I’m not really into the whole brevity thing. I already wrote a brief post (only 800 words) that concludes with succint advice to law departments on discounts, AFAs, panels, outside counsel guidelines, RFPs, and, in particular, a humbling recommendation they not ask law firms about the use of technology unless the answers will inform structured dialogue to improve business outcomes at scale and pace (because I’d previously written a book on this subject).
At the conclusion of this off-brand concision, I promised my tiny corps of hard core readers an extended universe of nerd content. Fair warning, this is not for everyone.
I’m a massive disappointment. For every complex problem, there is an answer that is clear, simple, and wrong. In pursuit of being less wrong, I refuse to promote simple answers to complex problems no matter how keen my audience is to learn ‘the one quick trick.’
My primary deck for presenting to law departments includes a slide acknowledging that what follows is “Easier said than done!” My voiceover explains my fundamental interest in hard problems and the fundamental truth that addressing hard problems requires hard work, where consistency trumps intensity—i.e., hard work for sustained periods.
Recently, I’ve even gone so far as to up my meme game and add a reminder slide near the end. My hope was Gotham’s wealthiest resident could reinforce my poverty of easy answers.
But hard ≠ impossible. I therefore conclude the talk—aptly titled “Winter is Coming”—with a nod towards reframing our approach to driving better outcomes at scale and pace: embedded advisory, compliance by design, integrated law, legal marketplaces, industry standards, service delivery maturity models, value storytelling, etc.
My caveats prove ineffectual. The shiny new vocabulary supported by an avalanche of data suggest to people (a) I have no hobbies (accurate), and (b) I have devoted real time to interrogating these questions (also true) and therefore (c) may possess the secret to unlocking all their law department’s latent potential (not so much). While I can advance strategic thinking and offer tactical guidance (tech, matter management, CLM, ediscovery, ADR, managed services), I don’t do magic.
When it becomes apparent I can’t provide the answer and many of my interconnected ‘answers’ are truly easier said than done, I find myself subject to all manner of special pleading about the obstacles my in-house compatriots face. Cost-cutting. Hiring freezes. Bandwidth constraints. Organizational politics. Legacy systems. Inertia. Etc.
In short, people tell me their jobs are hard. I believe them.
It is hard out there, and getting harder. Economics is the study of how humans make choices under conditions of scarcity. Recent headlines reflecting the scarcity of resources available to law departments, relative to escalating demand, should activate our empathy:
- Chaos, Complexities Overwhelming In-House Lawyers
- Legal Departments Report Swelling Workloads—but Without Budget Increases
- Legal Departments Are Eager to Do More with Less But Are Fuzzy on the Path
- 70% of Legal Departments Don’t Invest in Digital Transformation
- Weak Earnings Reports Add to Legal Departments 2023 Anxieties
- In-House Lawyers Are Stressed and Want to Walk Out
Almost 80% of in-house counsel are burned out and almost 70% are looking to move jobs in the next year. This is very unhealthy. And yet we may be only at the front end of some extraordinary “more with less” contortionism as we cope with deteriorating economic conditions.
Solving complex problems under adverse conditions is not obvious, simple, nor easy. We should empathize with how truly challenged in-house teams are, and will be.
The Gordian Knot of in-house existence is relentless pressure to cut costs (ratcheting up now) while servicing ever greater demands from the business as the complexity of the external operating environment explodes. Unyielding pressure to meet immediate, escalating business needs shortens time horizons on which in-house teams operate and saps patience for projects that not only distract from but affirmatively disrupt work getting done.
Solving for now. Tunnel vision is a completely comprehensible response from committed professionals who are legitimately busy, and becoming busier by the day. They feel they must tread water simply to avoid drowning. In fact, they must run ever faster to merely fall behind more slowly. They are involuntary entrants in a Red Queen’s Race—up a hill with a parabolic slope. No wonder they are heads down and burning out.
Near-term, failure is not an option (zero-risk bias). Long-term, failure is the only option, one way or the other. Disruptive projects, including experiments, ambitious enough that failure is a distinct possibility are the only viable path to achieving adequate leverage—i.e., narrowing the ever-widening gap between business needs and legal resources. But disruptive projects, by definition, distract from work, and there is much important work that needs be done now (with the backlog lengthening by the day). Disruptive projects demand time from people who have no time to spare and no time to wait.
The low-level time-savings arithmetic is simple and compelling, in the abstract. In reality, explain to a busy person you need five hours of their time to shave five minutes off their day, they will look at you like you have lost your mind. Five real hours ‘lost’ is valued far more than the net sixteen theoretical hours saved in year one and the twenty one hours saved every year thereafter. This preferencing of the present over the future is known as hyperbolic discounting. And these micro-level dynamics become materially more fraught at the macro level due to collective-action problems and path dependence.
Compounding complexity. In the foregoing, I repeatedly reference the intensifying demands on legal. I’ve previously covered the compounding complexity of the business operating environment. In brief, now more than ever, expert legal guidance affects business outcomes. In theory, this guidance need not come from traditional lawyer-delivered services but, in practice, still largely does.
Regalytics estimates “there are over twenty five thousand regulators in the US, and more than five million globally.” Regulators regulate. Regulations don’t merely accrete. Regulations overlap, intersect, and, often, as you cross borders, conflict.
Professor Dan Katz and his collaborators have empirically established the resulting increase in legal complexity—see here, here, here, here. The charts below track the unbroken upward trajectory and intersecting nature of statutes and regulations, as well as the increase in references thereto in 10-K’s (the public documents where corporations identify that which is material to their business).
The evolving regulatory environment, exacerbated by the attendant surge in investigations and litigation, is a primary source of intensifying demands on legal (there are others, like the Cambrian explosion in data volumes, which, of course, is also an active driver of net new regulation). From the perspective of the business, this unintended acceleration in complexity is real, organic, and exogenous (i.e., externally imposed), regardless of convenience, conduciveness to making money, or conformity to resource-allocation preferences. Of particular moment, new regulations and litigations do not exempt companies in cost-cutting mode.
Complexity costs. As Bill Henderson explains in his superb summary of Tainter and Olson, “Although higher yields increase total output (and wealth goes up), the process of always getting more from less necessarily requires planning and ingenuity. Over time, this gets harder.” One reason this gets harder is because complexity breeds complicatedness.
Cascading complicatedness. Complicatedness is “the increase in organizational structures, processes, procedures, decision rights, metrics, scorecards, and committees that companies impose to manage the escalating complexity of their external business environment.” Critically, “complicatedness hampers growth by slowing innovation…And it cuts margins by injecting inefficiency and cost into operations.”
Counterintuitively, organization size does not appear to be an influential driver of complicatedness. Completely intuitively, greater levels of regulation strongly correlate with higher levels of complicatedness. As the Boston Consulting Group characterizes it, organizations that “face daunting levels of external complexity…seem to have mimicked that complexity within their own organizations.”
BCG is responsible for the landmark analysis of complicatedness, the fabulous Six Simple Rules (h/t Jae). When the book released in 2014, BCG calculated that while environmental complexity had increased 6x, organizational complicatedness had increased 35x—i.e., unchecked, internal complicatedness tends to increase at a multiple of external complexity.
Additional studies have documented the time lost to low-value management processes, from budgeting to performance reviews, leading the co-founders of the Management Lab, Gary Hamel and Michele Zanini, to conclude in 2017, “it’s reasonable to assume that as much as 50% of all internal compliance activity is of questionable value…there’s compelling evidence that bureaucracy creates a significant drag on productivity and organizational resilience and innovation. By our reckoning, the cost of excess bureaucracy in the U.S. economy amounts to more than $3 trillion in lost economic output.”
The resulting demotivating labyrinth is among the reasons, as I once observed far less eruditely, “Every institution, no matter how venerable, looks like a goat rodeo from the inside.”
In-house lawyers are not immune from the suffering nor the allure of complicatedness.
- In-house lawyers, of course, must navigate increasingly complicated organizations both (i) to do their increasingly complex jobs and, at the department level, (ii) to acquire sufficient resources to do their jobs. With respect to the latter, finance, IT, HR, procurement, et al. are often more hindrances than helps in enabling the law department to meet the growing legal needs of the enterprise.
- Most other functions, however, would list legal among these internal blockers. The Department of Slow. The Department of No. 73% of enterprise employees perceive legal as a bad business partner and 65% admit to intentionally bypassing legal to get their work done. Legal is seen as introducing all manner of complicatedness—bureaucracy, restraints, chokepoints—that reduces business velocity.
- This friction is also externalized. Via the law department, each corporate client becomes like an independent regulatory body imposing complexity on their external providers through various mechanisms, especially outside counsel guidelines. I’m on record as loathing outside counsel guidelines, but I commend two epic Jae Twitter threads on how OCGs inject complicatedness into the B2B relationship (here and here).
Wicked problems and the limits of satisficing. As Jae observes, billing at scale is a wicked problem. Legal is beset by all manner of wicked problems where there is no single solution “and ‘wicked’ denotes resistance to resolution, rather than evil…Moreover, because of complex interdependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems. Due to their complexity, wicked problems are often characterized by organized irresponsibility.”
Unfortunately, wicked problems do not lend themselves to satisficing solutions. A portmanteau of satisfy and suffice, satisficing is a decision-making strategy to deliver ‘good enough’ outcomes—i.e., a solution that while suboptimal meets an acceptability threshold. Herbert Simon won the Noble Prize in Economics for the articulating the concept, “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world.” Satisficing is central to Simon’s work on bounded rationality and heuristics—i.e., mental shortcuts to reduce cognitive load and reach practical decisions within limitations (e.g., non-infinite time, knowledge).
Like adding another process, procedure, or layer to an organization, most outside counsel guidelines present as good enough. Most aren’t. The same is true of most discounts, AFAs, panel programs, and RFPs. But that’s an exploration for next post.
This post, I am interested in why law departments might solve for the local optimum at the expense of the global optimum. Why pursue the path of least resistance? Or, as our library and information science friends (like Greg and Sarah, who I am scared will yell at me for this) might frame it, the principle of least effort, which speaks to our propensity to use the most convenient methods and familiar tools to achieve minimally acceptable results—paired with our apparently hard-wired tendency to overrate the adequacy of low-hanging fruit. Say what you will about the problematic mechanics of modern legal buy, the standard kludges are ostensibly convenient for, and familiar to, law departments while achieving superficially acceptable results—i.e., they fuel the activity illusion without actually requiring real changes in consumption behavior.
This is no one’s fault. Blame-based narratives are unhelpful, and there is nothing particular to lawyers in this regard. Mastery, autonomy, and purpose are universal incentives—i.e., that lawyers are fundamentally focused on lawyering is entirely natural and consistent with the beneficial impacts of the division of labor. Everyone is susceptible to déformation professionnelle—defaulting to the point of view of one’s own area of expertise. The law of the instrument (to the hammer, everything looks like a nail) is deemed a law for good reason.
Lawyers’ instrument is lawyer time—abiding by what I’ve labeled the “lawyer theory of value.” It is completely unsurprising, especially when workloads already exceed capacity and the time horizon is yesterday, that the most appealing pressure release valve to increase current capacity to handle more legal work is more lawyering by more lawyers.
Go with what you know. For now, people remain the closest approximation to plug-and-play resources. Ask an overwhelmed human what would provide the most immediate assistance for a crushing workload, and their answer might well be cloning. That is, a carbon copy of themselves, needing no onboarding. The next best option is another person like them—in our case, a similarly trained, similarly smart legal professional who can ramp-up quickly.
In meeting the legal needs of business, lawyer time persists as the key resource and key constraint. Insourcing is the mechanism by which businesses purchase large blocks of lawyer time for low, flat fees—i.e., lower fees relative to market price for what is considered comparable external legal services. Insourcing is labor arbitrage. In theory, insourcing also gives companies direct control over how legal services are delivered and therefore the ability to transform them. In reality, examples of transformation are few and far between.
Law departments start as less expensive, more accessible alternatives to law firms, and continue to be characterized as such. Lawyer-centric insourcing services the law departments’ dubious savings mandate while appealing to the instinct to throw bodies at the problem (resulting in a bad case of Baumol’s cost disease). Insourcing delivers what law departments ‘feel’ they need (more bodies to handle more work) while enabling them to satisfy their mandate (more with less).
Insourcing has been the biggest story in legal, for decades. Since the middle of the 1990s, law departments have expanded at 7x the rate of law firms. There are now more in-house lawyers in the United States than in the domestic offices of the AmLaw 200—in-house is bigger than BigLaw:
Insourcing works. At the average corporation, legal costs steadily decline as a percentage of revenue, and many corporations experience brief periods of reduction in raw legal spend. Insourcing works—until it doesn’t.
While demands on the law department accelerate, the willingness of the enterprise to invest resources in the law department declines. Money is but one resource. Headcount also hits upper bounds, and not solely for fiscal reasons. There are hard and soft constraints on corporations’ general willingness to hire, as well as their specific eagerness to allocate finite FTEs to the law department. This headcount cap frustrates both the department’s bias for more bodies and the company’s savings expectations.
Even without a headcount cap, insourcing is insufficient and subject to diminishing returns. At best, growing headcount is a linear solution to a nonlinear problem. To return to a favorite Barnwellism, “If capacity must increase by 10x, our current approaches break, as the option of a 10x increase in hiring is simply off the table.” Rather, as Jason rightly observes, “we will need more capacity and new capabilities that mere conservation of resources cannot deliver. Our evolutionary path needs improvements on how we do work today that range from whole-multiples to orders-of-magnitude. This is transformation. Transformation is system-level change.”
System-level change, of course, is not what lawyers were trained to do.
The solution to our wicked problems. Long post. I thank you for making it this far. But you were warned. You should have abandoned hope at the outset.
Everything should be made as simple as possible, but not simpler. These truly hard problems do not lend themselves to simple solutions. My objective in this post was to activate empathy. We should seek to understand why smart, committed professionals might feel they have no choice but to pursue suboptimal quick fixes. My overall objective for this series, however, is to highlight that these are in fact choices, and we can choose to stop doing that which is unhelpful. We may be poorly positioned to resolve all our wicked problems. But we need not make circumstances worse. Doing nothing is better than doing the wrong thing even when something must be done.