Chasing the money: GCs move needle on law departments as a cost centre

By Jim Middlemiss January 15, 201815 January 2018

Chasing the money: GCs move needle on law departments as a cost centre

 

Joel Schuster is not your typical in-house lawyer. In addition to overseeing the usual legal functions, such as compliance and corporate commercial matters, Schuster, Chief Legal Officer, Senior Vice President and Corporate Secretary at Avigilon Corporation in Vancouver, has responsibility for bringing in revenues.

He is in charge of licensing the patent portfolio at the fast-growing Avigilon, which provides video security and analytic solutions.

That means the legal department has its own profit and loss statement, and the division sets a budget on how much it expects to earn from the 740 patents in its portfolio.

“Our revenues blend with the rest of the company’s revenue,” he explains. “We’re here to contribute what we can. It does help that we can bring in revenues. It makes the budgeting process easier.”

It can be done

Schuster is not alone when it comes to responsibility for making money.

Gord Davies, Executive Vice President, Chief Legal Officer and Corporate Development at OpenText Corporation, for example, oversees his software company’s compliance program, which audits clients to make sure they are onside with their software licenses, a service that generates revenue for the company. “It’s nice when Legal is not only a cost centre but also contributing on the revenue side,” he says.

Companies like DuPont and Ford have both spoken publicly about their legal department’s efforts to bring in money through loss recovery programs.

Then there’s British Telecom Group (BT) in the U.K. When that country’s legal regulator permitted the creation of alternative business structures, BT’s legal department saw an opportunity to leverage its existing investment in its claims services and its in-house legal department of 80 legal and support professionals. It created BT Law Limited, a captive law firm within the legal department, to market claims services to external parties.

“We are all under pressure and therefore the impetus is to go shake the tree and see if any money falls out,” says Dan Fitz, General Counsel and Corporate Secretary of BT Group, which owns BT Law (pictured above).

BT Law provides services to external clients in three areas: motor claims, public liability and legal liability.

The team handles legal issues for fleets totalling 43,000 commercial and non-commercial vehicles with more than 6,000 third-party and uninsured loss claims annually, and another 5,800 claims related to public liability and 400 accident and disease claims involving employees. With little to no marketing, revenues in fiscal 2017 hit £378,000, up 50% from the prior year. What started out as a money-losing operation in 2013 is now profitable, adding almost £60,000 to its parent company’s bottom line after tax.

Fitz admits, “It’s an experiment.”

The company was already paying to manage its own fleet claims. In fact, it repatriated the work from different law firms across the U.K. to get better efficiency and build a more uniform, consistent service across the country, so it was a chance to leverage that investment.

“We don't accept conflicted work,” Fitz notes. “Our first priority is to look after BT.” For example, it’s a service that a courier or delivery service with a fleet of vehicles could tap.

He likens it to a private labeling service for insured and uninsured claims. “We’ve got extra capacity.”

“It’s a long burn,” he says of the law firm’s development, “but does it take in more than what goes out? The answer is yes.”

He says managing claims in-house for BT’s fleet delivers benefits at the EBIDTA level to BT in “the low millions,” noting that BT vehicle-related claims brought in £14 million last year.

There have been additional benefits to the creation of BT Law. “One of the non-financial benefits is that the team thinks like a business now,” he says.

Then there’s DuPont Company, the 800-pound gorilla when it comes to evolving a law department. In the 1990s, it revamped the way it delivered legal services and the role of the law department under then General Counsel Tom Sager, who is now in private practice at the U.S. law firm Ballard Spahr LLP.

That included employing what it called a loss recovery program to shift the needle on how law departments approached revenue generation and the lawyer’s role in it. In an interview, Sager explains that “every practice area was assigned a leader to identify opportunities for recovery.”

It meant adopting the “mindset of a plaintiff attorney” and looking for wrongdoers, he says. No stone was left unturned and everything from seeking recovery in bankruptcy to anti-trust suits, commercial spats with business suppliers, mistakes and insurance claims were fair game.

He calls it a “programmatic” effort, rather than ad hoc. It has to be a “very data driven, disciplined process,” he says of assessing claims, noting that when a company threatens to sue customers or suppliers, the latter can “get their back up.”

However, the focus wasn’t litigation. In fact, very few of the matters ended up in court. Most were settled through negotiations and arbitration. The attention was on enforcing the company’s rights under existing contracts and laws.

The key, he says, is that the claims must be legitimate. Those brought forward were “well documented” and in some cases brought recovery within a matter of months.

“Some of these recoveries were quite large,” he says. For instance, there was a US$30-million recovery over a power outage that shut down production. Many were also routine, such as overbilling, being charged improper taxes, delivery of defective goods and accident claims.

It’s been a profitable venture for DuPont. Between 2004 and 2014, the loss recovery program brought in US$2.7 billion dollars. It wasn’t just in the U.S.—as much as 30% of recoveries come from other regions, including Canada. Moreover, he says, the cost of recovery was about 10%. Interestingly, he adds, the loss recovery program built a stronger bond between the legal department and business units.

“The more the general counsel is tuned into the overall operation . . . the more likely they are to want to get into a loss recovery program,” suggests Jay Fastow, a partner in Ballard Spahr’s loss recovery service. “They see it as enhancing the whole business.”

Long viewed as a cost centre, legal departments around the globe are now being eyed as a place that can actually generate revenue and—some suggest—become a profit centre.

On the flip side

It’s a controversial proposition, and one that is spawning debate in legal circles.

Proponents ask what’s wrong with legal departments and lawyers getting more involved in revenue generation and trying to move the needle on the notion that the legal department is a cost centre? After all, most companies that lawyers work for exist for one real purpose—to earn profit for shareholders. Why should the law department not be a bigger part of that equation?

Critics, however (and there are many), worry that by focusing on profits, legal departments are missing the boat and actually increasing corporate risk, something that legal departments are traditionally called on to reduce.

In a March 2017 issue of Seytlines, a publication by SeyfarthLean Consulting LLC that looks at the changing practice of law, Kenneth Grady, a lawyer and adjunct professor at the Michigan State University College of Law, writes that it’s time to “stop with the profit center nonsense,” calling it a “bad idea.”

In a takedown of profit-centre proponents, Grady discounted the concept, suggesting that “strange as this may seem, doing your job does not convert you from a cost center to a profit center.” He adds that chasing down wrongdoers can actually disrupt and distract an organization, not to mention increase the risk of claims against the company. He thinks legal departments are better off focusing their efforts on “becoming a competitive advantage” by reining in costs, reducing spending per lawsuit and maintaining or reducing existing risk.

Ottawa-based legal consultant Jordan Furlong, author of Law is a Buyer’s Market, also has apprehensions about corporate law departments that focus on revenue generation. He notes there are two revenue tranches at play: one is stopping or preventing revenue leakage through loss recovery programs, and the other is generating fresh revenue.

He’s more concerned about the latter than the former. “If you are saddling in-house counsel with sales responsibility, you put them in a difficult position. Inevitably, there is going to be some conflict arising in their role as sales generator and their role as risk manager and legal issue handlers. You create the potential for unhealthy horse-trading.”

Mostly, though, he thinks it “misconstrues” the role of the legal department, noting there are thousands of people in a company whose job is to focus on revenue. “There is only one person whose job it is to keep the company from shooting itself in the foot,” he says, and that’s general counsel, whose mission or purpose should remain risk management. “I think it muddies the waters.”

Avigilon’s Schuster, however, doesn't think potential conflicts should preclude legal departments from pursuing revenue-generating opportunities. In the event that a dispute arises between the company and a supplier or customer over a patent license, he says, the company will “figure out the best path forward and take that path.”

BT’s Fitz adds that concerns about conflicts are “valid criticisms” and “we discuss them routinely.” However, he notes, the potential for conflict is a daily occurrence in business. “I am not sure it’s a real criticism in and of itself.”

Underscoring value in the future

Nonetheless, there are challenges for law departments that want to take a more active role in revenue-generating functions. Silvia Hodges Silverstein, Executive Director of the Buying Legal Council, a trade organization for legal procurement, observes that “this really necessitates a new mindset and new skills.”

“It’s a much more business-oriented approach,” and she questions if legal departments have the right skill set and are ready for such a step.

Schuster agrees that when a legal department becomes responsible for revenue, there is a “change in culture. There are different expectations.”

Part of the challenge in the whole profit-centre debate is that revenue seems to be equated with value, which is only part of the story.

Legal departments are often hard-pressed to quantify their contribution to the organization. It’s difficult to measure the value of a compliance program or the early settlement of litigation. Revenues, on the other hand, are much more measurable. “The easiest way to assess value is money, but that doesn't mean it’s the only way,” notes Mark LeBlanc, General Counsel for Ontario public broadcaster TVO.

Casey Flaherty, a former in-house lawyer who now works with legal departments to help them improve their relationship with external counsel, says he is “uncomfortable with this idea of the law department as a profit centre.” However, he understands the attraction of tying value to revenue because the latter is easy to measure. The current challenge for him is that the key performance indicators (KPIs) that companies rely on to assess performance don't translate well in a legal department.

“How do you map the activities of what the law department does to the company’s own KPI?”

He agrees that you need “to translate as much of what you can do into dollars,” but you also need to bundle your metrics and KPIs to “tell a story.” Take non-disclosure agreements, which are de rigueur in most organizations. Shaving off time to complete them and making them easily accessible to departments that need them can have the same impact as revenue generation because it moves things along faster.

He suggests counsel push back on revenue mandates and “try to reframe it. Don't just tell me the law department needs to show profit, because that doesn't serve anybody. It will create a lot of perverse incentives. They’re either going to be gaming the system or taking credit for things that aren't really theirs.”

Like it or not, though, revenue generation and the legal department is increasingly in the crosshairs of executives, especially as the role of general counsel expands. David Calabrigo, Senior Vice President, Corporate Development, Legal Affairs and Corporate Secretary at Vancouver-based forestry firm Canfor Corporation, says that management teams and boards of directors “are looking to their general counsel to do more and develop more in terms of role and responsibility in the company.”

Calabrigo, who is responsible for acquisitions and divestitures, cites M&A as one area where GCs can play a bigger role in revenue generation. Companies analyze their targets and expect a certain return and synergies based on financial models. General counsel, he says, need to get involved in that strategy and execution because their department will become responsible for “the assumption of risk and all things inherent in that transaction. You’re creating value when you get involved in those kinds of transactions.”

TVO’s LeBlanc has seen the value legal departments bring when developing revenue-generating business models.

His company is transitioning from a traditional, legacy broadcaster to a digital operator, which means looking at ways to leverage existing assets. One of TVO’s prized assets is its Independent Learning Centre, which has interactive educational programming. Developed for Ontario, it is now taking that content into the international marketplace, and LeBlanc’s department has been critical to making that happen.

He says legal departments can no longer afford to ignore the revenue equation; instead, they must be “deeply engrained” in business units as they structure revenue models. “Our role is to assist the business unit in trying to build out those new business models.”

When it comes to equating revenue generation with legal departments, Sager says, “I don’t believe it’s on everybody’s tongue but I think it should be. It’s getting traction.”

Jim Middlemiss is a regular contributor based in London, Ontario.

This article was initially published in the Winter 2017 issue of CCCA Magazine.

Filed Under:
Comments
No comments


Leave message



 
 Security code