Six best practices for legal operating models

Those companies that have embraced these leading practices in their approach to legal operations seem to have weathered the crisis more successfully. And no matter how far along companies were in this regard before the pandemic hit, COVID-19 accelerated efforts to transform legal services operations across the board.

Traditionally, the legal functions of international companies are often set up to mirror the company’s geographic or functional business structure. Lawyers in one country or business unit may not be fully aware of what approaches and positions are being taken in other countries or units, and this can bring significant inefficiency and risk.

But when these silos are removed — when legal functions are set up so that the general counsel leads the department globally, with influence over decisions on matters like human resources, technology investments and process improvements across the company — efficiency follows.

In fact, structures that give the general counsel and head of legal operations the scope to define all aspects of the target operating model and the power to enforce their decisions company-wide stand to realize cost savings from nine to 16 percent,^[2] depending on the industry.

The best structure for the legal function differs widely by company and by sector, and it needs to center not only on tasks but also on the risks and opportunities that face the organization overall. This broader context should drive structural decisions such as the legal team’s size, how and where lawyers are deployed, and whether to open or close local legal departments in particular locations. Defining the right governance and controls to ensure the operating model runs as designed is also key.

Legal department processes generally include both support processes, which include back office work like archiving and spend management, and the core processes of managing specific legal issues.

In the past, many legal teams focused on defining and standardizing their support processes. This helps prompt lawyers in the organization to maintain files and documents in a consistent way, corresponding with the types of matters they are handling (e.g., M&A transactions, litigation, tax matters).

More recently, attention is turning to defining and streamlining the legal function’s higher value core processes. Many companies are standardizing how and when the business should seek the legal function's involvement, for example, by using decision trees or other common processes.

Global contract management is another core process that we’ve seen potentially benefit from company-wide harmonization. Legal teams can speed up the process and drive more value by having common directions for designing contracts, internal approvals, signing, and archiving contracts.

Streamlining core functions such as litigation and M&A or those involving intellectual property can be more difficult, but detailed process mapping often reveals opportunities for gains in optimizing aspects of these activities as well – for instance, in standard processes for e-discovery, or transaction due diligence.

When it comes to sourcing legal services internally, externally and through automated means, we recommend taking a strategic approach — again based on tasks and risk.

For each of the legal function’s various tasks, determining the right providers involves considering:

• the task’s relevance to the broader business strategy
• the task’s complexity
• the risk framework of legal issues involved
• the potential to standardize the task
• the volume of the work, and whether it is expected to increase.

In cases where significant time is spent on high-volume, low-risk legal work, such as trademark tasks or processing non-disclosure agreements, it may make sense to outsource these activities to free up the legal team’s time for higher-priority work where their legal insights will make more of a strategic difference. It’s also possible that these activities could be automated or carried out by alternative legal service providers.

Internal teams might also want to have external counsel deal with high-value work that may be outside the ordinary course of business, such that they do not have relevant expertise resident in their legal teams. For example, a company may want to bring in external legal counsel to respond to a hostile takeover bid. However, if the company is pursuing a strategy of aggressive growth through acquisitions, then it might make sense to build M&A legal capabilities in-house.

In short, for some high-value, high-risk work, relying on external legal specialists may be essential.

Once you’ve assessed the legal function’s target operating model based on organization, processes and sourcing, a next step is to define the competencies you need to support it. Do you have the right people in the right place at the right time to meet legal service needs across the company?

A goal of this analysis may be to transform the traditional legal function hierarchy into something much more agile and cost-effective. Rather than a pyramid-shaped structure, with tiers of lawyers at various levels led by the general counsel at the top, a more strategic model looks like a rocket. This model eliminates many of the lower-tier lawyers on the pyramid’s sides, replacing those on the right side with paralegals, for example, and those on the left with legal operations and technology specialists. This leaves a leaner, central column of lawyers available to service the business’s higher-risk, higher-value legal needs.

Although lawyers can often be risk-averse where technology is concerned, legal technology can play a vital role in supporting legal operations. The current market for legal technology is somewhat fragmented, dominated by single-point solutions that only serve specific needs or subsets of people and don’t necessarily communicate or interface well with other systems. Looking ahead, however, legal services technology is evolving toward more holistic solutions that are better integrated into the business’s broader technological infrastructure.

There’s no doubt that digitalizing current processes often delivers positive outcomes. For example, automating standard contract forms and introducing self-service legal solutions such as chat bots can provide platforms that legal teams can leverage to provide scalable legal advice. Using technology for day-to-day legal tasks can also give legal teams business intelligence and insights into those areas of the business that require the most attention.

The key is to consider technology in a broader context that also takes into account skills, resourcing, stakeholders’ expectations and needs, and value. Legal teams need to design their target operating models first, and, as part of this, decide how technology fits into the bigger picture.

A final challenge in designing the target operating model is defining the right measures to evaluate and manage the legal team’s performance. Legal functions often lack the visibility and data they need to track the actual value they contribute.

The challenge lies in determining what sources of data your company’s systems can provide that present a true picture of the legal function’s operations. How these data needs can be met should be considered when any new technological solution is being adopted.

One of the most important things is to ensure key performance indicators (KPI) deliver a meaningful measure of performance. Simply tracking how many contracts a lawyer handles or how many M&A transactions are completed gives an incomplete view. These numbers don’t acknowledge the complexity, value or other aspects that could affect the volumes of transactions involved.

We recommend setting KPIs based on data input and data output in a way that highlights the performance and the effort involved. An example of this would be introducing a chatbot to respond to routine legal questions that were previously dealt with manually. If 100 percent of these requests five years ago (input) were serviced manually, and you find the chatbot is answering 80 percent of these questions today (output), this provides a clear measure of the tool’s performance.

As COVID-19 and other disrupters – such as international and domestic political disputes, trade issues, and broader economic conditions – continue to create uncertainty and risk, legal functions need the agility to react quickly to new opportunities and threats, and to anticipate what’s coming next. These are exactly the purposes that a well-designed target operating model should achieve.

In particular, the shift to remote working in a fast-changing business environment highlighted the value of good processes, innovative technology and strong governance. Legal functions that were already on the path to target operating model transformation are proving to be nimbler and more effective as a result.

The imperative for legal functions to transform is clear. So is the path forward. By examining the legal function’s current state and investing in the six dimensions that have proven key to successful legal target operating models, organizations can transform their in-house teams into smaller, more agile business partners that create competitive advantage and deliver value.