Managing corporate legal budget to get harder
Even at the best of times, obtaining and managing a budget for the legal department is tough. It’s about to become even more difficult.
“It’s hard at the best of times for corporate legal departments to obtain and manage a legal budget. In the current climate it’s going to be harder.”
That is the view of Kain Lawyers director Gerry Cawson, who noted that even though Australia is beginning to emerge from lockdown by easing social distancing restrictions, the economic and professional landscape is not yet out of the woods.
Hall & Wilcox special counsel David Dickens agreed: “We are still not in a business as usual environment and won’t be for some time.”
Whilst it may be too early to fully appreciate the long-term ramifications of the pandemic, Piper Alderman partner Alasdair McLean argued that making the right decisions will have a significant influence on the success or otherwise of one’s operations moving forward.
Where spending should be focused right now
Most corporate legal departments, Mr Cawson mused, won’t be immune from the general approach of businesses post-pandemic to “scrutinise their expense lines”.
“I’d expect that they are going to come under even greater pressure from their businesses to find value in every dollar they spend. That’s going to drive them to develop a variable cost model (hiring specialist skill set for the particular work required, rather than building their own team of generalists with the associated overhead),” he suggested.
“I see this as opening up opportunities for ‘niche’ or ‘specialist’ firms that provide [top-tier] quality of advice but at a price point that often reflects their lower overhead costs. I think it’s also likely that corporate legal departments may want to develop a consistent platform or way of working so that their external advisers can plug into this consistency to help the [in-house] teams better manage the diverse ways that external advisers provide advice, engage on projects and communicate.”
COVID-19 threw organisations into “crisis mode”, Mr Dickens added.
“Boards and management had no choice but to make fast and sometimes drastic decisions and become more involved in the details. While the immediate crisis period has passed, many organisations now have a greater willingness to move quickly, and consider ways to be better prepared for a future crisis (whatever kind) impacting their business,” he recounted.
“Boards will also need to continue to closely monitor the environment they operate in and their own financial position. It is critical that they have the best information at hand for board and management to do this, particularly when making significant decisions quickly. We expect that as the government support measures are withdrawn, a number of companies will be in distress and there will be increased restructuring and insolvency.”
This may have significant effects, Mr Dickens continued, on an organisation’s supply chain and customers.
“Corporate legal departments should be anticipating the ongoing needs of boards and management in this regard. This means having ready access to the best financial information and ensuring they are ahead of this issue and in a position to guide the board and management,” he surmised.
“As an example, we expect there will be a lot more structural advice required (can we exit this agreement, can we redeploy some of our workforce, do we have [step-in] rights in insolvency?) rather than business as usual questions. For many in-house legal teams, this will mean spending on expert advice and encouraging the business to ensure operating systems provide accurate, comprehensive information about the company’s financial position.”
In light of these considerations, spending on technology will be especially important, Mr McLean said. “[That said], [it is] important to understand that technology requirements and solutions can change rapidly and that they need to be able to scale up and down rapidly. I would be very cautious going forward in making any investment in technology that requires heavy customisation or that requires [long-term] contractual commitments,” he warned.
“I would prefer to make investments in a broader number of more generic products that are capable of rapid implementation and that can be scaled up and down efficiently – as opposed to making large one-off investments in technologies that will have a real risk of redundancy in a short time frame,” he said.
Need to get spending decisions right
In such times, collaboration has been shown to be an incredibly important element for a business to succeed, Mr McLean submitted.
“The need for legal teams to have a close relationship not only upwards to senior management, but also across to HR and IT and other teams is particularly important in a disrupted environment,” he said.
“I think that well-resourced legal departments have been presented with a unique opportunity to take on a broader range of leadership responsibilities with their business and to assist in taking the business through environments. In particular, by taking positive steps within the legal team itself, [in-house] counsel will be able to be more effective in engaging with the broader business on these issues.”
It is “critical”, Mr Dickens argued, that legal departments make the right calls when allocating their spending in the coming months or year.
“The COVID-19 period for many businesses has been about survival and that means closely managing cash flow. There will be additional rigour brought to external spend and we have seen this already. That’s always been a challenge for in-house legal teams but it’s even more challenging now. Obviously, in challenging financial environments, it is important to ensure money is being used wisely and is being used to secure real value,” he outlined.
Mr Cawson supported this: “Different businesses deal with legal spend budgeting in different ways but typically legal costs on a project are built into the project costs while the overhead of the corporate legal department [is] under the responsibility of the [general counsel[ who has little flexibility for overspend.”
“With the uncertainty that is still surrounding the next 12-18 months from a health and economic perspective in particular, it is likely to be harder for corporate legal departments to achieve their budgeting goals.”
Boards and senior management will have to be more willing to make quick decisions and make changes to the business, Mr Dickens advised.
“Boards have become adept at making quick decisions, even those that involve potentially big changes such as moving workforces or closing parts of the business. As they’ve moved into a different mindset, there may be an increased willingness to do more of this. Corporate legal teams can give good insight and information about the changing structure of the business and how it can or should be shaped and this will really help, especially if done proactively,” he said.
“It’s also essential that legal teams are prepared: know where all the documents are, what the lease terms are, what the rules are with employees. Have all that data [at] hand so quick decisions can be made. Board and management also expect that their advisers think outside the box. Don’t just look at the written terms, for example of leases and other contracts, but look at what other options may be available to solve problems.”
Next week, Lawyers Weekly will examine the speed with which decisions about corporate legal spending will have to be made, as well as some inherent opportunities pertaining to the allocation of that spend.