"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.

Five requirements of corporate culture for building an effective in-house legal function

In my nearly 20 years of corporate legal experience, I have built in-house legal functions, helped lead large, existing functions and yet also advised in-house lawyers as outside counsel. During this time, I have observed that the success of an in-house function will depend not just on the ability of the in-house legal professionals
running it (which is obvious), but also on the cultural receptivity to legal in the "host company."  As a result I have come to believe that there are five very important guidelines - prerequisites even - to ensure a corporate legal function's success.

The first is being very specific with respect to your job specification in terms of both qualifications and personality type.  Stick to that with conviction.  Is industry experience required?  What substantive areas of law are really arising on a regular basis?  That should be aligned with the ideal candidate's background. As far as personality type is concerned, consider that a spectrum exists with "forceful change agents" and "peacemaking cooperators" at the extremes - what type is best for your organization?  When ready to go find that right person, make sure you understand the difference between hunting and hiring.  It will drive the recruiting approach and likely determine whether you end up with a superstar or somebody who just needed a job.

The second requirement is to be very explicit, internally and externally, about what kind of role is being created when the legal department is launched. This is all part of good human resources practices in providing a candidate with a realistic job preview. There are basically two types of legal functions that get created with the first hire.  There is the best practices function and the...well, not best practices function.  In a best practices function, the candidate will have either a Chief Legal Officer or General Counsel title, will be a named executive officer and paid accordingly, will officially be part of the most senior executive team, will participate in all board meetings, will act as the company's lead decision maker on legal issues, will report directly to an engaged CEO and will have the authority to hire and fire outside legal vendors.  It is possible to create a legal function where these practices are not present. However, it's important to make sure that the candidate is acutely aware of the landscape so that expectations are not mismatched.  A great deal of confusion can be created when legal departments are established with some good practices but not all - this can create tension as the function tries to develop.

The third cultural requirement is to appreciate the need for a legal function to play a major role in developing a risk management philosophy for the entire corporation.  Many corporations evolve without any kind of risk management philosophy. This results in those companies being very aggressive in certain situations but skittish in others, without there being any rhyme or reason for these approaches.  This leads to unpredictable behavior that can frustrate investors, partners and employees.  An effective legal function will help the company develop a consistent and rational risk management approach that fits with the company's point in the corporate lifecycle.  Allow, encourage and expect your legal function to play this role.

The fourth need is to understand the impact that cynicism about the legal profession has on corporate America. Some of that cynicism is warranted. But some of it is not. The reluctance to engage "pricey and pedantic" transactional lawyers, for example, can create problems down the road when poor contracts turn into conflicts. This has a draining effect on the ability to maintain a cost effective and proactive function.  What's more, it can create a vicious cycle.  Companies that ignore or don't seek out legal advice because "those crazy lawyers are so cautious and expensive," will often end up only spending more money on legal services to reactively clean up messes.  Make sure your organization is really open to legal advice.

The fifth point is to ensure adequate resources and in fact require immediate hiring where the volume demands it. This also helps avoid chicken and egg situations.  For instance, a legal function won't have any internal credibility if it can't responsively review commercial contracts.  But, it can't be responsive if it's not adequately staffed.

How a ton of good luck can be bad and a little bad luck can be good

The forthcoming book by venture capitalist Ben Horowitz, The Hard Thing About Hard Things, figures to be fantastic.  He recently blogged about one of his career experiences as a sort of teaser. 

In his blog he writes about an experience that, had he handled differently, might well have caused him to go jail.  Having the opportunity to hire a star CFO at one of his companies, he jumped at the chance.  The CFO recommended a change to the company’s stock option practices that could potentially have benefited the employees. 

But Horowitz was already a believer in a strong legal function and had his General Counsel review the suggestion.  The General Counsel believed that the practice was illegal and recommended against it.   Horowitz followed his General Counsel’s advice.  Years later, the same CFO would be accused of wrongdoing by the SEC for stock option granting practices at a prior company.  She was asked to leave the Horowitz company and ultimately did spend a few months in jail.  It sounded like a difficult period for Horowitz and one that left a long term impression.

This challenging episode is a great reminder to me that, in Corporate America, a little bit of bad luck can be good and a ton of good luck can be bad.  This seems counter intuitive at first so I will explain.

A few rough seas of the sort Horowitz experienced in his introduction to creative stock option practices can be a valuable learning lesson.  He had enough bad luck to forever remember the lesson but not so much as to sink his company.  I imagine that today Horowitz feels even more strongly that an effective General Counsel will report to the CEO.  That creative accounting isn’t necessarily a good thing.  And that lawyers who simply speak the truth and are heard are an executive’s best protection against going to jail.    

By contrast, companies, executives and boards that have had only good luck tend to lack these war stories.  They don’t have the tough learning experiences to draw upon.  It’s not so much that they are certain to be more reckless, but rather that they may not consider the importance of compliance or ever think about the events that could destroy their businesses or careers.  That is, all the good luck is a bad thing – it exposes their blind spots and allows them to become tolerant of sloppiness that hasn’t (yet) caused major problems.  As a result, a sort of quiet bliss makes them more susceptible to big failures that more seasoned, perhaps hardened, business people will know how to avoid.