Legal operations
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Office anthropology™
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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 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.[1]
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 phone number for Robert Walters. Law firms hired them without question, rightly supposing they would work like Spartans for a pittance before buggering 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.
The weaponised legal department
As the deals came through ever faster the bankers began to wonder whether they could rationalise that legal spend a bit. “The less we spend on the legals,” they reasoned, “the nicer our German cars will be.”
An obvious touchpoint 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 communicate in memoranda. “Why don’t we hire some lawyers to manage that legal relationship?” thought the bankers. “If they filter out all the stupid questions, and maybe head off some of the wild goose chases, we won’t burn so much in legal fees. And our name will be spelled right on the football team, too. That’s really important.”
Again, everyone won: the bankers got fatter fees; the law firms got rid of under-performing associates by parachuting them into the banks to steer all the work back to them, the underperforming associates got paid investment banking bonuses and got to go home at 6pm.[2]
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 inhouse legal eagles, it transpired, weren’t so useless after all. They started to do more than just steer instructions to law firms, translate banking gibberish and check the football team. They started to add value.
As a consequences legal departments started to get really big. Teams that had numbered a mere handful in 1995 were running into the hundreds ten years later.
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.
Scrutiny intensified after the Russian crisis, the dot.com bust and the Enron collapse, but they the business administrators really started to find their line and length in the wake of the global financial crisis in 2007. There were way too many goddam lawyers.
“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.
The great retrenchment of in-house legal began, and ten years later gathers pace. But it didn’t happen, as you might expect, be addressing 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 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.[3]
- 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
References
- ↑ In the 1990s, £350 pounds was a preposterous hourly rate. The preposterity has not been tempwered with time: the going rate for a magic circle equity partner, at the time of writing, displays a sustained contempt for gravity and the general principles of mean reversion, and is more like £1,000. To give you some idea of the scale here, when the JC first stepped onto Southampton dock, from the slow-boat from the South Seas in the late 1990s, the biggest transaction he had ever worked on was about seven million Australian dollars. Within a year in London, he had worked on at least one deal where the legal bill was bigger than that.
- ↑ Now this may seem uncharitable to inhouse legal eagles, but it is fair. I say it as exactly such an underperforming associate. The appeal of inhouse legal was that it was better paid in the short run, and the hours were much better. And, in the ’90s, there wasn’t as much actual law to do. The really heroic associates, who liked being regularly beasted till 5am and working weekends, stayed, became equity partners and cultivated aneurysms etc. It is not for everyone. Inhouse life has its moments, but it is a lot less of a slog. Of those who went in-house few returned to law firms (at least not till the 2010s, when the trend started to reverse, largely due to the rise of legal operations machines).
- ↑ It is said that Banks’ reluctance to buy professional indemnity insurance for their legal teams may propel this, but this strikes me as a fatuous argument. Banks are classic self-insurers. If ever the amount of a legal call is sufficiently grave to warrant claim on a professional indemnity policy there are better questions to ask, such as why is a bank adopting such a risky strategy in the first place? If that is too naive an outlook — ok, guilty as charged — then maybe that is the triage point for engaging external counsel.