Curtis Lu is general counsel of FTI Consulting and a member of the firm's executive committee. Views are the author’s own.
A well-functioning legal department can help save a company millions of dollars in risks that are mitigated, or even help generate millions in revenue through, for example, strategic business advice on a merger or a new product launch.
However, a well-functioning legal department requires investment, and it can be difficult to quantify everything an in-house team does to enable a business to generate revenue. Applying traditional profit-and-loss metrics to measuring a legal department’s value could instead lead to underinvestment in risk mitigation capabilities, which would prove detrimental in the long-run to the enterprise.
Striking the right balance requires more subjective standards than profit and loss. Here are a few:
How capable is the legal department in managing risk?
The legal department now acts as a business advisor and a moral, ethical and regulatory compass for the organization, in addition to advising on reputational issues and anticipating and addressing systemic risks. And the risk portfolio it manages continues to grow.
According to The General Counsel Report 2022 from FTI Consulting and Relativity, roughly 60% of general counsel surveyed indicated that their risk landscape is expanding or becoming more difficult to navigate in areas of compliance, regulatory enforcement, data privacy, information security, emerging data sources and ongoing effects from the pandemic.
The legal department has control over some risks. When governments worldwide issued sanctions against Russia in response to its invasion of Ukraine earlier this year, businesses needed to ensure they complied with those orders. Having the right technology and systems in place to ensure companies did not work with listed entities enable the legal department to manage that risk.
Other risks may be unforeseeable or out of the legal department’s control. Ultimately, the responsibility falls on the entire organization, with the legal department providing the adequate policies, trainings and counsel. If known risks repeatedly appear, there is a basis to say the legal department may be falling short.
Are the technology investments appropriate?
The COVID-19 pandemic forced companies to adapt to a remote workforce and grapple with choked supply chains. Cybersecurity threats are on the rise, governments are instituting new tax regimes and climate change threatens to have significant impacts on the global economy.
To manage the increasing risk profile, legal departments will continue to invest in technology to meet these demands. In fact, respondents to FTI Consulting’s General Counsel Report said contract management (40%), matter management (23%) and compliance software (13%) were top areas of technology investment for in-house legal teams in 2022.
Demonstrate the effectiveness gained from contract management tools. Use data to show how much money the business saved through compliance programs by avoiding regulatory action.
Are the investments in people appropriate?
More investment in technology necessitates greater technical competence. Only 33% of general counsel responding to FTI Consulting’s General Counsel Report survey said in-house attorneys had adequate technology knowledge and capabilities. Conversely, the view of technical competence among litigation support professionals rose from 68% in 2021 to 84% in 2022.
Emphasizing investment in professional development must be a priority. If legal teams underinvest in training, their lawyers will lack the skills necessary to manage increasingly complex legal matters and risks.
Beyond training, do you have the right people with the right skills in the right roles? If your business is growing overseas, do you have resources in those jurisdictions to help you navigate local laws?
Are the investments in external resources appropriate?
In judging legal department effectiveness, outside counsel will always be part of the equation. Is the legal department retaining the right outside counsel? Is the department appropriately managing outside counsel?
Again, show the efficiencies gained through appropriate management of counsel or the money saved as a result of their support. Quantifying the risks prevented can be a powerful story to tell.
Look at the entire picture
The legal department is in a unique position of balancing two goals – enabling the business and minimizing and mitigating risk. Focusing solely on the first could outweigh any benefits the legal team can bring to an organization. Profit-and-loss metrics are tailor-made for revenue-generating activities but may fall short when used to assess the legal department. By looking at the complete picture of managed risks, legal departments can show their true value as a business partner.
FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.