Transforming Legal Departments into Strategic Business Partners for the Twenty-First Century

By Scott Snyder, Ph.D., President & COO, DSI and
     Justin Miller, Senior VP & Managing Director of
      Global Legal Services, Office Tiger

"...trying anything new will always produce problems. So companies nurture yesterday far too long."

- Geoffrey Colvin, Fortune, September 19, 2006

On March 3, 2006, Research In Motion (RIM) -- the Canadian developer of the hand-held, communications device, BlackBerry -- announced the final settlement of a four-year patent dispute with NTP (a holding company with a portfolio of some 50 U.S. patents, including inventions in the fields of wireless e-mail and RF antenna design). After a $450 million settlement fell through during 2004, RIM continued to pursue the battle begun in 2002, with dire consequences. Ultimately, RIM's legal department not only failed to win key legal decisions; it also risked an injunction that could have shut down the firm's wireless services in the United States. Moreover, with protracted legal maneuvering creating considerable uncertainty about patent litigation and the firm's future, RIM lost more than 130,000 new subscribers in the fourth quarter of Fiscal 2005. Teetering on the brink of disaster, BlackBerry's developer thus had no choice but to pay NTP $612.5 million U.S as part of very costly settlement terms.¹

RIM's far-from-unique experience reveals a number of significant transformations over the past decade, including the fact that corporate legal departments must battle an array of new challenges, from an explosion in litigation fees to a new breed of aggressive intellectual property regimes. Legal departments must also monitor and tackle an escalating number of issues associated with doing business in emerging markets with vastly different legal systems and norms, with managing global and virtual workforces, and with making sense of a massive expansion in business communications and information.

The soaring number of companies now deemed "high risk" by Standard and Poor (up from 35% in 1985 to 73% in 2006), along with broad increases in uncertainty, volatility, and risk associated with changing markets, technologies, customers, and products reflect these trends. A recent Harvard study also reveals that significant external events have blind-sided more than 2/3 of all CEOs over the past three years. And that blind-siding often results in unwanted press coverage and legal battles that end up costing companies like RIM hundreds of millions of dollars.²

Because legal departments can and do significantly influence the long-term value of corporations, the RIM story also reminds us that companies need to make their lawyers better strategic partners by developing a new business paradigm. The legal function should be more deeply connected with the decision process and the legal team must play a significant role in preparing for future disruptive events by tackling the sorts of dynamic challenges that businesses will continue to face during the 21st century. After all, legal departments in companies such as GE, IBM, Qualcomm, and Monsanto have managed to create billions in royalties from IP portfolios, and to profit from strategic business and legal decisions. What sets these successful firms apart? Do they hire more talented lawyers or invest more in their business education? Do they place a higher strategic priority on building competitive IP positions in the global marketplace? The evidence suggests that they do these things and more.

Although few CEOs (or Boards of Directors) currently perceive their legal department as a source of competitive advantage, as capable of positively influencing the core strategy and results of the companies they serve, a recent Corporate Legal Times (now Inside Counsel) survey confirms that many CEOs would like members of their legal departments to become better strategic partners. But we are not there yet: the overwhelming majority (44%) of CEOs ranks their CFOs as their most trusted advisor, while only 21% select their general counsel as an expert on whom they can depend.

Figure 1 - CEO Perspective
[click image to enlarge]

Executives tend to de-value, distrust, and discount their legal departments because lawyers and the businesses they serve tend to have incongruent goals and vastly different vocabularies. Legal training focuses on avoiding risk or creating language to eliminate it (by shifting that risk to someone else, including the customer). Thus, lawyers find themselves at odds with their clients' core business interests, including the latter's desire to exploit risky situations or at least to take some risk in order to stimulate or capture opportunities. Moreover, the legal profession's focus on hourly fees rewards activity rather than results, which means that lawyers frequently use uncertainty as an excuse for their unpredictable performance on budgets and outcomes. Because some 31% of the CEOs surveyed by Corporate Legal Times also argue that they want (and need) their legal departments to reduce costs, this additional disconnect may help to explain why many Wall Street analysts and business pundits seemed surprised when Pfizer's and Viacom's Board of Directors recently announced that they had elevated lawyers (and former general counsels) to the position of CEO. But those appointments also highlight the need for change and the ways in which legal issues now dominate pharmaceuticals, entertainment, communications, and most other industries.

While many lawyers need better business training and leadership skills, find it difficult to adapt to changing business needs, focus more on loss prevention than on value creation, and lack strategic focus, successful firms tend to create legal departments that do what nearly all CEOs surveyed believe their GCs should do: devote less time to mundane tasks and more attention to risk management, compliance and ethics training, outside counsel oversight, corporate governance, and strategic planning.

Transforming Legal Departments: Strategic Planning for Change

Through our collective experience with business executives and their legal departments, we know that scenario planning can help members of legal departments to become much more proactive, as early-warning scanners and strategic partners for their firms. Scenario planning can also help companies to develop that critically common vocabulary so that all can focus on current and future factors influencing business results.

Indeed, our on-going work in scenario planning has identified four factors that make some legal departments more "Strategic" than others (and a valuable business partner rather than just another functional cost center incapable of conferring competitive advantage upon the corporation). These are training in business leadership to develop a common vocabulary and common goals between the legal department and the rest of the business; better "reflectivity" to match the skills of individual lawyers with the particular challenges of the business units they serve; a change in legal's risk orientation, from loss prevention to value creation; and a better focus on critical thinking, planning, and cost reduction by out-sourcing and off-shoring routine tasks and low-end services that currently absorb far too much legal talent. We have also developed diagnostic questions to help companies avoid some of the pitfalls that currently prevent legal departments from becoming better strategic partners (click here to take the diagnostic quiz).

To align lawyers with business strategy, companies must transform the legal department's position from loss prevention to value creation, so that the legal team can, among other things, make better decisions, serve as an early-warning system to reduce risks, and take offensive moves to thwart threats and create new opportunities.

At the same time, as the following diagram suggests, legal departments must operate more efficiently, adhering to a new model that allows for the reductions in cost that mirror other business units. Leveraging opportunities in India and elsewhere by following the example set by business units and the financial departments of many major companies, legal teams can off-shore routine tasks such as the review and negotiation of non-disclosure and basic sales agreements. It can employ automation, including document assembly systems for contracts, and electronic culling tools that intelligently employ concept search and keyword (Boolean) search. Shedding these low-end services will not only cut costs significantly, but will also allow the legal department to focus on strategic issues and decisions to enhance the businesses they serve.

Figure 2 - Finding a Strategic Focus

In addition, legal departments must align with the future strategic environment of the business by developing a new competency model that focuses on scenario planning, options analysis, and other innovative techniques. Of course, this transformation, shown below, will require on-going education and investment, both in people and systems.

Figure 3 - Legal Transformation

Finally, the legal department must act as the company's early warning system, its "Strategic Radar" (a skill most major companies still lack), to help people throughout the organization with sensing and responding to both strong and weak signals of change, whether through rumors or via real and perceived threats and opportunities. Such scanning also requires a broad view, not only looking for changes taking place within individual firms and industries, but beyond both, into the larger global political-economy and its myriad competitive landscapes and technological advances, within the scientific community, throughout physical and regulatory environments, and among diverse cultural and social groups.

To create this exciting new pathway toward a legal transformation, DSI has begun to support several initiatives, including:

The Future of Legal Scenario Study, a unique report focused on developing multiple futures that legal organizations may encounter to challenge and develop new success strategies;

 

The Legal Strategic Radar, an early warning system for legal departments seeking to sense and respond to new opportunities and risks throughout the rapidly changing business environment; and

 

Legal Transformation Consulting, including the services to support the development of key strategic competencies to position businesses and their legal departments for a future of value-creating activities.

One day, it will come as no surprise when a Fortune 100 company names a corporate lawyer as its next CEO. Are you ready to succeed in that future? To test your legal department's strategic radar and health, click here to take our diagnostic quiz.