Wednesday, January 18, 2017

"Why is our legal department growing faster than the rest of our company?!"

As in-house legal functions grow and add staff, sometimes the rate of their growth actually exceeds that of other, perhaps revenue-generating, functions or the company as a whole.  This leads executive teams, boards of directors and especially Chief Legal Officers and Chief Financial Officers to ask a perfectly reasonable question: why?

There are a few simple reasons that a corporate legal department could see rapid growth.  Occasionally a legal function is only created late in a company's life cycle.  In those situations, many legal needs have gone unmet for years.  There will be a great deal of catch up and clean up to do.  This will often require rapid and substantial hiring to create an effective legal function.

Sometimes a company is undergoing a unique set of changes, such as preparing for an initial public offering, acquiring other companies at a rapid pace or entering into a new business with significant regulatory or other legal-intensive implications.  These situations will also require growth in the legal department.

In my view, these are all "good" reasons for a legal function to grow.

But in many cases a legal function gets bigger because of more nuanced factors.  And that growth isn't always a good thing for the company.

As legal functions develop, a great deal of attention is paid to their skill sets, workload, responsiveness, tolerance for risk and personalities.  Not as much focus is afforded to two critical factors: First, whether those individuals in the legal function are the right people to be doing a certain piece of work.  Second, whether the timelines expected of the legal function are reasonable for the assigned projects given the cost.

As to the first factor, many established companies in particular have grown to like the skills that legal professionals bring to the table.  They are capable writers and communicators, team players and analytical thinkers.  But, even in-house, they are still expensive resources.  So, it's not always efficient to leverage lawyers to do work that can be done by other functions.  I have seen in-house legal professionals do everything from fill out order forms, put together responses to requests for proposals, pick up computers from departing employees, write press releases and set up meetings between sales teams and revenue recognition experts.  Having legal teams spend time on these activities may seem like they help the organization at the time, but they also increase costs substantially and cause legal functions to grow bigger.

The second factor also impacts legal department size and spend.  When requests presented to the legal function are consistently marked "urgent," legal functions need staff to respond appropriately.  Pushing back on aggressive timing isn't always comfortable or culturally accepted, especially by more junior legal staff who may not have visibility about whether a particular assignment is truly urgent for the company to succeed.  Yet, staffing will generally need to increase to satisfy widespread demands for projects to be completed "yesterday."  Experience and judgment are needed to solve these challenges.  It may be helpful to establish basic service level agreements to align expectations with a company's tolerance for legal expenses.

These more nuanced factors are not necessarily healthy drivers of legal department growth.  It's beneficial for General Counsels and their fellow executives to analyze the reasons for growth, what exactly their teams are being asked to do and whether the timelines they are working under are reasonable for the circumstances.

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