The Smarter Legal Model

The Smarter Legal Model – More from Less
by Trevor Faure
published by Practical Law Company, 2010
price: £250

“Insight into how General Counsel reconfigured an in-house legal department simultaneously increasing legal coverage, lowering costs, while managing headcount”.

Trevor Faure is General Counsel for Ernst & Young Global Ltd. From relatively humble beginnings he has forged a hugely impressive legal career, beginning as a London-based barrister at one of the top commercial law chambers, leading to positions as in-house senior counsel with Apple, serving as a Legal Director with Dell and then as VP and General Counsel with Tyco International (Europe, Middle East and Africa or EMEA). But Faure is not your typical General Counsel. According to the Times of London in 2004 Faure:

moved to Tyco International…as head of its legal group in Europe. The company had just been through a widely publicised corporate governance scandal and its legal department was in disarray. Its lawyers, overworked and under-resourced, spent much time on minor commercial matters rather than focusing on problems critical to the company’s survival. Mr Faure, given a blank slate, set about overhauling the department. He adopted modern management strategies and conducted a root-and-branch re-examination of the legal function. His aim was to define the lawyers’ role, measure their value to the business and, in the process, to “demystify” the practice of law. He cut Tyco’s spending on legal matters by 20 per cent without reducing headcount or reducing the department’s coverage of critical legal matters — and in a move widely followed in the City, Mr Faure slashed the number of law firms that Tyco dealt with from more than 280 to only one.

Faure was voted 2008 In-House Counsel of the Year by The Lawyer (UK) magazine and was ranked as one of the world’s top 25 corporate counsel on the Legal Business Global Power List 2007. His book, The Smarter Legal Model is a highly practical “how-to” guide on running an in-house legal department that encapsulates the many lessons learned during his time with Tyco and elsewhere. Besides the commercial accolades, Faure and his model also have supporters in academia — the Smarter Legal Model is now being taught at Harvard Law School as part of its program on the legal profession. At a cost of 250GBP for a 157-page book, The Smarter Legal Model seems like an expensive addition to a corporate law library. But for in-house counsel, compared to the potential cost savings that might be attained by applying the lessons learned here, this is a cheap investment.

Faure’s thesis is that in-house legal departments can be run in a business-like manner, simultaneously balancing three competing factors:

1. the provision of more legal coverage/compliance services; with
2. less headcount (and thus lower costs); while also
3. providing those delivering legal services, in-house counsel, with something approaching a work-life balance.

Equilibrium can be achieved by taking a quantitative and scientific approach to a domain that, on the face of it, defies quantification. In essence it involves looking at the in-house legal function as a management consultant would address business improvements in any business. Faure briefly mentions the importance of Six Sigma methodology in driving business improvements but does not dwell on the details. Instead, throughout the book Faure repeats his mantra that “if you cannot measure it, you cannot manage it”.

The steps he suggests in-house counsel take are as follows:

Stakeholder analysis

A stakeholder analysis is a fairly standard tool for management consultants or project managers. It involves asking all major parties – the business, in-house counsel and the General Counsel what are their fundamental requirements from the legal function? Subject to some variances, any business needs its in-house legal function to provide a quick, responsive and flexible service, provide the ability to quickly review contracts and provide advice on potential disputes while appreciating the dynamics of the business. In-house lawyers need visibility within the business, knowledge of the law, financial reward and recognition and work-life balance. General Counsel wants 100% legal coverage, full compliance with all relevant laws and 100% geographical coverage.

Review of current gaps

The next step is to review what is currently offered by way of legal services (“actual state”), and compare that picture with the output of the stakeholder analysis (“desired state”) and identify the gaps. Gaps may be caused by headcount issues – too few or too many. There may be insufficient in-house lawyers leading to an increased use of outside counsel. Alternatively a company may have too many in-house lawyers leading to business resentment and customer dissatisfaction caused by “over-lawyering” on every transaction or dispute. Determining what is the optimum number of lawyers for any given business can be determined by looking at the ratio of number of lawyer per dollars of revenue and comparing industry metrics. Even if the headcount ratios are in balance, there may still be gaps in legal coverage and compliance due to inadequate training or insufficient exposure of the legal department to the business. Gaps may also be geographical, particularly for international corporations – e.g. sufficient coverage in Canada and the US, but insufficient coverage in certain European countries or the Far East. The production of a gap analysis gives General Counsel a baseline from which to work.

Faure also recognizes the importance of risk in this equation. What are the consequences of insufficient legal coverage? In-house counsel may take the view that there must be 100% coverage and compliance in all jurisdictions. But senior management within the business may view legal coverage as similar to an insurance policy. If the risk of not having coverage is minimal, why bother with coverage – the risk may be acceptable.

Business improvement through individual improvement

In Faure’s mind, business improvement starts with individual lawyers. Faure recommends that General Counsel carefully assess the quality of in-house legal staff by looking at three attributes:

1. their actions (are they leaders, managers or responders – in other words pro-active or re-active);
2. their attitude (are they focused, energetic and self-motivated, are they the “wait and see” type or are they unwilling or afraid to adapt); and finally
3. their ability (which ranges from fully capable, to talented but still learning, to those individuals who have insufficient knowledge to see either the problem or the solution).

An individual can be any combination of these three factors and Faure provides some different examples of these combinations (the realistic ideal, high potential, borderline, flatline, kamikaze…). Faure then identifies eleven personality traits that are relevant to work-related issues. For example the first three are – are they introvert or extrovert, are they motivated positively towards goals or negatively, away from goals, are their life decisions based on possibilities or necessities, etc. The end goal here is a 360 degree performance review — both self-assessment, by management and one’s peers and, if necessary, a performance improvement plan.

Business improvement through legal spend analysis

Faure then turns his attention to legal spend – again applying the same mantra that “if you cannot measure it, you cannot manage it”. It starts with a review of current legal spend and analysis against legal risk and business complexity (and the use of visual “heat maps” to demonstrate this analysis). These heat maps can then reduce the level of subjectivity around decisions on legal spend, identify areas that are either under or over-supported and identify other areas where further attention should be directed. The heat map analysis would work nicely for multi-national corporations with operations in multiple jurisdictions. But for corporate entities operating in a single jurisdiction, Faure suggests a different approach, instead looking at legal services as a pyramid with increasing legal and financial exposure as one goes up the value pyramid. Thus lower value work such as HR contracts, customer complaints and employment work occupy the base of the pyramid, tax work, divestments and acquisitions, intellectual property work might occupy the middle tier and compliance work (in the sense of investigations), business restructuring and major litigation occupy the top tier of the pyramid. The key here is to ensure an efficient distribution of scarce resources whether internal paralegals, outside counsel and in-house lawyers and over time move the more skilled resources up the pyramid so that they are focused on the areas of highest risk and financial/legal exposure.

Inefficient use of outside counsel can be reduced and eliminated over time by eliminating what Faure calls “the bridge of inefficient behaviours”, i.e. stopping business clients from going to law firms directly, stopping minor matters from being sent to law firms (and stopping law firms from accepting such mandates), stopping law firms from over-staffing projects and getting key stakeholders from the business to consult their in-house legal department sooner. This bridge can be eliminated via a number of steps – for example, by making the law firm work for no fees if it accepts work directly from a business client, without the oversight of in-house legal counsel.

Building Profitable Partnerships with law firms

For outside counsel, this is perhaps the most interesting section of the book and a potential taste of future relationships with large corporations for legal services. Faure starts by pointing out that in the traditional billable hour model, the economic interests of the corporation and outside counsel are misaligned. For one side to win the other must lose. Examples of this “zero sum game” include hourly rates being either two high for the client’s budget or too low for the firm’s profitability, law firms billing more hours than necessary while clients expect fewer hours than is feasible and the belief by the firm that a client’s legal misfortune is the firm’s opportunity. Faure believes interests can be aligned and replaced with a profitable partnership for both corporation and outside counsel. Once again it comes back to a stakeholder analysis – what does each party in the relationship want? Clients want low predicable legal expenses, access to quality expertise and resources in crucial must-win matters. They want a firm that understands their business drivers, that is responsive and flexible, that can help the client avoid risk altogether. Law firms want profitable work of a high quality and of an appropriate profile. They also want a long-term relationship. They want a satisfied client who is willing to generate recommendations and they want low professional risk. If all of the above can be met, they want large volume. While there may be some minor variances, this stakeholder analysis probably holds true for most corporate clients and most law firms.

The next step is to identify the different types of legal work that are undertaken and find a fee structure that is appropriate for each type of work.

For pure commodity work, the fee structure might be based on a fixed fee ($ per unit) but with an incentive to drive efficiency – for example, the firm can keep 50% of the savings if the annual total fee is below the estimate.

For lower level (“commodity”) litigation, success criteria must be defined in advance. This is achieved by an early case assessment (a report written by the law firm, with a prediction around likely outcome, estimated timeline and costs. In other words the litigation must be planned like a project. This report is paid for by the client. The client must then choose a success criterion which could be a result or a settlement. Another success criterion by which the firm might be judged is the accuracy of its costs estimate. The work is then executed by the firm. At the conclusion of the matter a report is drawn up. Outcomes are compared with initial success criteria. If the result is within X days or $Y of the defined success criteria this results in an uplift in fees.

For corporate records work, fees can be fixed ($ per legal entity), with remedial work undertaken at normal hourly rates.

Major projects are undertaken at hourly rates.

Finally, a bonus mechanism can be put in place. Faure mentions two types of bonus – general satisfaction bonus i.e. the senior management team is surveyed every six months on their level of satisfaction with outside counsel. If there is an improvement over a certain level, 100% of the bonus is awarded to the firm. But the bonus works on a sliding scale. Secondly a bonus can also be implemented in order to encourage proactive litigation avoidance. If the number of litigation proceedings decreases, a bonus is awarded on a sliding scale. The greater the reduction in litigation, the greater the bonus. This is not a bonus for litigation settlement but a bonus for litigation avoidance. Since no significant work has been expended by the firm with regard to litigation avoidance, this bonus is usually pure profit.

Faure has more than just interesting innovative ideas – he has clearly “walked the walk” with Tyco. The results are impressive- while internal headcount remained unchanged, costs were reduced by 20%, yet legal coverage increased by 50% and third-party governance metrics increased over 6 years from 2/10 to 9.5/10, yielding a 20-30% increase in client satisfaction. In the final substantive chapter, he describes the process that he has worked through with Tyco. In terms of coverage, Faure put in place new regional lawyers to cover the whole of the EMEA region for the first time, reduced the number of outside counsel firms from 200+ to one and put in place a 24 x 7 x 365 multi-lingual legal hotline. In terms of quality, he introduced local language and business expertise in key areas of law, supported by online contract drafting tools and pro-active legal training. In terms of control, he introduced online reporting, invoicing and predictable fixed fees. With regards to costs he oversaw a major reduction in average hourly rates across the EMEA region. For its part Eversheds (the preferred outside counsel firm for Tyco) managed the relationship through GAMS (their Global Accounting Management System) – part time and billing system, part estimation/project management system (built at a reputed cost of 16 million GBP).

Conclusions

This is a managerial “how to” book for a niche audience – General Counsel in large corporations. But it is not a narrative of events. Of the Smarter Legal Model, Faure writes “it is not a panacea for all legal departments but a bespoke conclusion for a vertically-managed multinational with many business segments. While aspects of it might or might not work for different businesses, the methods used to arrive at the Smarter model will help other design their own bespoke conclusions.”

But because this is a managerial book rather than a narrative, there are areas where some questions go unanswered. For example one is left wondering how exactly Faure presented his change management agenda both internally, to in-house counsel and to the business at large. We know that Faure was given a free hand to do whatever it takes to fix the problem. But what obstacles to change did Faure encounter? No doubt there were many. Also the Tyco scenario may be unique. How then does one sell the mantra of change to an in-house legal department that is under-performing but is not fundamentally broken? Also while Faure indicates that there was no overall change in headcount, presumably a number of “heads rolled”? How was that managed? What was the impact on morale? This is the culmination of lessons learned but written from an entirely objective perspective. But business of law is also a people business — maybe managing change from the human side is worthy of further exploration if Faure is looking for further material for a second edition.

From a law firm perspective, it would be easy for outside counsel to ignore this book – “very interesting but ultimately irrelevant” might be a simplistic conclusion. That would be a fair analysis if one views the credit crisis of 2008/2009 as merely a severe but momentary blip in the economic cycle and that the “normal” picture of legal services will resume in due course. If on the other hand one views the 2008/2009 crisis as a once-in-a-generation event that has caused a significant economic reset – that the balance of power in legal services has shifted in favour of corporate counsel and the “more for less” mantra is more than just a passing fad, outside counsel should pay very close attention to the lesson learned here. The implications for the delivery of legal services are significant.

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