You’re Going the Wrong Way: A CEO’s Warning About Legal Department Decentralization

When it comes to how to best structure the legal department, GCs and CEOs aren’t seeing eye-to-eye, and that’s a problem. Why? The way a legal department is organized is critical: it impacts oversight, purchasing power, visibility, speed, enterprise risk management, and operating expenses. 

Recently I was speaking with another CEO who asked my opinion regarding potential changes to her legal department. This CEO wanted to decentralize the function so that in-house lawyers report into a business unit or regional leaders. 

The change was intended to address two challenges. First, despite mandates to cut costs and freeze hiring, legal spend at her company was still increasing (in large part because of historically large law firm rate increases). Putting the legal budget in the hands of general managers with P&L responsibility was an attempt to view legal costs through more of a business lens. Business leaders, she said, could look at the outsized costs of legal talent and law firm rates and rationalize that spend in line with the specific needs of their division or business unit.  Second, she had become persuaded by a chorus of CEO peers who argued that embedding lawyers within the business makes legal more of a value creator as opposed to a (perceived) value blocker.

The problem was that she was getting tremendous pushback from her GC. The anecdote isn’t a one-off – instead, it’s indicative of a much larger debate. Axiom recently commissioned a survey of over 300 GCs to benchmark current legal department models and identify changes underway. Findings highlight the deep disconnect between CEOs and GCs and reveal three critical takeaways important to both audiences.

Three Key Takeaways:

1. Most organizations have centralized legal departments.
   Axiom’s research revealed the prevalence of three primary legal models:
   – 73% of GCs have a centralized legal department: All legal staff report to the GC regardless of region, business unit, function, or legal practice area.
   – 32% have a hybrid legal department: Some lawyers report to business/geographic management, while other lawyers report to a centralized legal department managed by the GC.
   – Only 5% of GCs have a decentralized legal department: All legal staff report to regional heads, business unit heads, or other non-legal functional heads, though this may include a dotted line to a centralized GC. 
2. The C-Suite wants a decentralized department.
   Despite the relative rarity of decentralized models, CEOs have grown more fond of them and are asking their GCs to make changes consistent with that approach. Putting my CEO hat on, I understand why: CEOs and functional/regional business unit leaders sometimes perceive legal to be a department that that doesn’t quite understand the commercial pressures of the organization and can’t meet its speed requirements.

   CEOs want more responsiveness from their legal department, faster speed to action, better alignment with business goals, and equally important, they want their legal departments to cut escalating costs. Many think decentralizing is the way to get there.

3. GCs are decentralizing their department – but they don’t agree with or want to make this change.
   According to Axiom’s research, 71% of GCs are heeding CEO requests and decentralizing their legal department.
   Red flag: They don’t want to.
   According to the survey, two-thirds of GCs prefer a more centralized structure. Why? GCs believe such a structure has five key benefits:
   – It optimizes in-house and external spend.
   – It has the strongest corporate governance and universal legal operations standards.
   – It allows for the most flexibility of resources.
   – It best mitigates risk.
   – It enables the most efficient shared services across business units and geographies.

   GCs also know that for all the perceived commercial advantages of a decentralized approach, the model creates many larger problems. They cite three, in particular, which should set off alarm bells for any of my peers concerned with operational effectiveness:
   – Inefficiency: legal competency duplication and/or inappropriate resources for novel needs; an elimination of purchasing power with outside vendors
   – Lack of Visibility: limited transparency into overall spend and/or lawyer utilization
   – Ineffective Risk Mitigation: risk increases when commercial incentives are favored over standard legal practices

   In other words, a significantly decentralized structure exacerbates the GCs’ most pressing pain points (resourcing and risk mitigation) without solving for the CEOs’ cost control or alignment goals.

Better Ways to Solve Legal’s Underlying Pain Points 

CEOs and GCs can have the best of both worlds by establishing a more central-leaning hybrid legal department model, in which most lawyers report into a centralized function with a smaller number embedded with the business. 

Such an approach allows GCs to staff their department with a core team of generalists and support them and business unit leaders with a virtual bench of flexible legal talent. By using a layer of flexible legal talent, GCs can leverage a deep bench of “always-on,” cost-effective lawyers who combine the variety of legal experience GCs need with the commercial acumen business leaders want. It’s a win-win solution providing cost-savings flexibility, efficiency, and enhanced commercial alignment.

To my CEO peers, I encourage you to consider all factors before you go down the path of decentralization.   Meet with your GC and include your CFO and COO in those conversations.  Outline shared goals so you can have an informed debate about the pros and cons of different departmental structures. Finally, and perhaps most importantly, discuss all the tools at legal’s disposal – beyond overhauling department structure, engaging traditional law firms, or investing in more in-house hires – to more effectively maximize value creation while minimizing enterprise risk.

Written by David McVeigh.

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