Top five challenges for in-house legal departments

Today’s legal departments are under pressure like never before. Amid ongoing supply and demand instability, rising geopolitical conflict and increasing regulatory complexity, international businesses are rethinking their business models and structures, and busy legal teams face challenges on all sides to help manage the implications.

What are some of the key issues that in-house legal departments of international companies are dealing with right now? Based on what I hear from the leaders I work with, their five biggest challenges are as follows:

1. Business models are evolving quickly, and international structures and transactions are getting more complex.
2. Trade disruption, geopolitical conflict and economic volatility are heightening business uncertainty and legal risk.
3. Mass legal procedures against international companies are becoming more common, creating cross-border operational complications.
4. Increasingly complex global structures are compelling legal departments to put more priority on oversight and governance of their organizations, as well as group companies and subsidiaries, and aim to support the growth and development of the business and new business opportunities.
5. All of these demands are intensifying pressure on in-house legal departments to transform their operating models, embrace technology and the use of data, and consider further ways of boosting their performance.

Let’s explore each of these challenges in turn, along with some approaches that leading in-house legal departments are adopting to manage them.

Legal departments definitely have their hands full keeping up with the pace of change and rising complexity in the business and political spheres. As organizations reconsider their business models and look at opportunities to restructure, they may consider a range of strategies, from splitting out activities or geographies, to selling assets and liquidating subsidiaries. Legal teams should keep on top of these plans so they can properly advise on the risks and implications, and to help ensure that the business’ strategy can be executed in accordance with its expectations.

In some cases, financial instability is driving a need to restructure in order to raise capital and create liquidity. In particular, the combination of the pandemic and the emerging economic volatility has put a number of companies under short-term stress over the past two years, requiring some measure of restructuring to continue operations and avoid insolvency.

On the horizon, more restructurings will likely occur in response to the new global minimum tax and other international tax rules being developed by the Organisation of Economic Co-operation and Development’s Inclusive Framework. For now, this issue is in the domain of the tax function as they consider the financial impact of the new tax in terms of their structure and operations. As the tax’s implications become clearer, this may lead to changes, for example, to where the company operates, how internal arrangements are documented and how treasury functions are housed. As a result, the burden of managing the strategic impact of the new rules is expected to soon shift to the shoulders of legal teams. They should be ready to support the execution by the business of its strategic response, and meet the business’ expectations to do so.

Companies continue to operate in a relatively fraught trading environment as COVID-19, geopolitical conflict and economic uncertainty continue to aggravate supply and demand issues. All of these factors are creating new legal challenges for organizations that are looking to adapt quickly to these changes.

In particular, ongoing pressure and disruption have forced many companies to reconfigure their supply chains and the business structures that support them. Whether the company is changing its center of manufacturing or an operating location, or merely re-contracting or re-papering its trading arrangements, existing contracts should be dealt with and new ones may need to be established.

However, many companies have challenges in managing the enormous networks of contracts that govern their business relationships across their business units — who is in charge of contracting processes, where contracts are stored and who is responsible for downstream monitoring of compliance and performance. This was especially evident during the pandemic, when the move to remote work combined with sudden interest in certain contract terms (e.g. force majeure) highlighted the importance of good processes for completing, archiving and accessing agreements.

Further complications stem from the tightening of investment laws. The last few years have seen governments around the world impose regulatory controls over cross-border investment, and further changes are expected. As governments broad their tests beyond national interest to also encompass a national security test, the conditions being imposed are raising compliance issues for organizations transacting across borders, imposing even more demands on the legal department.

International companies are increasingly subjected to mass legal actions. It is expected that the number of these cases will likely continue to swell globally, broadening from traditional claims arising from consumer goods and financial products to new areas related to consumer privacy laws, data breaches and cyber security breaches.

The rising emphasis on environmental, social and governance (ESG) is also driving up mass claim volumes. More stakeholders such as shareholders and community groups are taking mass legal action against organizations that are not seen as adapting fast enough to climate change or working hard enough to meet other ESG demands.

Some actions can involve hundreds or even thousands of claimants. Unless the case is a formal class action suit, companies can find themselves defending the claim in multiple courts across multiple jurisdictions. This creates significant challenges for legal teams to keep up with the individual claimants, the status of their claim and the likely path to settlement. With multiple claims working their way through different legal systems at different speeds, legal teams are also challenged to help ensure consistency of positions and avoid issues such as collateral estoppel, where a finding of fact or law in one court is binding on other courts in future proceedings.

In the current regulatory and political environment, significant risk is created by the ever more complicated structures that international companies are adopting. With thousands of operating and other subsidiaries and entities worldwide, managing the legal needs of the organizational network is a huge task.

Compliance is an especially difficult area, as each company has its own annual filings, tax returns and other reporting requirements to fulfill, in each relevant jurisdiction. A change in one area, such as a company director, can trigger requirements in multiple entities. As the number of entities and jurisdictions involved rises, so does the risk of non-compliance. In-house legal departments need to decide whether to build compliance capacity in-house, seek a managed services provider or adopt a mix of sourcing solutions.

For all of the above reasons, legal teams are under intensifying pressure to meet new demands and match the pace of business change. Many general counsels and their teams are reimagining their operating models to better support the broadening spectrum of risk, compliance, governance, operations and regulatory issues, as well as the need to support the business in the execution of its strategy.

Whether a legal team is seeking solutions to manage its global entities, its business reorganizations or its strategic mergers and acquisitions, technology is increasingly fundamental to a legal department’s efficiency and effectiveness. Many relatively routine, procedural tasks can be automated and scaled for consistency across jurisdictions. Broad systems can be implemented to efficiently control and provide visibility over work involving large volumes of complex data, such as company-wide systems for contracts. External service providers can deliver access to specialized solutions for mass legal actions and other situations outside the usual course of business.

In fact, the market for external legal advisers is shifting as in-house teams seek help with a new range of demands and external providers increasingly leverage technology to deliver more specialized services. Where an international company may have once partnered only with a number of traditional legal firms, many of them are now engaging a wider portfolio of advisers and managed services providers to suit their specific needs.

All of these operating model changes require the legal team to access a much broader mix of skills, either in-house or through a range of external advisers. Beyond technical legal expertise, legal departments increasingly need professionals who are adept in such areas as technology, data and analytics, project management and stakeholder relations, as well as legal change management. It is the combination of these skills which is necessary to help ensure the successful implementation of change in any legal department.

In the long run, in-house legal professionals stand to potentially benefit from this transformation. As standardization, automation and sourcing alternatives relieve them of the most routine, repetitive work, they can be better able to support the business with more involvement in the business and more focus on providing greater insights and supporting execution, which allow the legal department to add the value that it has long been capable of providing.