Legal Departments are moving in an environment of constant change, both in terms of their regulatory ecosystem and in terms of business development and technological advancement. KPMG Law has been analyzing the activities, organization, trends and development of Legal Departments since 2005, allowing new insights into strategies and the definition of best practices. This long-term analysis shows an unambiguous trend from decentralization towards centralization that can be observed in many Legal Departments across all industries and regions.
Today: trend to centralization
As a result of a heightened efficiency pressure and risk reduction policies, a clear trend of centralization accompanied by strong central governance can be observed. Legal departments worldwide react to the rising pressure and changing expectations for the Legal Function by introducing solid reporting lines from the regions to the central Legal Department as well as centralizing tasks and increasing headcount within the central Group Legal Function. Legal Departments with decentralized units that are managed without any functional or disciplinary management have become a rarity.
This strong central governance has clear benefits both in terms of cost and risk reduction, as well as quality enhancement. Implementing this change in leadership, which impacts all areas including HR-related decisions, resulted in large financial benefits for the General Counsel. Having benchmarked the different setups for over a decade it can be stated that, besides improved transparency and risk position, this setup allowed a save of 9 to 15% on the total costs per bn sales compared to those of same industry that practiced a weaker central governance. However, it should be emphasized that this organizational change should only reflect the relevant elements of an international cooperation within a global Legal Department, leaving the local legal advice unchanged in the responsibility of local units.
The above-mentioned cost saving potential and quality enhancement possibilities result from a range of consequential improvements. Among other things, central communication allows the establishment of a shared strategy, common goals, and an aligned risk appetite. This ensures that processes can be improved by establishing an integrated decision-making process, unified reporting lines and aligned legal advice both regarding content, the mandate of Legal and the quality.
Furthermore, this harmonization provides potential to improve the sourcing model of the entire Legal Department. On the one hand, concerning the service portfolio, namely by jointly determining what is done internally, what can be outsourced and what the business itself should do. On the other, when it comes to Outside Counsel Management. With the use of a unified approach and framework agreements, the negotiation position of the Legal Department can be substantially improved, paving the way for negotiating better terms. Moreover, a streamlined process and network for Outside Counsel Management can reduce time spent on guidance and matter handling and ensure an aligned quality review throughout the entire Legal Function.
Another improvement opportunity lies with technology. Ensuring an aligned approach toward the use of IT solutions – namely from its procurement until the final roll-out and use – will bring immediate effects. An example are an aligned approach and improved interfaces both within Legal as well as toward the business, and the leveraging of this unified position with regard to licensing agreements. On top of this, the consistent use of these IT-systems throughout Group Legal allows for a coherent data source, enabling a transparent performance assessment of the Legal Department. This allows for transparent communication of the Legal Department’s actual value contribution, thus improving its internal standing.
Yesterday: habit of decentralization
This urge for centralization was in part a consequence of a well-established tradition of strong decentralization, as many central Legal Departments used to have decentralized units hovering around them like satellites. Free rein prevailed: often there was hardly any functional control, no coordination of content and processes, and no alignment regarding the evaluation of risk potential. The obvious consequences were higher costs due to lack of control as well as parallel and redundant workflows, which led to an increased need for resources. The local management created their own “legal kingdom”. In addition, it led to a heightened risk potential as well as a lack of transparency within the entire Legal Function. Due to the ever-increasing expectations regarding speed and quality and the accompanying cost pressure that became more and more relevant for Legal Departments, a trend towards stricter centralization and increased control of the decentralized units emerged around the beginning of the year 2000.
Tomorrow: strengthening the network?
Besides the many advantages that centralization offers, some disadvantages can also be identified. On the one hand, there will be an increased need for management and coordination due to the reduction of autonomy within the decentralized units. On the other hand, the strong and direct contact with the business may be partially lost due to this strong emphasis of the central approach. One of the clear advantages offered by decentralization was a direct contact and strong exchange with the business, customer centricity was key. This allowed for immediate intervention and insight into ad hoc issues that would otherwise not be on Legal’s radar. Now, centralization risks for Legal to become a black box that lacks transparency.
This may be the reason why recently a slight tendency towards decentralization can again be observed, with lawyers being placed closer to the business or even in the business itself. However, in doing so, Legal Departments makes sure they don’t water down the strong central governance line of Group Legal.
In the future, we might witness Legal Departments converging on some middle ground between the two opposites. Despite the advantages of business proximity and understanding of the business, it will remain important not to go too far in this decentralization in order not to end up back at square one. General Counsel remain cautious and see the value of strong centralized governance, even if this means a strong development of Group Legal.
How this organizational and policy-making structure will evolve in the coming years remains to be seen. The Global Legal Department Benchmarking Report will continue to evaluate this practice and the direction it takes. The Key Success factor will be to realize the advantages of centralization, while still recognizing the need for proximity to the business.