Legal operations

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

Recursive rent-extraction from the consummate rentiers.

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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 five damp introverts who would quietly prepare board minutes and maintain a register of charges. Their idea of a business trip was an excursion to companies house to file a Slavenburg.

To be sure, the banks did these big, clunking deals, and used lots of lawyers, but it engaged them directly, from law firms, when it needed them.

Each of these transactions — mergers, acquisitions, equity offerings, bond issues, syndicated loans — were a big, risky deal. They involved parties who weren’t well acquainted sending each other pots and pots of money: not just millions, but tens or hundreds of millions. 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 quite easily can go wrong and, when they do, they go badly wrong. (Just ask Citigroup.)
• 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 one of those big, clunking, multi-million dollar deals, would quite happily expend say one percent of that value on a decent firm of lawyers to make sure nothing went wrong.

Lawyers at these firms found you could name a preposterous hourly rate, and the banks would hardly 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 was simple: a 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 document, 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. In house 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, 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 swtichboard 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 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: [[Microsoft Office|Bankers communicate in spreadsheets. Lawyers communicate 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.

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 mis-spelled in the final prospectus disappeared from the commonplace and banks started to structure ever more elaborate deals, as the cost and capability of practical legal structuring inside their organisations mushroomed. The inhouse 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.

So legal departments started to get really big. This was a direct move to reduce external legal spend. The better staffed you were, the less you spent. Within ten years, 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 — your four hundred internal lawyers, and 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, most global banks were running into the billions.

Remember our 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.

“We seem,” the business analysts wryly 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 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. Suddenly the heroes at first chief of staff, then the legal chief operating officer, and latterly legal operations had the same kind of hiring mandate the legal eagles had fifteen years earlier. It is a deft re-brand: chief of staff sounds like, and was, some retired military adjutant who put money in the meter and made sure payroll got done. Chief Operating Officer sounds a bit more organised and intrusive on what the department does. “Legal operations” sounds like a factory: a long-term industrial undertaking that is here to stay. It sounds like the industrial revolution for the artisanal weavers of the old legal department.

The great retrenchment of in-house legal began, and for ten years kept pace. Much low-hanging fruit was picked. but eventually, the legal spend was buttoned down, But it didn’t happen, as you might expect, be addressing the difficult questions the credit crisis plainly posed.

But

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 kit, 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