For years general counsel have professed their commitment to ‘adding value’. Is there any substance to the jargon?
Most general counsel (GCs) don’t think much of the term ‘adding value’ – a surprising revelation considering how frequently those two banal words crop up in conversation with in-house counsel.
‘As a phrase it is rather trite,’ says one senior GC. ‘It is over-used and has been devalued – it has become almost meaningless now.’
For many, dropping this catch-all business jargon into conversations is an attempt to describe something that is difficult to articulate. ‘I wouldn’t be sorry if it wasn’t used again,’ comments Land Securities’ head of legal Alex Peeke. ‘The word “value” has connotations of finance, which can lead people in the wrong direction where they try to quantify what they do in pounds and pence. A better test is whether legal is seen as an integral part of the business team. Of course, it is valuable to save money on legal fees but if that’s your be-all and end-all then you aren’t doing three quarters of the job.’
Nevertheless in a business or industry context, adding value is typically defined in financial terms. The term was popularised by Harvard Business School’s Michael Porter, who in his 1985 book Competitive Advantage devised the ‘value chain’. It comes from looking at the costs incurred by activities involved in achieving an organisation’s core aims – ie design, production, selling and delivery – and comparing that with the value those activities generate. The greater the difference, the greater the added value of any given activity.
In addition, the phrase ‘value add’ – sometimes used interchangeably – is also dependent on price, ie supplying additional products or services at no additional cost to the purchaser.
‘To a limited extent that is absolutely fine – saving costs is part of the equation – but that is the first and easiest thing to do – it is the low-hanging fruit that you gather. You make your savings, you generate your efficiencies but then you move on – you don’t stop there. That is not really what adding value should be all about.’
Although some GCs see adding value in a broader sense, according to research carried out by Nabarro in late 2009, many senior in-house counsel were unable to convince their chief executives on how valuable their contribution to the business was – financial or otherwise. The report, ‘From in-house lawyer to business counsel’, found that while 40% of in-house lawyers felt that the legal team made a very strong contribution to the business over the previous year – only 14% of chief executives felt the same.
While this particular piece of research was commissioned over five years ago, according to Paul Hughes, executive development director at Cranfield School of Management, there is still a fundamental disconnect between senior in-house legal heads and their chief executives. Hughes believes that many GCs fool themselves over the ultimate influence and impact they have on their business – appearing confident of their role in a misunderstanding he calls ‘a dangerous game of bluff’.
‘A worrying number of in-house legal teams don’t get past the “we will deliver a good service at a lower cost year-on-year”,’ he argues. ‘They think that is a good strategy. That is the point of entry. Some of them are bluffing, but in reality they are only bluffing themselves. Human beings have a wonderful capacity for self-deception. What more of them could be doing is far more soul-searching about whether they really understand the value proposition of the business and whether they are helping the business to be successful in that respect and looking at the gaps – asking themselves where they need to improve and where they are getting in the way. If they don’t have that granular level of detail they are kidding themselves.’
Practice makes perfect
Although the concept of adding value is a familiar one, there are varying interpretations as to how and when the phrase first emerged in the context of in-house legal advice. For most, it is regarded as a relatively new notion as the profession moves away from the traditional idea of the lawyer as an authoritarian figure in an ivory tower.
For Alison Kay, group GC and company secretary at National Grid, it is a direct result of the increased influence of the in-house profession post-Lehman.
‘You have got higher quality people wanting to work in-house and they have brought in something different,’ says Kay. ‘They have brought great quality and commercialism to the role and looked to see how the legal function can be a valuable part of the business. The push has come from the team, from the people coming in and from saying “we can actually do more than we have traditionally done in the past”. It has coincided with businesses looking at how they can do more and be more efficient and add more value.’
For Reckitt Benckiser’s senior vice president and group GC Bill Mordan, the notion of adding value was born out of the increased need for GCs to justify legal spend over the last decade.
‘I’ve been doing this job for 20 years and I have heard it with greater frequency in the last ten, and really with a pitch in frequency in the last five. I think the desire to squeeze costs within a business has caught the legal department in a difficult place because in some businesses we are a significant cost – litigation, legal compliance, regulatory issues are expensive and are getting more expensive. So lawyers have to come up with an expression in order to say: “No, you are getting value for your money.”’
While the theory of adding value in business is easy to grasp, practical examples have proved more difficult in-house beyond straightforward cost control. First, in a commercial arena, there is the persistent view among some key business stakeholders that lawyers are blockers whose function is purely defensive – existing to avoid negative outcomes rather than generate positive ones. As such, the legal department has historically been rarely considered part of the commercial offering of an organisation.
‘Lawyers often have to stand up and challenge their own organisation, they have to hold them to account and often have to say no and that isn’t always popular,’ says one commercial head of legal. ‘They’re not always going to be flavour of the month and that might in itself restrict their opportunities to access areas of the business which they might otherwise be able to add value. It’s a difficult tightrope that lawyers have to walk.’
Hughes agrees, arguing that the ability of in-housers to be influential is often weakened by the power to say no. ‘Some in-house lawyers are influential because they have a power base in that they can restrict what other parts of the business do. If the power comes from holding restrictive power or having a veto – that is not healthy or sustainable. And it means they are not connecting what they’re doing to the front of the business.’
‘When lawyers come from private practice they can be quite narrowly focused,’ says Aviva’s group GC and company secretary Kirsty Cooper. ‘They have to be able to develop a broader approach and be able to work with people in a commercial enterprise. It’s not enough to just say: “This is the advice.” They have to actually say: “This is the law and this is how we can use it to resolve your problem,” or come up with another way of doing it.’
GCs often cite the ability to get close to the business as an indicator of their success in adding value – even going as far as physically moving their teams closer to key decision-makers to make them more approachable to other parts of the business. Conversely, Nick Macrae, senior vice president EMEA at Warner Bros. Home Entertainment Group, feels that the legal team giving the company more freedom and independence is an alternative, better way of adding value. His team has developed roadshows in which lawyers travel around and carry out presentations to different business functions explaining how certain legal issues work.
‘What we like to focus on is constructing what we call a “legal-free zone” – that is basically saying “provided you stay within these particular parameters and you’ve thought about the following five issues, then actually the risks are low. We’ve given you the tools, you can run with that and you don’t need to come back to us”. The business loves that, when as a lawyer you are sitting there and saying “we are giving you a licence not to contact us”.’
Macrae is adamant that this practice does not diminish the importance of the legal function. ‘We set out the red-flag issues, so if there is something particularly sensitive or involving an antitrust issue, then clearly they do have to check with us,’ he adds.
For Mordan, whose team has pioneered a contract management system called i-legal, which enables the business to create its own contracts, this independence is about increased knowledge of legal issues and knowing when is the appropriate time to seek advice from the in-house legal function. ‘It’s not just giving them independence to do the work they are doing without having to wait for a lawyer, it is also helping them to develop habits that prevent problems from happening. In i-legal all of our procurement people know that if they are dealing with a vendor in a particular country over a certain value, that it raises a red flag and they have to do due diligence checks.’
At Land Securities, the small team of eight lawyers goes further – directly influencing the wider industry that the business operates in. The in-house team recently played a leading role in championing the British Property Federation’s Model Commercial Lease – an initiative to partially standardise leasing documents across the industry, something that takes up considerable time and resource when handled on a case-by-case basis.
‘As the legal department we asked the business to get behind that as well and said “there’s a wider industry benefit but there’s also a massive benefit to us of being able to standardise these transactions and get stuff done quicker”,’ says Peeke. ‘You want to be an industry leader in things and that means being an industry leader in some of the legal aspects as well.’
Measuring up
Yet for all their talk on practical ways of delivering value to the business, GCs are upfront in admitting that this is very difficult to measure – another reason as to why so many resort to harder metrics such as cost savings. Macrae believes this is a defensive move. ‘We should be challenging ourselves to demonstrate what value we are genuinely adding instead of falling back on generic justifications, such as “we add value because we minimise payments that would otherwise need to be made through litigation”,’ he says. ‘To me, that is almost a defensive way of demonstrating added value. I prefer to focus on aspects that are perhaps more difficult to put a price tag on – the softer things like information sharing, relationship building – affinity with the business people and being a key part of strategy setting and project implementation.’
Regular business feedback – either formal or informal – is cited by GCs as one practical method in which the legal team can demonstrate a broader contribution to the business. At Aviva, the business carries out customer surveys and the performance of the legal team is regularly scrutinised. ‘Generally we get a pretty positive response,’ says Cooper. ‘Where we don’t or in different parts of the business where that isn’t the case, we ask ourselves: do we need a different kind of team in that part of the business, do we need a different kind of leader of that team? I am very conscious that the management team definitely do feed back to me if they feel that somebody isn’t in that space.’
Key performance indicators (KPIs) are also used by GCs and businesses to establish how the in-house team adds value. For example, at Land Securities, the KPIs are linked to other parts of the business. ‘We are building a lot of offices in London and we are building a number of retail outlets out in the regions,’ says Peeke. ‘It is all very well building these things beautifully but you’ve got to find tenants for them and you’ve got to do the deals to do the lettings. Getting these lettings done on time and on budget – we are KPI’d on that.’
Yet for Hughes, such measures are superficial. He argues that while it is tempting to see metrics, processes and systems as being the solution, these should not be the starting point for developing this area. ‘These can be used to support the solution, for example by being adjusted to what is required for in-house lawyers to add more value. But the solution begins with the legal team’s capability requirement from the organisation’s perspective first. Then the supporting processes and metrics can be engineered in to support that. Too often it is designed the other way around with the systems and metrics having no purpose in supporting the organisation. Worse, this can lead to people playing the system – gaming behaviour – with no real understanding of what they are actually doing.’
Still, while there is no doubt that the modern GC is far more intent on demonstrating their commercial sensibility than they would have been ten or 15 years ago, there is little sign yet of a coherent framework for establishing the value the legal function provides to the business, let alone how it can be improved upon. As such, cost control and business satisfaction have become the closet proxies, however unsatisfactory.
As Kay sums up: ‘I will be honest, we have recruited people into this team who really didn’t understand what National Grid was about or how it makes money. GCs need to be sitting at the same seat, absolutely hand-in-hand with the business. That will increase our exposure, it will increase the fact that legal is increasingly invited to the table earlier and is not brought in at the last minute to check a contract. It is no longer acceptable for a GC to go along to a board meeting and say: “Well the law is very vague, so on the one hand this and on the one hand that… I’m going to have a cup of coffee now while you make the decision.” GCs are effectively integral to that decision and you stand and fall by that.’
Laudable aims, no doubt. However, the question for the in-house profession remains whether it is ready to take the next step of building a sophisticated framework to measure and drive value in the context of a legal team. More than a decade after ‘adding value’ became ubiquitous jargon for GCs, there is still little sign of the profession putting substance and structure to the spin. LB
kathryn.mccann@legalease.co.uk