Are lawyers operating in a bubble?
Updated: Jun 5, 2019
About a month ago I was having lunch with the General Counsel of a large multinational company. We were having a conversation on the role of legal and on whether a GC should be part of the board. This GC, arguably one of the more experienced in the world, had herself been a board member for the past five years now. Despite being an Executive Board member, reflecting on her contribution she told me she had often found herself out of depth during board meetings. Nine out of ten meeting there are no legal issues on the agenda. Boards tend to focus on growing shareholder value. GC’s remain lawyers and not entrepreneurs. Their role is to limit risks rather than identifying business opportunities.
Law firms and in-house legal teams must realize that they are operating in a micro cosmos. For lawyers their day-to-day business revolves around legal issues. For law firms it is even the way they make money, it is the business model. For clients, the companies that employ the in-house lawyers and that keep law firms busy, this is not the case. Clients’ world revolves around growing the business. From the CEO perspective Legal is not more important than Facility Management. Probably Facility Management could be slightly more important given the huge savings that can be made by negotiating a good deal for an office building and given the importance of having decent heating/cooling and the lights burning. For lawyers this insight invariably comes as a chock, how can a mundane function like Facilities ever be more important than Legal? Isn’t Legal the most important thing there is? No, it isn’t.
I recently came across an interview with the owner and founder of one of the world’s leading offshore companies. He has just returned form sailing around the world solo on his yacht. Upon return he had fired half the board as they had not been able to take the company forward during his absence. During his time at sea, he had come to realize that his company had gradually over time lost its entrepreneurial spirit. Growing bigger had changed the dynamics towards risk control, compliance, and administrative procedures. Pivoting away from the ambitious, opportunity seeking, client driven entrepreneurial company it originally was and that had been the foundation of its success. What he particularly hated were lawyers.
The cost of lost opportunity For lawyers it is important to better understand what is ultimately the most important to their client. Commercial companies are under tremendous pressure to deliver shareholder value. Business leaders have to focus on growing the business by identifying business opportunities. Companies are more concerned with revenue, cash-flow and profit than they are with costs. When lawyers state that they “understand their clients’ business”, they typically refer to industry sector expertise. Seldom to the business economics. The same holds generally true for the in-house team.
For companies, time equals money. Between 11 and 13 March 2019 all global aviation authorities decided to keep all Boeing 737-max aircraft grounded due to serious safety concerns. Immediately several legal battles began on who is liable for what. No doubt an interesting and challenging legal question. The corporate reality behind this is however slightly different. This reality is about time and revenue. Leasing a 737-max costs around $360,000 a month or $12,000 a day. For an airline operating 15 of these aircraft that is $180,000 per day in leasing costs alone. Then there are the costs of renting other aircraft and the costs of potential loss of market share on routes that were operated by the 737-max. For the airlines every day costs money and every day represents lost opportunity. It is far more important that the technical issues are solved fast than to quibble about who is liable for what. Time is money. Rather than focus on liabilities they want Boeing to focus on making the aircraft safe again.
For companies, the cost of legal is often overshadowed by the cost of lost opportunity. Every extra day it takes for the lawyers to get their job done, equals a certain amount of revenue and profit missed. If Hilton opens a new 200 room hotel one month late due to legal issues, this easily represents over $1m in revenue lost. Lawyers, whether external or in-house, are typically not enough aware of this. Lawyers tend to see legal issues disconnected from business reality. Lawyers are operating too much in a legal bubble.
Who is the client? For law firms the in-house team is in many cases the representative of the client. The Legal Department, headed by the GC, instructs the external lawyers and manages the matters. Like all other internal departments in a sizable company, the Legal Department will have its own dynamics. There is no reason to assume that as it comes to office politics and office dynamics the Legal Department is any different than Facilities, Finance, IT, HR, and so on. Anyone familiar with the big corporate world will know that departments always complain about each other. Who doesn’t believe that the IT-Department ‘sucks’? Again, why would Legal be the exception?
For everyone working in a legal capacity on behalf of a company, either in-house or outside, it is of vital importance to keep in mind that ‘the client’ is not the Legal Department. The client might not even be the CEO. The ultimate client are the Shareholders, as increasing shareholder value is the only purpose of the company. We would encourage all lawyers to keep this in mind. Lawyers should focus on being business enablers rather than legal technicians.
Data & Dialogue, a relationship redefined In April we will publish a 292-page book on the relationship between law firms and their clients and between clients and their law firms. The book will explain in great detail what the business and political dynamics are at either side. In doing so, the book will describe how lawyers can increase value to clients while retaining their profitability. The use of data analytics might be one of the drivers for change. The book will contain tons of graphs, tables, industry standards and best practices. Complementing the book there will be a special website with regular updates and free information to share. The book is for both law firms and in-house legal departments and it will absolutely transform their future relationship.