Legal operations

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Legal operations
/ˈliːgəl/ /ˌɒpəˈreɪʃənz/ (n.)

Recursive rent-extraction from the consummate rentiers.

Legal operations is a second-order derivative military-parasitical complex that feeds off the direct, first-order rent-seeking of those members of the legal profession who, shipwrecked on their sacred voyage from pupil to partner, found themselves washed up on the shores of a deserted in-house legal department.

The history of inhouse legal — how it went from “sleepy backwater for awkward, work-shy, typo nuts” to “military-forensic complex in need of taming with extreme prejudice by management consultancy” in twenty short years is interesting, by the way.

So, let me tell you a story.

The history of the inhouse legal eagle

Once upon a time, there was hardly such a thing as an in-house legal department in a bank at all. There was one, but it was a sleepy area in the basement, rather like a personal library, populated by a handful of damp introverts who would quietly prepare board minutes and maintain the firm’s register of charges. Their idea of a business trip was an excursion to companies house to be rebuffed when trying to file a Slavenburg.

Now, at the time, banks did big, clunking deals. These transactions — mergers, acquisitions, equity offerings, bond issues, syndicated loans — were big, risky affairs, involving parties who weren’t well acquainted sending each other pots and pots of money: not just millions, but tens or hundreds of millions or, every so often, billions.

So two rather obvious observations:

• Firstly, if you are regularly funnelling hundreds of millions of dollars around the financial system, things easily can go wrong and, when they do, they go badly wrong.
• Secondly, a very small portion of a couple of hundred million dollars, when you look at it next to, say, a nice house in Surbiton, is still a very large sum of money.

Therefore bankers, who themselves might collect as much as seven percent of the value of those big, clunking, multi-million dollar deals, would quite happily spend say one percent of that value on a decent firm of lawyers to make sure nothing went wrong. Meanwhile, the ashen men and women of the in-house legal team were hardly involved, at least until it came time to have a charge registration rejected.

Lawyers at these firms found they could name a preposterous hourly rate and the banks would not blink.

After all, work needed to be done, and it was the lawyers who would usually do the hard yards, churning out thousands of pages of verbiage, running down every quixotic idea, accommodating every spurious risk factor, war-gaming every nightmare market that the issuer’s finance director could confect. The lawyers regularly worked through the night to meet an artificial deadline imposed by a junior analyst who, when it was met, would ignore the proffered draft for a couple of days before advising, without remorse, that he’d forgotten to mention the deal changed Thursday last, and the draft, knocked up in lieu of a long-planned anniversary dinner, hadn’t been needed in the first place.

The rise of the magic circle

Forged of these fires was the magic circle, a concept which has been with us since at least the time of the First Men and, yea, even unto the primordial pagan era before them when Children of the Forest roamed the Woods of Bretton.

The business model of the magic circle was a simple form of intellectual rope-a-dope: we will turn heaven and earth to document whatever you require us to document, whenever you want it, with two considerations: firstly, our legal opinion will disavow responsibility for all the stupid things you made us put in the documents, and secondly you will pay us handsomely, by the hour, without question, for doing so. Our end of the bargain is our blood, sweat, toil and tears, expended in the pursuit of whatever hare-brained intellectual contrivance should catch your fancy. Yours is to pay, through the nose, for the privilege.

Since, in the context of a two-hundred million dollar deal, whatever we ask you to pay us will be a drop in the ocean, everyone wins.

For many years, this state of affairs was all fine and capital: everyone clipped their ticket, lived prettily and maintained nice homes in the stock-broker belt to and from which they commuted each day in late-model German cars. Inhouse legal barely got a look in, but to trot along to companies house every now and then to have a Slavenburg rejected. It was the corporate end-clients who paid for it, after all, and since their executives were commuting from the same stock-broker belt in the same sorts of cars as the bankers, they weren’t any more bothered about it than anyone else.

As the roaring nineties wore on, the deal pipeline grew ever fatter. Fortune-seeking young contrarians started pitching up in London from all sorts of far flung places clutching foreign degree certificates and the switchboard number for Robert Walters. Law firms hired them — us — on the spot, rightly supposing they would work like Spartans, expect little by way of pay, and bugger off after a couple of years to spend the rest of their lives pleasure-boating on Auckland harbour and kicking the crap out of the rest of the world at Rugby Union. A handful stayed, mainly for the cricket.

The rise of the weaponised legal department

Still, as the deals came through ever faster, and the legal bills got ever bigger, the bankers began to wonder whether they could rationalise that legal spend a bit. “Perhaps we could be a bit more economical here,” they reasoned. “And the less we spend on the legals, the nicer our German cars will be.”

An obvious friction-point was the hand-off between the bank and the law-firm. It was clunky: bankers and lawyers don’t really speak the same language: Bankers communicate in spreadsheets, lawyers in turgid memoranda.

“Why don’t we hire some lawyers of our own to manage the legal relationship?” thought the bankers. “If they filter out all our stupid questions, and maybe head off some of the wild goose chases, we won’t burn so much legal expense. And our name will be spelled right on the football team, too: that’s pretty important.”

And so the bankers started to hire lawyers from the law firms. Again, everyone won: the bankers got their bigger cars; the firms could parachute under-performing associates into the banks where they could steer deal-flow back to their almae matres, the associates got investment banking bonuses and got to go home at 6pm.

Heroic associates who liked being beasted till 5am and working weekends stayed at their law firms, became equity partners and cultivated aneurysms etc. But aneurysms are not for everyone. In-house life had its moments, but it was a lot less of a slog, and you got to kick law-firm associates around. Of those who went in-house, few returned to law firms.

So began the modern in-house legal team. This worked well for everyone: deals got done more efficiently, the embarrassing sensation of seeing your firm’s name misspelled in the final prospectus disappeared from the commonplace and banks started to structure ever more elaborate deals, as the cost and capability of legal structuring inside their organisations mushroomed. The in-house legal eagles, it transpired, weren’t so useless after all. They started to understand their organisations and the business rationales, and found they could do more than just steer instructions back to law firms, translate banking gibberish and check the football team. They started to add value.

But legal departments started to get really big. This was a direct consequence of the wish to reduce external legal spend. The better staffed you were, the less you spent. Within ten years, in-house teams that had numbered a handful were running into the hundreds.

Here come the management consultants

All good things must die, and as the encroaching modernist orthodoxy of managing to margins gripped the city, bean-counters turned their attention to the scale of these legal activities. Which, by 2005, was colossal. The sunk cost of legal — pay and perks for four hundred internal lawyers, and the external legals on your massive pipeline of mergers, IPOs and CDOs going out the door, was in the high hundreds of millions of dollars. By the early 2010s, rocked by litigation and regulatory action in the wake of the financial crisis, most global banks’ legal overheads were running into the billions.

Remember our obvious observation above: a very small portion of a colossal number is still a very big number. If you can knock even five percent out of a billion dollar run-rate, you are going to look like fifty million bucks of hero.

Some business analysts arrived, intent on becoming heroes.

“We seem,” they noted, “to be spending a shit-ton of money on lawyers, and it doesn’t seem to have done us much good. We took a bath on Russia, Enron, WorldCom, and now half the known financial universe has imploded. We seem to have an internal team of three hundred legal eagles, and we are spending half a billion on external legal firms. And everything still seems to be blowing up. Can we not do something about this?

Thus began Zarathustra’s down-going.

When you’ve been spending money like it comes out of a tap, it isn’t hard to look like a hero: you just turn off the tap. It helps when deal flow is flat-lining and the litigation portfolio is winding down by itself, but still: credit where it is due: the consultants cut the legal spend by twenty-five percent, annually, over four or five years. That’s a lot of hero.

The role and influence of these analysts grew: at first, it was an MBA with the title “chief of staff”. Then she became “legal chief operating officer”. Now the team has its own budget and the same kind of hiring mandate the legal department itself had fifteen years earlier, and calls itself “legal operations”.

It is a deft re-brand: “chief of staff” sounds like, and was, a kind of retired military adjutant who ran the CPD program and no-one took seriously. “Chief operating officer” sounds a more organised attack on the freedom and profligacy of the professional class. But “legal operations” sounds like a factory: a long-term industrial undertaking that is intended to displace the artisanal weavers and will be here for good.

In this way the great retrenchment of in-house legal began, and for ten years kept pace. Much low-hanging fruit was picked. But eventually, legal spend was collared, and opportunities to eek out cost dried up.

Digression: the dogma of cost control above all else

Note the narrative sweep here: industrialisation. Scale. Control. Margins. The approach to the problem of legal comes from a particular viewpoint. The accountant’s. It is quantification, not evaluation, and it is focussed on one dimension alone: reducing cost. The question is never what to do, or why to do it, but how cheaply to do it. The full beam of analytical, reductive rigour is trained on that single question: how can we do all this for less and less money? Focus has become laser-like on the delivery of legal services. How they should be delivered, with what tools, out of which segments, at which cost.

Now management orthodoxy has understood for decades that it isn’t cost, but waste, that is the problem in a distributed manufacturing process: raw materials do cost money. You do have to pay machine operators. At some point you can’t avoid the basic minimum costs of doing something properly. Rather, you rigorously test your processes to check you are doing it properly — and not overdoing it by wasting raw materials, overengineering, having your staff standing idle or engaging them in wasteful activity. The people at Toyota were very analytical about the types of waste you should eliminate in the 1950s and 1960s, and beat the American auto-manufacturers to a pulp.

But when the costs are so big, it is really hard not to obsess about them, in the abstract, in the round, as a thing in themselves. Especially if you are an accountant, and you don’t understand the manufacturing process that accounts for them anyway.

One last digression before we move on: Toyota’s lean production management technique works best in “tame” environments where all dependencies are mapped and all possible outcomes known. Where your environment is “wicked” — imperfect data, non-linear interactions, convex risks — you need three things that are generally designed out of production lines: expertise, flexibility, and redundancy.

In a perfect world, legal eagles are at their best in purely wicked environments. You consult them when things go wrong, your normal assumptions don’t work and you don’t know what to do. But in the actual world, all environments — even factories — are a mix of wicked and tame components in some portion or other. In banking, the trade-off is between product development and tail-risk management on one hand — wicked problems — and scaling and monetising products on the other — tame problems. We can assess the lawyer’s value on the tame axis quite readily, and that is largely by how well she can keep out of it: how can she standardise, simplify and de-complicate business-as-usual legal processes so it requires as little explanation to the muggles as possible and to what extent can she map out predictable legal processes into decision trees and playbooks and hand them off to an operations team (or, at the limit, automate them) altogether.

The other, wicked part of the lawyer’s day job — one humbly submits, the important part — is a lot harder to evaluate, and is impossible to evaluate if your only prism is cost.

Which brings us neatly back to the question of legal operations and what is really wrong with the legal department. If you accept these premises, it will be apparent that mea None of this addresses the difficult questions the credit crisis plainly posed.

What’s really wrong with in-house legal

Now acres of ink have been spilled, books written, monographs published, thought-pieces floated, on the problem of how to fix in-house legal. LinkedIn is awash with them; all in awe of technology’s current gallop; their mundane propositions all clothed in expressions of the richest finery. The operating theory: legal is profoundly broken, always has been, but, since we have some new ki t, this time is different. We can rebuild it. We have the technology. We have the capability to make the world’s first bionic legal department. Better than it was before. Better, stronger, faster.

But, friends, the problem is not technological, it isn’t new, and it doesn’t require vision. It is rather dreary and age-old. It is easy to state, if not fix:

Legal is too expensive and too slow.

This in turn hinges on two things, neither of them soluble by chatbots:

• Over-reliance on external counsel: in-house lawyers are still far too ready to send straightforward work out. This was the original plan, to be sure, and it made sense when the bank only had three lawyers covering the whole investment bank, but times have moved on. In-house teams at investment banks are the size of middling international law firms. They skew more senior and have far more institutional experience than their private practice equivalents. They should not need to refer English law questions to outside counsel, yet still they routinely do it.
• We over-engineer legal documents: Partly because any professional adviser is short an ugly option should anything go wrong, and partly thanks to the professional rent-seeker’s tendency towards iatrogenesis, legal documents are absurdly over-engineered. They are far too incomprehensible, inscrutable and, even for those who do understand them, they are shot through with overblown protections the parties do not need and will never use, but which are nonetheless argued about and nickel-and-dimed over for weeks of months. Even contracts that aren’t particularly high risk increasingly suffer from “banking envy”.

Now it is far easier said than done, but were we to address these cultural phenomena — neither are easily solved problems to be sure, but aligning systems and incentives influences behaviour a lot more than management theory does — then much of the millenarianism we are seeing would melt away. You don’t need artificial intelligence to review your confidentiality agreements if the market agrees a short, plain, standard form. You don’t need document assembly if you standardise and simplify your ISDA schedules.

But these problems require an understanding of human psychology and a deep grasp of the legal and market conventions — qualities with which your average MBA is not liberally endowed.

What the MBAs bring to the party

Now MBAs are not known for their imagination, but they do have a long suit in reductionist analytical rigour and they love an over-arching metaphorical schema. Management consultants are keen on publishing these, and they will throw PowerPoint thought pieces around at the gentlest invitation. Lacking the subject matter expert’s deep grasp of the market, the “in-house legal problem” may be impervious to front-on attack, but they can analyse it into submission.

You do this by breaking down the intractable whole into legible, familiar components that already exist in the MBA toolkit. Each becomes its own little sub-domain, with its own workstream lead-led workstream, going out and gathering evidence and, basically, getting in the way of the lawyers who are busily trying to execute on their own time-worn business model.

Perversely, change manager interference only further slows down the lawyers even — every other day they are fending off a call from a well-meaning analyst asking for feedback on some innovation or other they didn’t ask for and have little interest in using — while the size of the legal operations team grows, and it foments its plans to entrench itself into the legal team.

The legal work catalog, comprises the following components and opportunities:

• Strategic planning
• Formulating models for legal service delivery
• Project management
• Triage management
• Practice operationalisation
• Organisational optimisation
• Knowledge management
• Information governance
• Vendor management
• Finance management
• Business intelligence
• Training and personnel development
• Technology infrastructure management

Suddenly, the business of being an in-house lawyer is worthy of a modern military-industrial complex to support it.

See also

• Magic circle law firm
• ISDA ninja
• Ultimate client
• Look, I tried
• OneNDA