Best Ways to Make Your Legal Department as a Profit Center

The Legal Department As A Profit Center

By PracticeLeague, May 30, 2022 | 8 Min Read

Hitherto…

Traditionally, the stakeholders did not see the legal department as a significant enabler in terms of business results. In business terms, it was viewed as more of a cost center. Some of the more cynical line function managers went so far as to view it as more of a necessary hindrance that ensures compliance and risk mitigation than adding any real value to the business. In a slower-moving less agile world, this may have been a situation that could be adjusted to; not so now, in the rapidly at-flux new world order.

The New Normal

This new world is one where the demands & expectations of all stakeholders or customers in any business enterprise have not only risen, but are also in a state of much faster change than before. All stakeholders in the ecosystem now have access to much greater information, resulting in all decisions being made faster and based on more information. This has broken down barriers, revealed comparisons with competitors in easy to digest formats, and much more.

Legal Must Speak The Language Of Business

This, then is the world Corporate Legal Departments live in, this is the new normal. Hence, Legal must now speak the language of business, they must understand that the services they provide to other functions enable these other functions to do their job; they have to understand their needs, deliverables and processes, and then figure out ways to add value to them. That is the key: how can the legal function add value to its dependent functions, and thereby indirectly add value to the customers, vendors and other external stakeholders.

Adding value in this manner requires a better-than-average understanding of the customers needs; for every department eventually connects to and services the customers. This means working inwards from the outside, understanding the external needs of the various stakeholders, appreciating the internal processes and workflows that go towards satisfying those needs, understanding the touchpoints and intersections with Legal, and identifying ways to add value.

Identifying The Ways

Functions Of The Corporate Legal Department

Before we can identify the ways the internal teams can add value, and be seen as value creators, we must understand what the legal department’s functions are. In a nutshell, they are:

  • Compliance with Government Statutory Regulations
  • Compliance with Financial and Taxation Legislation and Rules
  • Compliance with Internal Policies
  • Documentation & Drafting of Legal Documents
  • Providing Legal Advice to the Board
  • Handling Matters and Cases
  • Managing Budgets & Spends

Thus, legal departments are in a support role, enabling the other functions performance. The legal departments are therefore interlinked and interfaced with all the functions and departments in a modern enterprise – Sales, Marketing, Production, Finance, HR, etc. In order that they can be seen to add value, it is important for the legal teams to understand what these departments are supposed to deliver, and what has changed in the expectations from these dependent departments. If the legal teams are providing a service style rooted in a reality that no longer holds true, it leads to a potential rift in the downstream delivery of services and products to customers from these departments.

Defining The Customer and The Profit Center

Customer here means the receiver of any service, spare part or product. To elucidate, for the purchase department, production is a customer as is any vendor that comes on-board; for HR, all departments are its customers. Customer, as it is used here, does not refer to external customers only

Profit Center is a part of the company that is treated as a separate unit. It is responsible for the profits of the company, is a defined contributor to the profitability at an organisational level.

Identifying The Problem

These above are the key performance areas of the modern Corporate Legal Department, and their interlinkages, or their various customers. The list of functions above is emblematic of the problem; the list mentioned is inward focussed; this, for a department providing enabling services, does not do justice to its key purpose. It is focussed on its own deliverables, rather than how & where value is being added by the department, and which problems of its customers it is solving. In and of itself, there is nothing wrong with this; just that it may place the department out of sync with the times. And it is this approach that places it as a cost center, since its focus is on mere provision of services, rather than solving its customers’ problems and satisfying their needs. This view needs to undergo a paradigm shift – legal should start view each function as its customer.

Charting What Has Changed

The difficulty in the current approach is that it may be rooted in a reality based in bygone times. This is because most organisations have processes that are more or less settled. It is these processes that enable the support functions to provide their services to their dependent functions. And these processes might be based on a reality that has changed since the processes settled, and are thus out of sync, and unable to deliver the changed definition of value addition. So, what are the value areas which a legal department serves to its customers, and what has changed? First, let us list the specific value add areas to each corporate departmental customer of the Legal Department.

From the above, we can draw a few summarised areas of service from the Legal Department, and trace the changes that have taken place in the connected ecosystems:

Onboarding new stakeholders into the organisational system

  • Technology, society, market changes mean that the newly incoming stakeholder expects & demands a higher level of service and comfort than earlier, one which is seamless, is easy and values time, among other things.
  • Higher competitive levels globally has meant that smooth continued operations are at a definite premium.

Dispute Intermediation

  • Propensity of disputes arising has risen in tandem with competition, demand and customer options.
  • Ecosystem changes has made access to judicial and regulatory approach by dissatisfied party/s easier.

Knowledge and Document Management

  • Increased regulatory activism leading to KYC and other related documentation being far more important.
  • Increased level of overall documents making search and retrieval harder than before.
  • In this uncertain changing world, knowledge retention and growth is key to sustained organisational performance

Compliance

  • Rapidly changing rules, policies and laws..
  • Globalised operations mean these changes are spread across geographical tracts that are anyway distinct from one another, doubling the pressure on internal systems.

Risk

  • Higher competition, other changes has increased the risk of failure, penalties and duties exponentially.
  • Higher media activism only adds to this pressure point, so that now Risk is a major area of focus for the business, more so now than ever before.

Decision Support

  • This is an information-driven world; where informed decisions can make or break the business. No organisation can now afford to make decisions sans pertinent information

Legal Department: Now A Key Business Contributor

From the above, we can see that in the changed environment, the importance of the legal function is now greater than ever before. Right from the first onboarding of any customer, client, vendor, partner, supplier to the production of services and onto the overall management of the business enterprise, legal has now become a central touchpoint for the entire organisation. The experience of the client while onboarding to the organisation, the availability of raw material, the smooth relations with vendors, regulatory and statutory compliance needs combined with the changed risk paradigm has placed legal in a unique place to make its mark, and its presence felt.

This is originating in the nature of the business ecosystem itself; the technology enabled ecosystem and increased competition have made the customers used to a certain level of service. Access to dispute settlement is now easier than before, again thanks to technology. The increased emphasis on transparency combined with easy price discovery mechanisms in the market has placed a premium on systems that can give the suppliers and vendors upstream confidence and trust in the organisation.

It is a highly competitive world, and no organisation can afford a system that takes too much time to find documents, or does not give a best-in-class experience, or does not keep in tandem with altered or new regulations. The risks to the business are now simply too great to contemplate. A lopsided experience to a key supplier, partner or client can motivate him / her to look to the competition who may be give a superior experience. A missed regulation can lead to crippling damages; a missed court date, or lack of documentation, an agreement date missed can lead to both penalties and business and marketshare losses.

Thus, the legal is now centrally connected to the business, through ensuring a smooth experience to its clients, customer, vendors, suppliers and partners. It also ring-fences the organisation and reduces risk in a highly changeable world. Its systems provide essential data that support business decisions through trends in clients, prices, terms and more. It ensures that no time is wasted in paper formalities – in and of itself a vital point, as the new world does not like to be kept waiting on documentation or formalities.

Conclusion – The Move To A Profit Center

The direct connection to business profits can be easily traced in the examples above: a better experience for the upstream supply chain stakeholders would mean better quality of services, at better rates with higher dependability – meaning leaner, more efficient supply chains. This results in better product / service delivery and at lower production costs. A top-of-the-line client or customer experience means a satisfied customer through smooth process, better product quality and transparent processes; legal contributes in giving a smoother experience in this. Better management of disputes and compliance translates to lesser damages and risk.

All of these are directly traceable benefits to the organisation. But the move to a profit center also means the ability to quantify these benefits. While putting a number value to increased stakeholder participation is currently difficult in the prevailing norms of business and accounting – other benefits can be quantified. Reduced time spent on paper formalities, overall return on investment into legal departments, penalty reduction, budget controls on spending, are all quantifiable as a direct add to the bottom line of the business. And while the key benefits may not yet be translateable into numbers for calculation, there is little doubt that they are helping organisations garner higher customer satisfaction scores, which translate to higher sales at lower cost. This is the subject of the 2nd part of this paper, which proposes to go into each technology and trace how it adds to the organisation.

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