Inhouse history part 2: cost and waste
The rise of the premium mediocre machines
Welcome to the latest instalment of the JC’s occasional newsletter, in which we put the megaphone up to the ear of storm, and sing along to the tune of oblivion.
This time we carry on last edition’s potted history of inhouse legal — which was a lot more popular than I expected — what are you people like! Today we take on the business managers, compare the practice of law to building Japanese cars, and wind up wondering whether it is possible to solve many-headed version of the agency problem by bringing in some more agents.
Last time, we left it where Slavenburgs were no longer a thing, and the legal operations team were, after a heroic battle, finally getting legal spend under control, and running out of low-hanging fruit to pick:
“In this way the great retrenchment of in-house legal began, and for ten years kept pace. Much low-hanging fruit was picked. But eventually, legal spend was collared, and opportunities to eek out cost dried up.”
Now let’s carry on with the journey. Where else to find economies?
We are all regulatory lawyers now
Eventually, the financial crisis faded into that deep muscle memory and scar tissue from which the lawyers’ immutable custom and practice is fashioned. Even the pipeline of out-of-control litigation and enforcement events started to dry up. Risk receded, but weaponised legal teams boxed on, still fixated on the same stables from which horses had already bolted, as those whose profession depends on precedent must.
Their cause was periodically bolstered by horses bolting from nearby, apparently harmless, stables to which no one had thought to pay any attention. Like the LIBOR stable.
Sexy CDOs being long gone, the life internal became all about regulatory overhaul, balance-sheet management, trade reporting, regulatory compliance and scaling unsexy annuity businesses. Broking went back to, well, plain old broking. And mopping up embarrassing farragos like LIBOR.
The legal conundrum was no longer the security waterfall, priorities on default or the tranching technology, but just the colossal weight of regulation applied to everyday operations across different regulatory playing fields: Dodd Frank. EMIR. MiFID 2. CASS. Bank Recovery & Resolution. Data Protection. Shareholder Reporting. Central Securities Depositary Regulation. Attending to these issues was at the same time gravely serious, fiddly, dull and arcane — really, legal eagles couldn’t ask for a more benign ecosystem: we have to do this stuff, it’s really complicated, utterly tedious, and no-one but us has a hope of understanding it.
But if the in-house legal team thought this meant jobs for life, their management had other ideas.
Banks were no longer printing money like there was no tomorrow — it turned out there was a tomorrow after all, it was awful, and banks were stuck with it — but nor, any longer, were they defending against the risk of massive damages and regulatory fines. They were simply getting used to a dreary new world. With stable but unflashy revenues, the way to increase margins was to train all weapons on the expense line.
A big group of internal lawyers merrily generating an external legal spend in the high hundreds of millions of dollars loomed very large on that expense line.
So, the narrative sweep changed. Now ordinary working stiffs in the legal department — there were, after all, an awful lot of them, chuntering away on LIBOR remediation and Swiss Stay — swung into view. Management went on the march.
Cost control über alles
But here is the thing: lawyers are witches and wizards, business managers are muggles. The actual law, thanks to generations of careful legal nest-feathering, is opaque, baffling, long-winded and obtuse. It is muggle exclusionary, by design.
Management must therefore take lawyers at their word, and their services as presented: whole, ineffable, immutable, and stuffed with odd things that they swear must be accepted as insoluble, brute facts of the universe.
But, incipit tragœdia: for such is the inscrutability of the legal craft — so impenetrable is it to the laiety — that a muggle manager can know only that one has this magic, or one has not. Thus: witches and wizards, who have it, are interchangeable, substitutable, switchable with each other: they are fungible.
Digression: waste, and the Toyota Production System
Management gurus have understood for decades that the economic challenge in a distributed manufacturing process isn’t eliminating cost, but waste. Some things you do need. And with those, as with everything, you get what you pay for.
But you should not pay anything for waste. Waste can take the form of unused material, over-engineered design, unnecessary complication, superflous operations or errors.
Taiichi Ohno and his engineers at Toyota in the 1950s were among the first to realise this. The “Toyota Production System” is the origin of modern “lean” production management theory.1 Ohno-sensei identified seven categories of waste, or “muda”. He had in mind vehicle manufacture, of course, but the read-across to contract negotiation is pretty close.
But waste is hard to see. Cost is easy.
But waste is harder to unpeel than cost. Many of the manifold wastes in legal processes require subject matter expertise to identify. A muggle business manager cannot rationalise legal product, nor simplify it, nor cauterise it, nor expunge the tedium with which overflows — you need a Hogwarts graduate for that — but she can parcel it up and offshore it. Thus, the tragic irony of the law’s ineffability.
Thus, the notion of delivery becomes the only yardstick. “We do need this ineffable magic,” she realises, “but it could be delivered from London, Belfast, Gdansk or by someone rifling through a playbook on his lap from a service centre in the outskirts of Hanoi. I shall create a unitised legal service and deliver it in the most cost-effective way.”
But a “commoditised legal service” is one of two things: either it is a genuine commodity — a production line involving legally-relevant content, but containing no unsolved legal problems, and thus is not really a legal service at all — or it really isn’t commoditised — it is the management of emerging legal problems, no doubt amongst a lot of dross — in which case just lifting and shifting the process to cheaper, greener personnel in a low-cost jurisdiction is not just a false economy, but a danger.
But just because business managers can’t second-guess the waste in legal process, doesn’t mean it can’t be done. It can be done: you just need the mandate, time, energy, disposition and expertise to do it. This was Ohne-sensei’s key insight in the Toyota Production System: asking the engineers on the line to be responsible for process improvement not only empowered the workforce, but was far more effective at rooting out real waste. No one likes to do wasteful work. It is boring, tiring, and unfulfilling. It is tedious.
Toyota’s system revolves around the concept of jidoka — “automation with a human touch”. If you empower your staff to monitor for waste: if you give them the mandate to challenge their own environments, they become invested in optimising their own processes, rather than being victims of it. They, more than anyone else, are best placed to see waste, and figure out the best way of eradicating it.
And here we pause to note the JC’s third law of worker entropy:
There is a 100% correlation between:
(i) activities that, however important they might seem, in fact have no value, and
(ii) activities that are tedious.
All other things being equal, if an activity is tedious, it is wasteful. If it is wasteful, you shouldn’t do it.
No skilled professional should be afraid of optimising legal work processes. It will necessarily lead to better quality work.
But jidoka requires skill and experience. Rule-followers in low-cost jurisdictions, hired purely for their cheapness, are bad candidates for this role.
Rooting waste out of legal processes — simplifying documents, ditching unnecessary legal protections and arguing for a standardised platform cleaned of the risk department’s sacred cows — is hard, and lawyers with a mind to do it are rare.2 It requires value-judgments, market experience and an appetite for taking risk — though really it is substituting one kind of risk management — ultimate, final protections one does not in practice ever use — with another: standardisation and commoditisation of standard process.
The Agency Paradox
This is all well and good in theory. In practice the agency problem gets in the way. Suggest to any lawyer that processes elsewhere in the firm are monstrously inefficient, you will find wholehearted agreement. Propose that his own processes are wasteful, and brace yourself for a welter of special pleading.
Him: “I totally agree we need to shorten our documents, cut out the complexity and the clutter, write them in plain English, and standardise. Modernisation is key.”
You: “Great, so how about this confidentiality agreement you sent me, that goes on for eight pages?”
Him: “Ah. Yes, well, you see, that is a special case and [the client relationship is really important and they wouldn’t accept any change] and/or [we have been doing it this way for years] and/or [we cannot afford to weaken our stance] and/or [insert excuse here... ]”
Behold the agency paradox: every agent believes in an equivalent double standard: viz., the key to its principal’s business transformation is to disintermediate everything but himself. An instance of, “I agree with you generally, but my particular case is special”.
Now, can you really blame business management for boxing on without the lawyers’ help?
On the other hand, management’s preferred approach: “juniorising” and “right-shoring” create more overheads, more confusion, more bureaucracy, more horizontal escalation, more wasteful audit: in essence, more work for middle management. This is no less a case of special pleading that the lawyers’.
Instead of answering stupid questions, low-cost off-shore replacements ask them. Measurable costs may have declined — but, all told, probably not all that much, once you factor in that bureaucratic special pleading — but unmeasurable waste will have exploded.
Stupid questions distract not just those who ask them, but those to whom they are addressed: all who are hindered from doing more productive things. Hare-brained notions skitter around the skirting-boards of all organisations, out of sight, unchecked, by their nature creating more stupid questions, more bad ideas, triggering little chain reactions of waste. An invisible tide sloshes around the organisation, delaying things, pulling useful people into its undertow, spawning its own little waves of dreck and powering armies of little administrators chasing these fripperies down and, as they go, building out yet more complicated operational infrastructure. If not answered quickly and clearly, these chains sometimes harden into policies, procedures, work-streams, teams and even whole departments.
But when fixed costs are so big, it is really hard not to obsess about them, in the round, as a thing in themselves. Remember where we started, last episode:
… a very small portion of a colossal number is still a very big number. If you can knock even five percent out of a billion dollar run-rate, you are going to look like fifty million bucks of hero.
“I know,” the poor business analyst will complain, “that cost isn’t the thing. But it is all the CFO cares about. Management wants to see a five percent reduction. Every year. What am I supposed to do?”
Next time: can the legaltechbros help?
Odds and Sods
Cantankerous ruminants corner
Thanks to Robbie for yet more in our ongoing series charting the unexpected travails of contrarian livestock. The dramatic timing on this video is beautiful: there’s a long, appropriately Hillaryesque sequence — this happened in on a hillock in New Zealand — where the brave rescuer claws his precarious way up a near vertical escarpment and just as you are done with wondering how on earth a sheep got up there, you start thinking, “how on earth is it going to get down?” and you realise that its intended rescuer is having the same thought at the same time.
Watch to find out.
As far as we know, only ovine pride was hurt in the making of this film.
Music corner: that was the river; this is the sea.
Chalk Farm’s Roundhouse offered the unalloyed joy of seeing Mike Scott and the Waterboys live recently. Casual listeners may know Fisherman’s Blues or The Whole of the Moon but aficionados will know Scott has released 14 beautifully eclectic albums over nearly 40 years, all are in their unusual way magnificent, and this edition we salute Mr Scott and friends by featuring the their latest, 2020’s Good Luck, Seeker.
Till next time!
JC
This is a fascinating topic in itself, but we don’t have space for it here. There’s a bit about it on the JC at Toyota Production System, including a nugatory attempt to map TPS to the ISDA contract negotiation life-cycle.
It is hard for inhouse lawyers: to remove legal terms is to say, “no-one got fired for buying IBM, but dammit, I’m buying Apple.”