(7 pages)
Legal departments are subject to the same kinds of forces for change that have led companies to transform structures and processes in product development, operations, sales, and more. The changes in the legal ecosystem include unprecedented technological advancements, a new wave of corporate litigation, and legal colleagues’ evolving career expectations. To attract and retain talent, operate efficiently, and support the organization’s mission, general counsels should take a fresh look at their organization’s structure.
About the authors
This article was a collaborative effort by Jan Krause, Corinne Möller, Johanna Pracht, Dina Seilern-Aspang, and Tobias Sodoge.
As we work closely with general counsels and their teams across industries, they often wonder which structure and processes will best prepare the legal department for change. While each situation requires tailored analyses and recommendations, we believe four general imperatives should be top of mind for every general counsel building a next-generation legal department:
- clarifying the functional purpose and priorities
- setting up for a changing legal ecosystem
- preparing for a new wave of corporate litigation
- enabling careers for legal talent
Clarifying the functional purpose and priorities
For many companies today, the array of legal challenges is expanding, making a high-performing legal department more important than ever. To be effective, it must offer more than on-demand concierge services, and should have a voice in numerous strategic and tactical decisions, rather than being brought in only after the fact, such as after a contract has been signed.
While business leaders might not always know when or how to involve their in-house lawyers, clarity of purpose should start in the legal department. Since the department oftentimes constitutes the company’s ultimate line of defense from a range of risks, the general counsel needs to define its functional purpose and priorities clearly. This often requires leaders to ask uncomfortable questions, such as:
- Where can the in-house department make a difference for the company by providing advice in its own capacity, and where does it effectively manage outside counsel or similar external capacity (Exhibit 1)?
- How does the department balance the need to protect the company, its assets, and its employees while enabling business endeavors, even in less familiar areas?
- How does the increasing emphasis on (legal) risk management, compliance, and forensic management change legal operations, and does the department have all the skills it needs to address these topics?
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One approach to defining a functional purpose is to compare business activities and priorities with how and where in-house lawyers spend their time. Should the legal department focus more on drafting complex commercial contracts for new projects, managing external counsel to handle mass litigation, or responding to day-to-day requests?
To improve transparency and inform discussions with business leaders, we recommend that a legal department understand and categorize which business activities drive the legal workload, such as drafting commercial contracts and preparing for investment decisions (Exhibit 2). The general counsel can use this assessment for various applications. Following are just a few examples:
- Enable joint prioritization with business units by creating transparency on legal workload based on business activities.
- Understand internal resource needs by role and skills required (e.g., subject matter and jurisdiction).
- Forecast external costs and decide on required partners’ capabilities.
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Aligning the legal department’s activities with the strategic goals of the company is often an eye-opening exercise that can help the general counsel articulate the department’s value proposition and decide where new investments are warranted.
Setting up for a changing legal ecosystem
New means of collaboration, the rise of litigation financing, and advances in technology are changing the legal ecosystem. Technological developments, for example, are increasing the volume of data to be processed, enabling remote working arrangements, requiring new security measures, and adding technology skills to the department’s talent needs.
Remote work during the COVID-19 pandemic has presented new security concerns and other challenges in accessing files, contracts, and other data while working from home.
Getting the right person for the job, arguably a general counsel’s most important task, is complicated by the aforementioned changes in the legal ecosystem. While legal departments could once choose from preselected panels of law firms for help with particular subject matters, a much broader range of services (such as digitally enabled legal services, legal tech, insourcing providers, and litigation financing) is available today. General counsels need to learn how to navigate those services (Exhibit 3).
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Artificial intelligence, for example, can speed up the process of drafting legal papers through the use of tools for automated research, translation, document generation, and pre-population. Today’s machine-reading algorithms can also review thousands of documents in minutes, freeing lawyers from repetitive, low-value tasks and giving them more time for high-value analysis and advice. These and other new solutions can help general counsels address capacity constraints. Given the enormous quantities and value of data now available from public and private sources, most next-generation legal departments will need data scientists who can harness it.1Kevin Buehler, Rachel Dooley, Liz Grennan, and Alex Singla, “Getting to know—and manage—your biggest AI risks,” May 2021, McKinsey.com.
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Preparing for a new wave of corporate litigation
Many companies with global footprints are exposed to new waves of litigation brought on by professional litigators who have developed elaborate strategies for bringing their lawsuits forward, including the selection of jurisdiction and the use of online marketing to reach potential claimants. The trend is accelerated by a growing litigation finance industry that now has more than $11 billion to fund claims globally (Exhibit 4). Many litigators embrace financing because it provides coverage of their legal fees, which enables planning security and potentially a fungible portfolio of business. Claimants choose financing solutions because they provide immediate relief from risk and legal fees in exchange for some limits on the upside.
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Often these lawsuits take the form of class-action-like mass proceedings. Recent examples include claims of air pollution, antitrust violations, and breaches of consumers’ personal data. Attacks can also be launched in the B2B context: more companies now see litigation as a way to fight for market share and keep competition at bay. Regulators litigate to enforce standards, and a new generation of digitally enabled consumer litigators seek compensation for their clients. Flightright, for example, offers low-cost digital legal services to airline passengers.
Meanwhile, more not-for-profit organizations are suing on behalf of others, using court proceedings to drive social change and protect the environment, especially with respect to carbon dioxide emissions (Exhibit 4). The NGO Germanwatch, for example, is supporting a Peruvian mountain guide and farmer in his suit against the German utility company RWE, claiming that its global greenhouse gas emissions contribute to ecological changes and threats to people in the Andes. In another example, the Dutch NGO Milleudefensie has brought Shell to court, challenging its carbon-reduction targets, and pressing for a commitment to reduce its carbon dioxide emissions by 45 percent by 2030. The court of The Hague ruled in favor of the NGO in the first instance in May 2021.
Besides preparing to defend their companies against lawsuits, general counsels can adopt a forward-thinking, preventive approach to legal risks. Some general counsels are now working much more closely with the broader organization, convening cross-functional teams to anticipate areas in which regulation is likely and to participate in public discussion of these issues. Of course, they also should prepare for regulatory compliance. Many in the EU are now planning organizational changes, for example, to adhere to new laws on corporate responsibility.2E.g., German Lieferkettengesetz. Some are also bolstering corporate resilience by “translating” regulatory challenges into opportunities to create value, such as by improving environmental, social, and governance to appeal to investors, customers, communities, employees, and potential hires.
Enabling careers for legal talent
In seeking to hire, develop, and retain the best talent, corporate legal departments must compete with law firms and the public sector, even though many law graduates do not consider in-house positions their first choice (Exhibit 5). Many believe, correctly, that promotions within a legal department can be rare. Increasingly, positions in the middle and senior ranks are now filled by lawyers from private practice. This predominantly one-way traffic from private practice to industry means that many qualified people may vie for an open position, making it increasingly difficult for in-house lawyers to move up.
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Some companies are making the roles more attractive, however, by opening career paths and skill-building opportunities. Careers in a corporate legal department usually start three to five years after graduation and some training in a law firm.
In times of constrained financial resources, to attract talent and set themselves apart, leading corporate legal departments are creating more exciting work environments for young professionals—for example, by creating interdisciplinary teams that include data scientists, forensic experts, and external counsel. Many are also offering more attractive working conditions, including flexible working hours and part-time models.
Around the world, the most imaginative corporate legal departments are broadening career opportunities with a range of other innovations. Here are a few examples:
- Expanding geographical reach. Some firms give in-house lawyers responsibilities over a wider range of geographies instead of handing them off to external lawyers.
- Offering internal and external secondment programs. Telstra and Westpac, for example, “swapped” in-house lawyers as part of a three-month pilot secondment program in 2016. Both also offer internal secondment programs where lawyers can rotate throughout the business.
- Opening adjacent career tracks for those who want to grow beyond legal. Some topics naturally overlap, such as compliance, audit, and risk. Some companies go further, offering opportunities across finance, M&A, procurement, and investor relations.
Such efforts are becoming necessary tactics for building a legal department suitable for today’s legal ecosystem. We have found that as legal operating models shift to keep pace with the business strategy, skill gaps are emerging in legal departments. General counsels can increase the attractiveness of individual jobs and elevate the function by offering training in areas such as cross-functional project management and presentation and analytical skills.
Even as today’s legal departments come under pressure from a new wave of corporate litigation, they have skills gaps to fill and must recruit from a pool of young talent with doubts about working in legal departments. These challenges are not insurmountable, but they do require a fresh perspective on the structure and processes of the legal department. Our experience has shown that general counsels can build a next-generation legal department by addressing four imperatives: clarifying purpose and priorities, setting up for a changing legal ecosystem, anticipating and planning for litigation, and enabling careers for legal talent. The resulting next-generation legal department will not only provide on-demand concierge services but will also have a voice in the company’s strategic and tactical decisions.
Jan Krause is a partner in McKinsey’s Cologne office; Corinne Möller and Johanna Pracht are consultants in the Hamburg office; Dina Seilern-Aspang is a consultant in the Vienna office; and Tobias Sodoge is a consultant in the Berlin office.
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