department and fought suits hard to make itself an unattractive target for plaintiffs.

The first company ended up having bigger problems later on because, in outsourcing all aspects of the litigation, its executives had become so detached from the issues they were having with their products that they ended up getting hit with a class action that cost far more in the long run, Kirtley said.

The business team should be engaged with legal counsel in coming up with strategies for how to defend the company, he said. If the matter is halfway through and the executives are asking why it cost so much, it's probably a sign of deeper trouble in the relationship.

“What I tell my clients is that if it gets to the point where they're coming to ask questions, whether it's the CFO or the manager of the business unit or the board, if they're coming to ask you why you spent $350,000 defending this matter, then you've already got a problem,” Kirtley said.

Communication between the legal department and the executive leadership is key, and it goes both ways. In order to be valuable in the first place, corporate counsel must understand their company's business objectives and be part of the strategy for achieving them, experts said.

“Sometimes lawyers get blinders and see things only through their jurisprudential eyes,” said Arthur Molins, general counsel for North America at Lufthansa German Airlines. “I try to understand the underlying business of Lufthansa, my client, so I can appreciate better the concerns of a salesperson that may be requiring legal services, and not in the abstract of a very closed legal mind.”

“In other words, I try to be practical as well as technical in my legal advice,” he said. “It puts the onus on the lawyer to work hard to understand the business at hand.”

In the airline industry, the difference between a great year and a horrible year can be measured in very finite terms, Molins said. A dip in the economy, a spike in oil prices, a rise in political unrest all leave their mark on the bottom line. The law department need not also be a drain, but rather a resource.

“I've always fashioned my law department to create value through efficient and prompt legal services, making everyone's jobs easier, and ensure the law department is looked at as an asset and not a numerical liability,” he said.

The more your internal clients view you as an asset, the more they might be willing to go to bat for you if your department comes on the chopping block.

“If the businesspeople and the ones who are generating revenue are saying, 'This is important. I would rather have something in my own department cut before I had this attorney fired or outside counsel no longer retained,' that helps make the case far more convincing than the general counsel would make on his own behalf,” Kirtley said.