By Shahzad Bashir, From Corporate Counsel

Since the financial crisis of 2008 and 2009, law departments have had to deal with the “new normal.” Previously, despite some lip service to the contrary, law departments had been able to insulate themselves from corporate pressures simply by reminding the management team that “legal is different” and “we can’t afford to take the risk.” But since 2009, more and more law departments have found that they are no longer immune to cost cutting, management best practices, use of data analytics, use of alternative service providers—not just alternative fee models—and, lastly, the balancing of risk with cost.

Many law departments are struggling to meet these new management benchmarks as they are pressured to measure up to the same level of scrutiny as other corporate functions. In many ways it is true: law departments are not like other business units. They are not profit centers and they deal with many different types of issues relating to legal, risks and compliance on behalf of the entire company. But other functions, specifically information technology and finance, are similarly situated and yet have had much more success in performing to measurable business standards. If we can understand why those functions have had more success, we may be able to draw a transformational roadmap for law departments.

There are many reasons law departments have been unwilling or unable to make these changes. In my recent conversation with former DuPont general counsel Tom Sager, Tom described a failure of leadership within departments. “I attribute [it] to three reasons,” he told me. “The general counsel is beholden to the law firm that got this individual into the position. The general counsel is far enough along in a career and doesn’t feel a need, so there’s really no incentive to make change and introduce some disruptive technologies or experiment at the risk of failure. Finally, a lot of general counsel are simply risk-averse.” However, he added, vendors, service providers and law firms have not been very creative either in bringing practical, cost effective and innovative solutions to law departments.

There’s a lot of truth in that statement, and it is worth considering that finance and information technology tend to be run by people with business and management experience along with their technical skills. Most CFOs and CIOs have some form of management degree, and many MBA programs include a finance or management information system concentration. There is, however, no MBA with a legal emphasis. Most lawyers have not been trained in a culture of business innovation and transformational changes by leveraging their work to processes and technology, along with people.

Over the past 20 years, a few early adopters have run law departments that have a reputation for performing like a business with performance standards. But now, CEOs and CFOs are asking the hard questions. Tom Sager was considered to be a maverick 20 years ago, but today his innovations are considered mainstream thinking. The question is, Do law departments have the vision, skills and tools to turn that thinking into reality?

In addition to the background and philosophies of their leaders, there are two other major differences between the law department and information technology and finance functions. First, finance and Information technology both touch more enterprise-wide matters more proactively than legal. In today’s world every worker interacts with information technology everyday. The same is true for finance. Second, most information technology and finance functions are bigger—with much bigger headcounts and budgets—than law departments. And when it comes to getting the right amounts of technology and support, size does matter. And lastly, both these functions have far more visibility.

Size matters because it impacts how—and which—vendors react to the size of the marketplace. As a rule, the major enterprise resource planning (ERP) providers have not invested in the law department market. Technology by companies like Oracle, Microsoft and SAP are pervasive throughout many companies. finance and IT have been able to take advantage of their scale, but none of the major vendors have developed products or modules for law departments. Not only has that required law department technology to be built by entrepreneurs who typically have not had the resources of the major ERP players, but also because they are unable to compete enterprise-wide, the tools have been limited to serving the law department exclusively and generally in a non-strategic manner.

Furthermore, the lack of sustainable investment by vendors and a disjointed marketplace has resulted in a series of disparate tools, rather than powerful, integrated ERP applications. Document management is typically disassociated from contract management. Records and information management tools stand apart from discovery tools. Even matter and spend management were separate until just a few years ago, with law departments forced to rely on totally distinct pieces of software—and totally different vendors.

Why has this been an impediment? Because historically it is not buyers, but sellers, who create markets. Users did not inform Microsoft that they wanted home computers. People did not tell Apple that they wanted to be able to take thousands of songs wherever they go. Deep-pocketed sellers create the market by defining user needs and creating the solutions. The large volume of information now available to help law departments make decisions requires more integrated and more powerful systems. How this plays out over the next few years will be a big part in determining how successful law departments can be in performing as businesses.

One additional disadvantage faced by law departments is their reliance on outside lawyers, who have little or no motivation to innovate. Law firms are usually the “vendor of choice” for law departments whenever possible, but they are typically chosen because the client wants an individual lawyer to handle a specific matter. (“We hire lawyers, not firms.”) This is not true of Finance or IT, who tend to engage firms on an enterprise basis, rather than individuals for projects. Despite their position as the most trusted advisor, law firms have not been able to take advantage and push innovation as sellers typically do. Individuals don’t bring about changes per se; it is the organization that does.

Unlike IT providers (and big accounting firms, who have figured out how to innovate), the law firm profession is highly regulated in the U.S. For example, law firms cannot take outside investment, which impedes innovation. At the same time, big firms are highly profitable, delivering unbelievable returns to their shareholders (i.e. their partners). This has caused firms to become change-resistant rather than industry-changing visionaries, as would take place in almost any other industry.

Nevertheless, changes have come, albeit slowly. General counsel must continue to force their departments to use available data and leverage their work to processes and technology, measured by industry metrics and benchmarks. This will likely accelerate if the U.S. moves to an alternative business structure philosophy, as has happened in the United Kingdom, to allow firms to take investment from, and share profits with, nonlawyers. Law departments will not be able to transform themselves without law firms, vendors and consultants consolidating or cooperating to deliver the kinds of innovative solutions that have long been available in every other function of the business, including law department-like corporate outliers, such as finance and information technology.

Shahzad Bashir is founder, president and CEO of Morae Legal. He is responsible for the company’s vision and strategy, and provides leadership to help its clients by transforming the legal industry.

For more on this story go to: http://www.corpcounsel.com/id=1202744295236/What-Will-It-Take-to-Run-Legal-Departments-of-the-Future#ixzz3tr8euWNV