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A DANGEROUS GAME OF BLUFF

In today’s business climate it’s imperative for in-house teams to demonstrate value to the business.
In a regular column, Paul Hughes of Cranfield School of Management tells us why and how.


B U S I N E S S     T H I N K I N G

When I was talking recently with the GC of a multinational operating globally, they outlined the purpose of their legal function to me. They said it existed to ‘provide high quality legal services tailored to the organisation’s needs, carried out by more knowledgeable lawyers than could be secured from external providers, yet at a much reduced price than would be paid if solely using an external supplier’. They went on to explain that the ‘highly administrative or specialised legal work was outsourced, while the core service (comprised mostly of commercial contract drafting, processing, revision and review, corporate legal compliance, managing employee matters from a legal perspective, and numerous other advisory actions on the legal requirements of organisational operations), was maintained by the in-house team’. I would think this broad description is a reasonable summary of what many - if not most - in-house lawyers reading this might describe their own function as doing. If so, well done, you are echoing the words of a highly successful global GC.

But that was the bait; here’s the switch. If you think that description was relevant to your own function then you’re bluffing about how much you truly understand how organisations, including your own, view and think about your role. And that bluff is in danger of being called. Those not bluffing would have recoiled in horror because they recognise that what is outlined above is an argument for ‘vertical integration’. They would have thought: ‘This is only a small portion of the tasks we do; we add value in many more ways than this.’ When I asked the GC how they ‘added value’ I was told that they ‘deliver a more efficient service than last year at a lower cost’. When I asked what else they would be doing to add further value, I was met with a blank stare, then ‘oh, greater efficiency’. The game was up. And it won’t just be me who spots the bluff…

Recent years have seen a strange economy for in-house lawyers as their power has grown substantially: the global impact of Sarbanes-Oxley (2002) and Dodd-Frank (2010) amidst a rapidly changing global and economic climate has produced a rising tide of legislation and regulation across all industry sectors and areas of law. The pressure to reduce overheads has led to the large law firms suffering as work has been brought into growing in-house departments. In many industries, especially banking, legal has been ‘on-call 24/7’ dealing with barrage after barrage of compliance-based demands; unravelling frighteningly complex balance sheets and asset holdings has kept everyone busy everywhere. The large legal firms are, quite frankly, 20 years out of date in their corporate sales model when compared to the likes of the large enterprise suppliers (like EY, Computer Sciences Corporation, McKesson, Accenture, IBM, PwC and co). Although they want to sell more services, they aren’t really willing to reinvent themselves enough to be consistently strategic business partners. The illusion that the vertical integration model will continue for much longer is easily maintained - in-house teams are growing, people are busy and times are good. The impact and influence of in-house teams has never been higher and they’re adding more value than ever.

Or are they? Our own (and others’) research has shown that while those in-house are busy and in many ways powerful, by pushing a vertically integrated model they are often unwittingly avoiding the activities that generate impact and influence. When asked in confidence, few non-legal stakeholders have viewed the legal function as a ‘truly strategic business partner’. Instead, they are often perceived as ‘necessary’, doing ‘important’ but ultimately ‘unwanted’ work ‘for the lowest price we have to pay.’ By continuing to use the language and argument of vertical integration it is likely that many GCs and their functions are unwittingly perpetuating this view. And that is important because if you’re not viewed as a strategic asset, at some point the outsourcing crew - the men and women with clipboards and spreadsheets doing ‘functional and role redesign’ in order to secure ‘efficiencies’ - will be looking you and your team over.

‘Price is what you pay; value is what you get.’
Warren Buffett

There is a warning from history; this has happened to most other functions over the last 40 years. It began in HR with payroll: it was ‘important’, ‘necessary’ and increasingly ‘efficient’, but it wasn’t truly ‘adding value’, so the transactional processing service was outsourced to external providers in the ’60s, ’70s and finally in the ’80s. Many ‘qualified’, ‘expert’ and ‘important’ HR professionals didn’t think this was a problem as they did ‘important’ work. So what if some menial and administrative work was outsourced? They were safe. Then the ‘devolution to the line’ revolution happened in the ’80s and ’90s, passing swathes of responsibilities from HR professionals to line managers, leading to the HR headcount per employee plummeting - and continuing to do so to this day. The IT function has been shrinking per head of employee for years with the outsourcing of ‘non-strategic’ and less ‘value adding’ aspects of the function. The cloud revolution will see even more reduction in numbers. So rather than integrating vertically, the trend for the last 40 years has been to reduce functional size and outsource wherever possible.

Why has the change happened? In simple terms, the phrase ‘adding value’, coined by the management guru Michael Porter of Harvard Business School (in his seminal book Competitive Advantage) comes from looking at the costs incurred in the activities involved in achieving the core aims of an organisation. You then compare the cost to the value that activity brings. The greater the difference, the greater the added value of any given activity. So for HR it was finding that payroll processing, although important and not a huge cost, just wasn’t adding any real value towards organisational aims. As long as people get paid then who cares how it happens? So out went payroll as soon as someone opened a business offering payroll administration and processing services. Good idea? You bet! Ross Perot founded Electronic Data Systems (EDS) to focus on this (and then other company payments) and made billions when many were outsourced to his company and the others who jumped on the bandwagon.

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For HR, payroll was just the start, because it isn’t just the likes of EDS who are constantly probing for activities that aren’t adding value and can therefore be outsourced. McKinsey, EY, PwC, Capgemini, Accenture and Deloitte, to name but a few, are constantly looking to find the next outsourcing seam. This was how the devolution to the line change came about. Consultancies identified opportunities for adjusting where HR responsibilities lay (for a fee), how these could be re-appropriated (for a fee), and then they’d carry out the work (yes, you’re getting the hang of it). And that’s just the value adding argument; we haven’t looked at the financial rationale for outsourcing. No organisation begins such a project without a well-structured financial argument to back up the expected improvements on the bottom line as well.

‘So what?’ you may say. ‘That’s fine, but I don’t know about any of that and quite frankly, I’m okay.’ Well, I’d question your confidence because that might not be the case. The great legal outsourcing has already begun.

Firstly there are those circling to take a slice of your pie. EY and McKinsey, to name but two, have strategic functions looking into how to enter the global legal services outsourcing market. The race to identify opportunities to poke, prod and measure where you and team add value so it can be quantified has already begun. Where do you think the pressure for new law firm ownership structures came from? And don’t think it will just be the usual suspects eyeing up your business. The GC I mentioned in the opening paragraph has a legal administration team offshore. Do you think the organisations running these legal BPO projects don’t have expansion plans to take over even more services? Google Christopher Wheeler / lawyer / India to find just one example of someone seeking to move legal BPOs up the ‘value chain’ (another phrase coined by Michael Porter).

‘Your internal stakeholders are already looking at you with a “do we really need them on our balance sheet?” perspective.’

Secondly, your internal stakeholders are already looking at you with a ‘do we really need them on our balance sheet?’ perspective: be under no illusion of that. It is a repeated finding from research that an insufficient number of recipients of in-house services describe the service as adding value, and this is correlated directly with their perceptions of in-house impact and influence. Those teams with high levels of perceived impact and influence are the ones who have shifted their value proposition on from ‘we are providing a more tailored service at a reduced cost from that of an external supplier’, to ‘here’s how we do all of that and here’s how it actually adds value’. If you’re not doing that your bluff might well be on the way to being called. But if the consultants come knocking on the CEO’s door and you’re already perceived as adding value, then as a strategic partner with commercial insight wrapped around a core of legal expertise, who are they going to listen to?

So what do we need to know? What is the ‘value’ we need to add? That is less easy to define. It is dependent on the organisation you’re in, where it is heading, how it uses its assets and so on. There is no easy answer. And it is less about what you know and more about what you do. That’s the price you’ll have to pay - doing some things differently.

Over future issues we’ll explore what these things are - which I hope will provide you with lots of value.

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