10 minute read 17 Jun 2019
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Why the legal function must be reimagined for the digital age

10 minute read 17 Jun 2019
Related topics Law Digital Tax Workforce

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The EY global survey finds that legal functions must change their operating models to maximize value from digital transformation.

The recent EY legal operations survey of 1,058 senior legal practitioners from businesses around the world demonstrates the pressures that legal functions are currently under and how these may ultimately drive a change in operating models. In one of the most comprehensive surveys ever undertaken into the legal function, responses revealed that legal functions are having to balance an increase in demand against a squeeze on costs, while remaining compliant with a challenging and ever-changing regulatory environment. At the same time, they are struggling to capitalize on technological advances and are having difficulty attracting and utilizing talent resources.

As a result, many legal functions acknowledge that their operating model may well have to change – including exploring increased use of external providers – in order to meet these challenges.

  • Our survey methodology

    Our survey, which was conducted by Euromoney Institutional Investor Thought Leadership in late 2018, covered legal functions in primarily large businesses across a range of sectors including consumer products and diversified industrial products, as well as in government and the public sector.

Five key trends have emerged from the survey response data.

1. Cost pressures are driving change

It’s evident from the responses to our survey that legal functions are having to do more with less.

Indeed, responses to our survey indicate that 82% of businesses plan to reduce legal function costs over the next 24 months.

Despite this, nearly 9 in 10 respondents (87%) reported that their legal function had undergone either a large or moderate increase in demand for management information over the past five years.

These opposing forces are likely to squeeze legal function operations further, especially when taking into account the level of cost savings anticipated by respondents.

While businesses on average are planning to reduce costs by 11%, this figure is even more significant in certain regions and by business size. Notably, businesses in North America plan to reduce costs by 13% on average – and the figure is even higher for larger firms.

Cost reduction

15%

is the average cost reduction planned by legal functions with a headcount of more than 1,000.

In order to meet both increased demand and cost reductions, businesses are likely to increase their focus on re-evaluating operating models, which may include increased use of external providers.

Our survey indicates that legal functions are reaching a critical point. We urge general counsel to look widely for ideas to help reshape the function, as relying on leaner teams to continue to perform at above-average levels is unsustainable.

2. A need to capitalize on technology

While it may be widely accepted that digital readiness and the use of innovative technology across any business are essential for operational efficiency, responses to our survey indicate that the legal function is in danger of falling behind other functions, such as HR, IT and Finance, and the benefits they have realized in their moves to modernize.

Indeed, nearly two-thirds (64%) of respondents believe that other functions in the organization, such as finance, have benefited more from innovation, be that through the adoption of the latest technology or higher innovation funding.

Our survey also highlighted that there are a number of barriers to implementing innovation in the legal function. Largest among these were “ongoing business-as-usual pressures”, cited by 36% of respondents, closely followed by “budget constraints” (32%). The latter is understandable, considering the cost pressures highlighted above.

Barrier to innovation

28%

of respondents cited “lack of management skill/interest” as a barrier to implementing innovation.

Legal function leaders must put change on the agenda

Responses also pointed to the fact that management itself may lack the necessary skills to drive innovation – this could be either technological knowledge or change management abilities, for instance. Similarly, a lack of “interest” may point to decision-makers having competing priorities.

Failure to take advantage of innovative technology could make the legal function a weak link in the operational chain. Those businesses that change their operating model to capitalize on technological advances may well find operational efficiencies as well as cost reductions. More efficient organizations will be best placed to steal a competitive advantage, whether that’s speed to market with new services or faster adaptation to new regulation. As businesses become fitter and faster in the digital era, the more they need their legal function to keep up the pace.

Although simple, short-term cost-cutting measures such as reducing headcount or adopting technology seem to be common ideas, our experience shows that unless you unlock process and workflow, you will end up with the same problems in your legal function down the line.

3. Confidence around the regulatory environment

The legislative and regulatory landscape has provided considerable challenges in recent years and the pace of regulatory change shows no sign of slowing.

In spite of some prevailing uncertainty, legal functions report being largely confident about having a readiness plan to comply with future regulatory challenges, including new privacy and disposition rules, third-party data requests and regulatory events, such as US tax reform and BEPS.

Confidence about readiness is lowest for Brexit planning – which is arguably unsurprising as, at the time the survey was conducted, this was the one area about which there was the greatest lack of certainty.

Despite the apparent general confidence across a range of regulatory issues, businesses must continually ensure they have the right talent and technological capabilities to effectively monitor, evaluate and respond to major legislative change around the world.

Cost pressures and technological shortcomings as already highlighted may well make this more challenging than anticipated.

4. Challenges in attracting and deploying talent

While making the most of available talent across every function is key to optimizing business operations, our survey points to particular increasing challenges which face the legal function.

Not only are businesses encountering difficulties in finding the right staff, they are also struggling to deploy them as effectively as possible.

Nearly three-in-five businesses (59%) reported facing challenges in attracting and retaining talent they needed.

Use your resources wisely

Furthermore, on average, businesses appear to be exhausting a considerable amount of time and effort on routine/low-value tasks.

Time spent on low-value tasks

27%

of total hours are spent conducting routine compliance and low-value tasks across the legal function.

These two findings point to a resourcing environment which businesses need to address as a matter of urgency. While one answer may be in improving internal training and skills programs, these tend to be mid-to-long-term solutions. As such, it is likely that legal functions may seek to use external providers, especially with regard to routine tasks. Legal functions need to ensure that their thinking is in line with the wider business on these points, and that they have learned the lessons about automating intelligently that the broader workforce have applied.

5. Re-evaluation of operating models

Considering the backdrop against which legal functions are currently operating, it’s understandable that many are continuously evaluating their operating model. This is especially true in the areas of outsourcing and procurement.

Our survey shows that while an average of 33% of businesses are already outsourcing a wide range of legal function processes, such as legal entity management and compliance, a larger number would consider doing so.

Outsourcing processes

41%

of businesses would consider outsourcing routine legal function activities.

Successful procurement teams prioritize value alongside driving lower prices

Procurement models are also shifting, with increased consideration given to alternative legal service providers (ALSPs) and legal process outsourcers.

While this is true across businesses of all sizes, this is particularly true among smaller legal functions, with 60% of those with a headcount of less than 1,000 considering ALSPs and legal process outsourcers.

Effective procurement offers businesses a powerful way of delivering services more efficiently. In light of the current pressures facing the legal function, they must continue to examine which options enable them to meet the complex and changing demands they are facing, as made evident in this survey.

Conclusion

As revealed through our survey findings, legal functions are facing pressures from all sides, and those pressures are all compounding to create an environment that is driving change.

The need to meet increasing demand is in direct conflict with anticipated cost reductions, so legal functions are having to look closely at operating models in order to deliver on these opposing expectations.

Technological innovation and optimizing talent would naturally be expected to be part of a solution, but legal functions admit to struggling in both of these areas. As a result, many are now considering outsourcing and external procurement as a solution.

It is clear that legal functions are going through a seismic shift – something that we explore in greater detail in our full survey report.

Key action points

  • Include in-house legal functions as part of larger transformation initiatives
  • Explore areas of innovation without delay to avoid widening gaps between the legal function and the business strategy
  • Attract and, even more importantly, deploy legal talent effectively
  • Monitor global and regional regulatory challenges closely
  • Re-evaluate the legal function operating model to obtain maximum value

Summary

Legal functions are facing pressures from all sides, and those pressures are all compounding to create an environment that is driving change in the digital era.

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Related topics Law Digital Tax Workforce