• By Kenneth Tung

Establishing a Legal Function Beyond Home Jurisdiction


Albeit less newsworthy today, news of surging and sustaining investments from developing countries, in particular Asia serves as a reminder of the transition of emerging market businesses from more export driven strategies to globalization strategies [1].

The proportion of emerging market companies in the Fortune 500 lists continues the upward march. While many such investors still have a special place in their hearts for investment in real property and, for some countries like China, in natural resources, strategic investments in businesses is now part of the mainstream.

Legal functions in companies from developing markets are relatively young and shaped by corporate cultures different from their counterparts in developed economies with matured institutions; nevertheless, the pressures of “outbound” investments from emerging markets have thrust business leaders, corporate counsel and their outside advisers into a globalized world. Some of these transformations may seem even overnight. And so goes a rush to benchmark legal functions and find a path for these newly globalized businesses around the world. Today, plenty of content on managing the legal function in a globalized context, organizational structure, connecting legal staff across far-flung offices and similar topics are easily searchable on the Internet. A majority of these best practice points come from a bottom-up check lists of experience, such as finding a balance between global and local policies, level of specialization, outsourcing vs keeping in-house, trade-off between budgeting legal resources under the function vs the businesses, HR management from recruiting, supervision, evaluation, compensation, to development. Other recent favorite topics include the right size of legal team, reporting lines and organization chart, bringing traditional legal tasks and resources in-house on a contractor basis, and doing more with less.

For example, many executives have wrestled with what is the right size of the legal department and related cost structure. A handed-down rule-of-thumb that has been circulated around suggests a ball park ratio of US$250 million in revenue per in-house lawyer. From a historical perspective where legal counsel originated as outside counsel and taking an increasingly regular and even strategic role inside businesses, this approach is based on an assumption of certain volume of legal services that comes with a certain level business activities and enterprise and translating to a regular in-house lawyer [2]. Some general counsels (GCs) and company executives may consider it an issue where some business models do not come with its own revenue but instead contribute to other business activities. Think about Google providing a number of “goods” free of charge, and yet delivery of those services is still an operation supported by among others the legal function. Another example would be a business in a foreign country too small to be staffed with its full time counsel but big enough to keep someone awake at night while proper support from local outside counsel does not justify the case. This is probably behind the popularity of contractor lawyers in a number of jurisdictions worldwide.

Each of these topics is worthy of its own discussion and deliberation, but this article will resist the temptation to retrace these thoughts and will keep with a top-down, efficacy and demand-pulled orientation to explore a number of principles from the business perspectives.

Practice Law with a Strategy

Some colleagues in the corporate counsel community may consider management of the legal function as a necessary evil that come with the responsibilities of an executive. As corporate counsel needs to do more with less, many would rather see less of legal management and get back to the practice of law that is familiar and what lawyers are hired to do.

But this begs the question of whether companies hire GCs to practice law or to facilitate aspects of business and strategies. While this can be seen as a trick question, it also highlights what clients (and lawyers) can expect from the legal function as a principal gap between the legal community and the rest of the company. To continue to be relevant, the legal profession should not wait for the clients to take the initiative to solve this chicken-and-egg problem. The more lawyers can demonstrate willingness to go beyond lawyering to meet the business halfway to solve problems and shape strategies, the more the relationship between the two can embark unto a virtuous cycle. This is not unique to the legal function, as replacing “lawyers” with “finance/HR managers” and “lawyering” with “accounting & finance/payrolls, comps & benefits” in the previous sentence will point to countless management case studies.

More importantly, the practice of law so far has been more often than not limited to remedial measures, e.g., evaluating and making claims or defending suits, supporting transactions and reviewing contracts on the back end, with most factors beyond the lawyers’ control. In stark contrast, like policy and regulatory strategies, managing and shaping a function is mostly within our control. When executives are called upon to formulate and implement strategies for integration, coordination, improvement across the whole and to provide solutions, there are more options than cleaning up after many bridges have been crossed.

Context of Organization As a Strategy

Before diving into the subject matter, it is instructive to review various globalizing scenarios that may confront a corporate legal department:

  • Engaging mainly in domestic legal affairs but with growing overseas issues and demands that require external legal support (and costs);

  • Covering legal needs of the businesses globally with lawyers reporting either directly or indirectly (or dotted line) to the legal department;

  • As a result of an M&A, functioning through essentially two or more legacy legal departments that are either separate or on a journey toward integration.

Each of these contexts comes with its salient factors. The more common rationale for globalization moves includes a search for markets with growth potential above the home market, the drive to extend the competitive advantage at home to overseas markets, requirements from a climb up the value-add curve or “food chain”, perhaps with the additional gain in economy of scale, following one’s customers as they expand abroad. Whether growing organically or otherwise, fundamentally a globalization strategy reengineers how a company delivers value to its customers in existing and new segments and markets.

This is even in spite of entrenched business systems and organizational structures. Integration needs time and effort for the pieces to work together, but internal silos should not be allowed to take shape during this period. Growth of any kind needs to find its place in the whole or risks coming up against restrictions from the headquarters or discounted incentives for better performance at the overseas units. Just as M&A cannot be a success without a successful integration, the balance of integration and localization is the holy grail of shaping and implementing globalization strategies, whether organic or inorganic. To this end, managers of legal functions will benefit from keeping in view a number of principles and tools from the organizational structure field.

Many investments from developing markets to developed markets (“outbound investments” from the emerging markets perspective) have been known to leave units in the developed markets relatively independent. This may be due to:

  • The perspective of having been on the receiving end of management imperialism,

  • Self-knowledge of or humility regarding the home team’s relative lack of sophistication,

  • Avoidance of rocking the boat that might otherwise lead to haemorrhaging talent & cash flow while the purchase debt is still a burden.

Regardless, many multinationals (or MNCs) from emerging markets like China and India are viewed as to excel at bite-size innovation and the discipline of failing (and learning) fast with follow-up course corrections.

Business Globalization Strategies

As technology, productivity and globalization have been driving MNCs to expand from developed markets, they have experimented with managing global activities from the headquarters, through subsidiaries in various countries, from global business units with activities that stretch across numerous markets. All of these models aim to deliver values to customers in a more efficient manner, and behind these models is a combination of internal coordination/division of labor based on the logic to streamline and optimize the processes to convert ideas to markets, markets to orders and orders to cash.

These efforts have witnessed a range of outcomes that can be traced to myriad circumstances, from the market, industry, company to the individuals. Globalization’s track record is not better than M&A’s, which is challenged especially in the integration aspects, and many globalization efforts carry a “globalization penalty”. Many of these outcomes are simply due to the common mistake of attempting to shoehorn global operations into existing domestic structures, thereby contributing to a failure to realize full potential of newer foreign markets. When strategies succeed, they usually leverage the international organizational structure, people and processes of a company in ways that cannot be easily replicated. Equally important is that the organization has a flexible process for strategy formation and implementation [3].

Whether a company’s expansion was driven by realizing a competitive economy of scale, local differentiation (in each country/market) or arbitraging an advantage in its home or a foreign jurisdiction, it must minimize and control complexity in order to maintain speed and agility which are becoming table stakes in most industries and markets. And yet, shy of an organization staffed with the most worldly and globalized talent, companies must work with people who are mostly products of a single culture, market and jurisdiction. This is particularly the case in the legal profession as laws and practice are mainly a local and national affair in spite of the growth of a public and private international legal practice.

This is in sharp contrast with the business clients who have progressed with various globalization strategies. For example, businesses with marketing and sales at the head of the spear would focus on local market adaptation and relevance; companies with significant R&D and product development operations would consider standardizing and aggregating to reach scale; and industries such as those leveraging heavily in labor would arbitrage on cost and other advantages in a jurisdiction often beyond the home country [4]. While there are tensions between two or even among three strategy vectors, some companies manage to turn managing the tension into a competitive advantage. A case in point is the GE Healthcare business which excelled in aggregating its R&D in optimal locations, configured the function to take advantage specialization in various locations, and even adapted certain products to local markets such as India and China.

The legal function may be important to certain arbitrage strategies, especially administrative arbitrage that seeks out, designs and executes on an advantage arising from differences of rules across markets; however, it is not common for the legal department to be a lead in globalization strategy. What is more likely, depending on the leadership and bench strength of the legal department, is for the legal function to capitalize on opportunities to contribute to corporate and business strategies including those in the international context.

Every Business That Has a Strategy Needs a Corporate Legal Strategy

To achieve this, the legal function needs to live and breathe the operations and strategies of the organization, derive one or more corporate legal strategies (“CLS”) from the business strategies and objectives, and retool itself in order to execute these CLS’s [5] .

It is an open question whether most legal departments have devised and executed a CLS successfully. This is because it takes time to retool and position the legal function to break away from the negative cycles that limits business expectation of how lawyers can contribute to corporate strategies.

The leaders of the legal functions need to acknowledge and commit to acquiring skills new to the department, and the role of a corporate legal strategist will lead to developing key capabilities in addition to expertise in things legal:

  • Breadth in business driven mind frame across a broad range of business activities from product development to going to market, supply chain, procurement, sales/distribution and after sales opportunities, and everything from finance to HR that makes the enterprise function smoothly;

  • A strategic orientation and approach to addressing issues large and small, and even those not yet apparent, ultimately to gain sustainable competitive advantages in serving customers and enhancing the company’s position in the value net;

  • An aptitude to appreciate, demand and procure data at the right level and granularity as part of problem solutions;

  • Unwavering focus on solving problems (and not just practicing law), following issues upstream to the point of prevention while constantly being considerate of the interconnections and the big picture;

  • Design thinking and mind frame for continuous improvement of the legal function, from day-to-day operations to corporate strategy formation and implementation, always focused on the ultimate user and customer’s benefits;Competence in managing legal function with all the tools of process management such as six sigma, lean and agile that is already the language of most of the organization;

  • Willingness to experiment with and adopt technology to automate certain legal tasks and provide self-help tools for clients and progress careers of lawyers to more complex and high impact tasks.

In short, this calls for T-shape lawyers and legal functions - with the depth in working with laws and practice and the breadth to appreciate the end-to-end business activities of the company and the underlying strategies for competitive advantage to serve customers [6].

Having a CLS enables the legal function to meet the business half way and to develop itself into a strategic function. Although this is not the only way, the journey to arrive at CLS competence is a big step toward bridging the gap between business and legal.

Such a connection to a purpose of the organization calls for a fundamental transformations of the legal department, from the GC to the most junior member, from a group of “individual contributors” to active team players, and a team closely integrated with other functions internally and aligned on actions externally. This is another major step from a silo and a “cost center” to a component fully engaged with the rest of the organization. In the course of this transformation, the common budgetary pressure today of doing more with less will naturally be resolved as the department will be more prized as a team member working on the same agenda, solving more issues that matter and ahead of the curve. Imagine the management coming to the GC to ask what the legal department needs to enable it to deliver more.

Structure – the Seven Samurais

Aside from designing and developing a legal team that serves the company’s business strategies and corporate legal strategies in an optimal way, there are numerous considerations in cultivating a winning global team. This goes far beyond language capabilities, cultural appreciation and ways to maintain communication across various types of distances (cultural, geographic, economic and administrative). Most discussions will lead to the organization structure of the legal function and its connections to an overall global organization, and the organization chart is typically the representation that comes to mind. However, it is equally about people and processes [7]. Further, one would be remiss to design and develop a global organization without mentioning the well-known 7-S framework first developed by McKinsey in the 1980s.

This framework is applicable to most companies to analyze interrelated aspects of a complex organization and leverage the insights derived for efficiency and impact. This tool is useful for diagnosing organizational efficiencies, improving performance, align functions and processes during changes, reorganizations, M&A, and implementation of strategies such as globalization.

The seven organizational aspects are [8]:

  1. Strategy: The dynamic roadmap to maintain competitive advantages in meeting customer needs.

  2. Structure: The framework in which the activities of the organization’s members are coordinated. Examples include how departments coordinate activities, reporting lines, roles and responsibilities, level of centralization in decision making, lines of communication, cause-effect pathways for information to travel across the organization, official and informal authority, extent to which functions involve partnership within and outside the company.

  3. Systems: The day-to-day processes, decision making[9], within and across functions, procedures and their effectiveness in reducing redundancy and streamlining activities. Examples include databases connectivity, institutional knowledge (especially in case of people turnover), controls and failsafe, internal rules and automated systems.

  4. Shared Values: The guiding principles of the organization. These are the core values of the company and functions, measure and reward, any shared understanding of the reason of existence of the company and the department.

  5. Style: The leadership approach and the organizations overall operating approach. E.g., the level of the 360-degree consistency of perception of this style, how leadership style fits with the circumstances.

  6. Staff: The staff levels and how people are hired, developed, trained, socialized, integrated, and ultimately how their careers are managed. E.g., extent to which staffs serve customers and the company, effectiveness of training to help them to do their job better, issues holding them back from realizing business objectives, different ways for working such as contractors.

  7. Skills: The distinctive competencies of people within the organization, including skills required to shore up and improve the weakest link in the chain.

The last four aspects are generally considered the people aspects. Shared values represent a common ground where people, structure and systems/processes converge to realize a strategy.

Since the popularization of this 7-S framework, the role of processes, represented by systems in this framework, has significantly expanded. This is due to convergence of technology, how people are organized to work such as mobility, and the rise of the focus on data in all aspects of people’s lives. The legal services sector in particular has been a laggard in this area of improvement.

To help execute a globalization strategy and a supporting CLS (Strategy), the legal function must first analyze relevant end-to-end processes (Systems) in the international context and how they might interact with domestic processes, people and structures. Legal process management and systems that are keyed to the relevant foreign and domestic contexts, grounded with data analytics at the right granularity, will help to enable this analysis. The lawyers must also appreciate the expressed views and built in biases of stakeholders (Shared Values, Style, Staff, Skills) at home and abroad when tackling weak links and breakdowns in work flows and root causes of issues to be targeted. Based on these insights and improvement efforts, the leaders can adapt the legal organization (Structure) to serve the stakeholders and align better on the globalization strategy.

Take a hypothetical based on an article on emerging market companies challenging established incumbents in the global markets[10]. Figure 3 from the article illustrates Acer’s strategy to break out of the low-margin business of assembling computers for OEMs at the bottom of the value curve (“the Smiling Curve”) and migrate up- and down-stream to higher value add spaces. If one were in the shoes of the GC of Acer, what will a CLS that is informed by the 7-S framework look like?

In the move upstream toward R&D, design and components markets, in addition to recruiting legal and IPR expertise to support the drive for product development in areas such as CPU, software, memory chips and motherboard, the legal department will need to picture how these various components businesses would interact and integrate into the whole business strategy and CLS.

From the standpoint of the number three manufacturer of personal computers in the world integrating upstream, among what might previously be issues in the horizontal competition space would be added vertical competition issues that called for the legal function to devise a clear CLS to address competition issues and anchor the company’s strategy in relevant jurisdictions.

The varying degrees of competition in each of these markets in the supply chain, some outside the home country, will shape the new businesses and activities, including the way people are employed, the style of leadership and skillset required in each component business and supporting functions like legal. The key processes in each of the points along the value chain will be central to how the legal function will be engaged outside its legacy experience and competence. Concentration of legal talent relevant to each of these submarkets may reside at home or abroad, and the GC will need to work with each component business leader as well as the overall strategy execution leader to determine how and where to place legal supports and which area is closer to the core strategy. To retain strategic legal resources, the GC will work with HR professionals to bridge any gaps between the company’s shared values under new strategy and those in a particular submarkets or geographies.

On the back of these considerations, the legal function will restructure itself to meet the demands of each step in the strategy execution. A similar exercise applies to the expansion to business models downstream toward local sourcing, distribution, marketing, after-sales and e-commerce, of course, with different legal skillsets based on relevant requirements of people, processes and resulting structure.

The Seven Samurais - Take Two

It may be informative to switch lenses and consider another set of characteristics [11] when the legal function is called upon to support a company’s globalization:

  • Attitude (prioritization of global expansion)

  • Aptitude (knowledge and skills)

  • Magnitude (ability to align opportunities with capabilities)

  • Latitude (ability to adapt)

  • Rectitude (legal and ethical practices)

  • Exactitude (tolerance for uncertainty)

  • Fortitude (commitment to global initiatives).

As these characteristics are taken originally from the perspective of a company from a developed market pushing overseas, one can draw the reverse logic applicable to an emerging multinational expanding abroad. So while a western MNC will need to broaden the scope of what is permitted when operating abroad, an MNC from a developing market will need to recalibrate risk tolerance when it comes to legal and ethical issues in developed markets. The lawyers will need to distinguish the “corporate” view on risk management and lines in the sand based on applicable jurisdictions and markets. “This is the way it has always been done in the last X years”, “this is how we have got here” or “not invented here” should not be the main justifications for decisions going forward at home, let alone abroad. Also for the legal function, the same goes for Latitude and Exactitude when it comes to operating in developed markets.

As institutions in the developing market are still developing, what would be assumed ways to operate under relative uncertainty and to adapt to changes on the fly may need to be merged with more robust solutions to address contingencies while allowing more time to align with a wider value net of customers, suppliers, communities, and social institutions starting with various government agencies.

While the legal function must adapt to local sensibilities, like marketing to local preferences and taste, it does not follow that there is no room for aggregation strategy and standardization of legal processes. In fact, it is even more urgent to chart out baseline legal processes, their touch points and impact on business risks and opportunities, and manage them through standardization with some help from automation. This is because like any activities of a global enterprise, the legal function must rest its judgment on risk-adjusted values in business activities, abroad as well as at home. There is no way to measure unless there is an effort to standardize such values.

Playing a Part in the Strategy

With these tools and competence in mind, legal departments can contribute to corporate globalization in many ways:

  • Serving to bridge past success with future building – As many developing market MNCs bring competitive advantages that their affiliates in the developed markets have yet to adopt or cannot switch to without abandoning the latter’s strategy, companies need to maintain both strategies without either one replacing the other as a result of any reorganization or rationalization after the expansion or combination. Similarly, the legal function in each of these two types of markets should be a part of, or even serve as examples of linking up the domestic with the international, and find every opportunity for, and even invest in, cross-pollination. An investor-subsidiary relationship does not mean that ideas and advantages cannot flow two-ways.

  • Be a Triple A (AAA) organization – Whether the globalization strategy is led by Adaptation, Aggregation or Arbitrage, the legal department and other functions should play hand-and-glove to these strategies. If the strategy is to focus on country driven organizations to adapt to each market, the pitfall is to control complexity while achieving local presence and competence. In an aggregation strategy, the legal function should excel in standardized, cross-jurisdictional leverage in subject matter and industry practice without excessive standardization. In a business relying on winning by arbitrage, the legal department must support these focused activities in markets enabling the advantage including the touch points with the rest of the global business activities. If the legal function can itself lead or participate in the arbitrage, it can realize a CLS.

  • “Judo strategy” / confront and challenge – Help find strategies through which being a late mover to a market is a source of competitive advantage rather than a disadvantage. Examples of these moves seem more common today than before, exemplified by the sharing business where companies like Uber & Airbnb extract values from the established transportation and hospitality industries in markets around the world where incumbents least expect and cannot react, except through political measures. Aside from these legal or business campaigns, legal functions should organize itself with the capabilities and experience to shore up business in the higher end segments of the industry where the developing market MNCs may move toward (e.g., Acer).

  • Freeing up from mindset traps – Even with forays into developed markets, many executives of developing market MNCs fall into a number of mindset traps: lack of confidence, isolation / lack of unawareness of the company’s global potential, overconfidence which is itself a trap in a chamber with echoes of the company’s domestic success. Lead lawyers will be called upon to bring the legal function and its stakeholders out of these traps by supporting and even championing “outbound” initiatives. At the same time GCs should maintain equally authoritative voice(s) in overseas legal staff to encourage and host these campaigns and integrate overseas lawyers and colleagues with those from the headquarters. Develop a culture of continuous cross-border learning and avoid development of an “us” and “them” mentality.

Globalization strategies are about continuous learning because global marketplace is information and knowledge intensive. To survive in this environment, an organization, including its lawyers, must know how to learn as the central skill that allows a company to deliver better value propositions. This dovetails into the branching out mind frame and effort that a T-shaped legal function must adopt. While the cause for a globalization strategy is genuine, to avoid the globalization penalty, GCs must persuade the peers at the executive table to give the strategy a chance by investing in capabilities and process improvements.

This article was first published as a chapter (p.72) in Managing Your Legal Organization: Global Insights, Ramit Singh Chimni (Ed.), Magic Lawyers (2017)

Notes

  1. Emerging Markets Still Invest Overseas Despite Economic Downturn, by Courtney Fingar, Financial Times, May 17, 2016; The Rise of Asian Corporations: Asian Outbound Investment Is Reshaping Global Markets, J.P. Morgan.

  2. While one may think bringing work in-house is the mandate of the day when outside lawyers’ rates are expensive, it is useful to bear in mind that the ultra-inflation in legal fees has been a market factor for only the last 30-40 years. Before then, the principal benefit of bringing legal work in-house would be something other than cost arbitrage. Today, with the clarion call from innovations in process improvements that unbundle and reassign elements in legal work and follow up with automation opportunities, where a certain piece of legal service may end up will depend more on the efficiency of a provider for that task. And this is even before considerations from the possibilities in the field of artificial intelligence.

  3. For an apt illustration of how companies adapt to various globalization situation, see Figure 1 from DNA Global Network,

  4. See Managing Differences: The Central Challenge of Global Strategy, by Pankaj Ghemawat, Harvard Business Review, March 2007.

  5. See this link -iglegalytics.com/wp-content/uploads/2016/05/Legal-strategy-summary-FINAL.pdf.

  6. See Figure 2 from The 21st-Century T-Shaped Lawyer, by R.A. Smathers, Law Practice Magazine, July/August 2014; see also The MIT School of Law, by D.M. Katz, keynote presentation at the Stanford CodeX FutureLaw Conference, 2011

  7. Technology has always been playing a part, and increasingly more so in the terms of process improvement, automation, sharing of ideas and thought products across the end-to-end supply chain, and of course, artificial intelligence. However, technology should be seen as the means rather than an end to affect the scope of people, processes and structures of an organization and equivalent aspects in the market place.

  8. See The past and future of global organizations, by W. Aghina, A. De Smet, and S. Heywood, Harvard Business Review, September 2014.

  9. A common framework for how people and functions take up responsibilities and accountability is the Responsible-Accountable-Support-Inform-Consult (RASIC) matrix.

  10. See Going Global: Lessons from Late Movers,

by C.A. Bartlett and S. Ghoshal, Harvard Business Review, March 2000.

  1. See Does Your Company Have What It Takes to Go Global?, by D. Quackenbos, R. Ettenson, M. Roth, and S. Auh, Harvard Business Review, April 11, 2016.

About Kenneth Tung

Kenny Tung is General Counsel at Lex Sigma Ltd., where, in addition to facilitating strategic projects and transactions, he served as the China advisor to a top U.S. PE fund and currently as the Asia Pacific advisor to one of the world’s top auto components companies.

Kenny also co-founded In-Gear Legalytics Ltd. to complement and serve providers, clients, developers and investors in the legal service value net.

Previously Mr Tung served as the Chief Legal Counsel of Geely Holding and before that as general counsel in the region at PepsiCo, Goodyear, Honeywell and Kodak where he fielded a vast variety of issues and projects and drove efficiency projects/practices. In 1994, he came to China as a lawyer with Coudert Brothers and led major projects such as the Shanghai GM JV negotiation.

#KennethTung #KnowledgeUpdates #AllUpdates #NeedtoRead

SPONSORS LEGAL TV

BACK TO TOP

© 2017|2020 LegalBusinessWorld™

Australia | Asia | Canada |  Belgium | China | Cyprus | Czech | Denmark | Estonia | Finland | France | Germany | Greece | Hungary | Hong Kong | Iceland | India | Indonesia | Israel |Italy | Japan | Latvia | Lithuania | Luxembourg | Malta | Mexico| Norway | Poland | Portugal | Romania | Russia | Singapore | Slovakia | South America | Spain | Sweden | Switzerland | Taiwan | The Netherlands | Turkey | Ukraine |United Kingdom | United States |Middle East | Africa