Context: New Business Challenges, New Legal Risk
All firms — but particularly large, well-established firms — are currently facing a series of new business challenges without precedent in the history of modern capitalism. Most obviously, the emergence of global markets and digital technologies has resulted in more competition and disrupted established business models. Firms need to constantly re-examine their products or services. But it is also important that they do not neglect their organizational and governance structures. Commercial realities mean that firms must exist in a permanent state of innovation; a task that is not easily accomplished by over-extended and — often — cumbersome organizations that have lost the capacity for agile re-invention associated with younger or smaller firms.
These business challenges have to be met against a background of increased regulatory scrutiny from government and other policy makers. Contemporary debates surrounding firms have involved calls for ever-stricter rules in the areas of corporate governance, tax, finance, sustainability and privacy. The inevitable result has been the emergence of a regulatory landscape that requires firms to make a much more significant investment in compliance and the management of legal risk. Firms can easily become bogged down in the regulatory thicket that now surrounds all aspects of a modern business. Companies are obliged to spend more time and money on managing the rising costs associated with navigating the mosaic of overlapping legal rules. This is an issue for all firms, but particularly those firms that conduct any part of their activities in multiple jurisdictions or across different sectors of the economy. Firms need a mechanism to reduces such costs, whilst at the same time making them more agile. This is what we refer to as strategic legal solutions.
Strategic Legal Solutions
What are the implications of this new legal risk for lawyers? To what extent should lawyers engage with the complex organizational, management, and strategy questions associated with these new business challenges? Understanding the opportunities for leveraging the unique position occupied by legal service providers can point us towards an answer to both of these questions. Moreover, it allows us to describe and explain a new model for legal services.
Consider the current situation. All too often, lawyers operating in the corporate sector bring a traditional legal “tool kit” to solve contemporary business problems. This approach might have worked well when business models were relatively static, but in a world where corporate, innovation and product-service life cycles are much shorter, the traditional tool kit is often out of touch with the needs of dynamic and disruptive business. Lawyers are being asked to deal with issues that they don’t fully understand and within a legal framework that doesn’t always offer clear or helpful answers.
The result? At best, legal services are rendered irrelevant and at worst, they function as a distraction or are potentially damaging to a firm’s prospects of achieving sustained success.
Building the capacity of lawyers to better understand the business challenges of today will enable legal professionals to provide a more effective service for clients operating in the new economy. Understanding organizational, managerial and strategic issues can assist legal departments in doing their legal work and, in turn, help a firm in optimizing performance in an uncertain environment.
Moreover, lawyers need to have the capacity to work in multi-disciplinary teams — not only with accountants or fiscal advisors, but also with engineers, designers and architects. Crucially, lawyers can operate as a bridge between the diverse range of actors that must work now together in dealing with the new business challenges. A broader perspective means that lawyers are better placed to help their clients to maximize efficiency, enhance client services and reduce costs.
After all, firms often struggle to identify appropriate responses to the diverse challenges that they currently face. Focusing on strategic legal solutions can point firms in the right direction and in working to identify the most effective option. In this respect, lawyers are uniquely placed to both analyze and assess the current situation within a firm and then work together with that firm to achieve this goal.
Crucially, lawyers enjoy distinct advantages over traditional forms of consultancy. Whereas consultants appraise and advise on business challenges, lawyers have traditionally tended to focus on operationalizing and implementing that advice. This division of labor creates an extra layer of complexity and additional costs. An obvious solution is that lawyers perform the consultancy function. The problem, however, is that traditional forms of legal education have meant that lawyers often lack the capacities needed to understand and appraise the dynamic business realities of the new economy. This is where a more complete lawyer that understands business strategies is required.
What then are the elements of this type of approach? Five elements can be identified: Assessment (gathering information and an understanding regarding the current situation within a firm); Benchmarking (appraising the situation via comparison to other firms, standard metrics and “best practice”); Analysis (identifying solutions); Advice (communicating solutions); Implementation (putting solutions into practice).
The crucial point is realizing that each of these steps is fluid and non-sequential. It doesn’t matter where you “start” and the complete lawyer has the capacity to switch seamlessly between the different elements. In addition, since it offers the possibility of a fully integrated service — i.e. a single service provider offering both assessment and implementation — legal strategic solutions can avoid some of the informational and agency problems that arise when those responsible for assessment and advice are distinct from those responsible for implementation.
If you think of strategic legal solutions as a non-sequential process, as depicted in the figure below, then it can create the possibility and opportunity for a different mode of lawyering. Let’s look at some aspects of this in more detail, first with reference to compliance.
Compliance as an Opportunity & Not a Burden
In contrast to alternative approaches, “strategic legal solutions” see compliance — i.e., business management of new legal risk — as an opportunity and not a burden. When one considers the broad scope of contemporary regulation — for example, big data, sustainability, disclosure, corporate housekeeping and privacy — it is clear that every aspect of a firm’s operations now has a significant legal component. Regulation is central to how each of these issues are framed. Thinking about and implementing compliance becomes an opportunity to revisit multiple aspects of a company’s operations and to develop a firm’s capacities to constantly self-examine and update all aspects of its business activities. In this way, legal problem-solving of the future needs to understand the business implications of the regulatory framework, not to constrain the firm, but to help the firm grow.
Take the situation when a large, established company acquires a younger, smaller startup. Often there is a tendency to assimilate the startup into the acquiring parent firm. A lawyer is well-placed to assess the risks of such an approach and to point to an alternative type of relationship. Losing the unique culture of a startup, for instance, can often mean losing the founders or other key employees, greatly reducing the value of the transaction. By letting a startup retain its own identity “inside” the acquiring firm, more value can be added. Good examples of such an approach would be the acquisition of Zappos by Amazon or WhatsApp by Facebook. In both cases, the distinctive culture of the acquired company was retained and opportunities for mutual learning were realized.
Or, take the case of financial and sustainability reporting. The reality is that although the overwhelming majority of companies comply with the formal reporting obligations, the resulting reports are not accessible and, in the overwhelming majority of cases, do not reveal the real story about what is going on inside a company. They generate paperwork, but don’t really communicate much that is meaningful about the governance or what is going on inside in a firm. Lawyers are well-placed to persuade a firm to adopt a more personalized approach and to use the obligation to report as an opportunity to engage with investors and other stakeholders, whilst remaining within the increasingly complex legal framework.
A similar argument applies to an “in-house” lawyer involved with corporate housekeeping, since they enjoy a panoramic view of the whole corporate group. They are also in a privileged position to immediately recognize opportunities to streamline a firm’s activities or innovate. In certain situations — again firm communication strategy is a good example — it may be better not to opt for minimal compliance, but rather adopt a more open communication strategy.
In each of the above cases, legal service providers go beyond the traditional legal function and assess organizational and governance structures in order to ensure that such structures are agile enough to deal with business challenges.
But There is More
So far, we have only discussed the possibilities for helping firms, but strategic legal solutions can also help governments and policy makers in regulatory design. For instance, governments of all levels — local, national and regional — increasingly see the relaxation of legal rules as a means of stimulating a “start-up community”, in which fast-growth, small and medium sized enterprises are provided with an legal environment and support network that maximizes their chances of success, as a necessity for every city. There is a broad consensus that a community of entrepreneurial, young firms can provide a reliable means of job creation and economic growth. Putting in place the necessary legal infrastructure to stimulate the creation, scaling and sustained success of business enterprises is seen as a legitimate and important policy objective for all levels of government.
Equally, governments are increasingly keen to ensure that large established firms do not become bogged down by regulation. All too often, however, regulation is designed in the shadow of corporate scandal and the focus is on protection and assigning responsibility, rather than thinking about how regulation can create opportunities for the creation of value. Focusing on strategic legal solutions can also help public agencies to identify the best possible regulatory framework for shaping innovation eco-systems and ensuring that “older” firms retain or recapture their startup feel.
Lawyers that Matter
As such, strategic legal solutions operates in a space between ”law” and “business”, and is looking to drive innovation in companies, communities, countries and regions. This is a fitful, challenging space comprising complex, ambiguous transactions where uncertainties abound. Operating effectively in this space requires a different skill set and a broader perspective than that usually associated with lawyers. Nevertheless, this is the reality where lawyers and legal advisors must now operate and the aim should be establishing legal service providers and legal departments that can identify opportunities to exploit the advantages of their structural position in order to work in partnership with their clients to build innovative firms that shape the future.