Legal operations

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A tremendous new wheeze for rent-seeking from legal eagles. Legal operations is a second-order derivative military-parasitical complex that feeds off the direct first-order rent-seeking of those already in the in-house legal profession. The history of inhouse legal is interesting, by the way.

It works like this:

The prehistory of law in finance

Once upon a time there were deals, and banks who did them would engage law-firms to do the legals. Each one of these deals — mergers, acquisitions, equity offerings, bond issues, syndicated loans — involved parties who didn’t know each other awfully well transferring each other lots and lots of money: not merely millions, but tens or even hundreds of millions of dollars. Every now and then, even billions of dollars.

Two rather obvious observations:

• Firstly, if you are funnelling hundreds of millions of dollars around the financial system to randoms, things quite easily can go wrong, and when they do go wrong, they go badly wrong. Just ask Citigroup.
• Secondly, a very small portion of “a couple of hundred million dollars” is still a very large sum of money, even if you do charge out at £400 per hour.

Therefore bankers, who themselves might collect as much as seven percent of the value of a deal, would quite happily expend say one percent of that value, on a decent firm of lawyers to make sure nothing went wrong. After all, the lawyers usually wind up doing the hard yards, churning out thousands of pages of verbiage, running down quixotic ideas, accommodating spurious considerations and regularly working through the night generating needless “turns” of the documents to accommodate an artificial deadline imposed by uncomprehending analysts who would then, when it was met, routinely ignore the produced draft for a couple of days before opining that the deal had changed anyway and this draft could be junked.

The rise of the magic circle

So was born the magic circle, which has been with us since at least the time of the First Men, and even before them to the primordial pagan era where the Children of the Forest roamed the Woods of Bretton. The game was this: we will over-turn heaven and earth to document whatever you require us to document, by whenever you want us to document it, with two considerations: firstly, our opinion will disclaim all practical responsibility for any of the stupid things you made us put in the documents, and secondly, and more importantly, you pay us handsomely, by the hour for doing so. Our service is blood, sweat, toil and tears in the pursuit of whatever entertains you. Yours is to pay us through the nose for it.

For many years, this state of affairs was all fine and capital: everyone clipped their tickets, lived prettily, maintained nice homes in the stock-broker belt to and from which they commuted in late-model German cars. It was the corporate end-clients who paid for it, after all, and since their executive teams were commuting from the same stock-broker belt in the same sorts of cars, they weren’t bothered.

As the roaring nineties wore on, the deal pipeline grew ever fatter. Aspiring young contrarians started arriving in London from all sorts of far flung places, wanting a piece of the action. Law firms hired them without question, supposing (for the most part rightly) that they would work like Spartans for a couple of years, expect a pittance in compensation, and bugger off home 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.

The weaponised legal department

The bankers did start to wonder whether they couldn’t rationalise that legal spend: “the less we spend on legals,” they reasoned, “the nicer our German cars will be.” One obvious touchpoint was the hand-off between the bank and the law-firm. “Why don’t we hire some lawyers to manage that legal relationship? If they filter out all the stupid questions, and head off the wild goose chases, we won’t burn so much in legal fees. We will encourage them to work for us by paying them an investment banking bonus, and letting them go home at 6pm.”

So began the modern in-house legal team. This worked very well for everyone: deals were executed more efficiently, the embarrassing sensation of seeing your firm’s name mis-spelled in the final prospectus disappeared from the commonplace and the banks started to structure ever more elaborate deals, as the cost and capability of practical legal structuring inside their organisations mushroomed. The legal eagles started to do more than just steer instructions to law firms, translate banking gibberish and check the football team. They started to add value.

But at the same time, the legal department started to get really big. Teams that had numbered a handful in 1995 were running into the hundreds ten years later.

Here come the management consultants

With the encroaching modernist orthodoxy of management to margins grew, it was inevitable that the bean-counters would get involved. And so they did, a bit tentatively after the dot.com bust and the Enron collapse, but they started to find their line and length in the wake of the global financial crisis.

“We seem,” they wryly noted, “to be spending a shit-ton of money on lawyers, and it doesn’t seem to have done a lot of good. We now have an internal team of three hundred legal eagles costing us one hundred million dollars all told and, added to that, 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?

So began the great retrenchment of inhouse legal. But it didn’t happen, as you might expect, by asking the difficult questions the credit crisis plainly posed. Instead, management consultants got in on the act.

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 how to fix inhouse legal. All are in awe of technology’s current gallop; all burn with the thought-leader’s desire to clothe one’s mundane vocabulary in voguish finery; to ride the vanguard leading edge. But the problem is not technological, it isn’t new, and it doesn’t require much vision. It is rather dreary and age-old. It is this:

Legal is too expensive and too slow.

This in turn hinges on two things:

• Over-reliance on external counsel: in-house lawyers are still far too ready to send easy, English-law 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. Inhouse teams at investment banks are the size of middling international law firms. They have, generally, more senior and have far more institutional experience than their equivalents in private practice. There is generally little substantive need to refer complex English law material to outside counsel, yet they routinely do it.
• We over-engineer legal docs: Partly because external counsel feel short an ugly option should they screw anything up, and partly thanks to the professional rent-seeker’s general will to iatrogenesis, all legal documents are absurdly over-engineered for what they actually do. They are far too incomprehensible, inscrutable, and even for those who do understand them, they are shot through with protections that 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 those contracts that aren’t particularly high risk suffer from “banking envy”.

Now it is far easier said than done, but were those tasked with realigning legal to address these cultural phenomena — neither are easily solved problems to be sure, but aligning systems and incentives could help — then the need for much of the modern 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 imagination, 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 have a long suit in reductionist analytical rigour and they do like an over-arching metaphorical schema. They see the “inhouse legal problem” may be impervious to front-on attack, but they can analyse it into submission. This they do by breaking down that intractable whole into legible, familiar parts that already exist in the MBA toolkit. Each of these components becomes its own little sub-component, with its own workstream, and workstream lead, going out and gathering evidence and, bascially, getting in the way of the lawyers who are busily trying to execute on their time-worn business model.==See also==

• Magic circle law firm

• ISDA ninja
• Ultimate client
• Look, I tried
• OneNDA