Maximize Your Corporate Edge: Legal as a Driver of Competitive Advantage
When it comes to companies in which he wants to invest, Warren Buffett looks foremost for what he has called "durable competitive advantage." This means having a fundamentally superior position to the competition — defensible over time against all reasonable threats, both internal and external. He likens this position to a castle, replete with battlements and surrounded by a broad moat.
Among the departments of an enterprise, the legal department is often viewed as a necessary cost of doing business: an overhead organization for dealing with contracts and IP management; an expert coordinator of legal actions and procurer of vendors; or an administrator of claims, disputes, and other unhappy business realities. Viewed from this perspective, the highest aspiration for general counsel is to be maximally efficient, responsive to needs, and operating with reasonably predictable costs.
Increasingly, leading-edge legal teams are showing that there is an opportunity for the legal department to move beyond the role of "efficient helper" to a role as "the castle builder": the architect of durable competitive advantage for the enterprise. According to a 2014 NYSE Governance Services report, "Three-quarters of directors agree the GC's capacity for business judgment adds value to the board, and nearly as many (71 percent) say GCs add value to the management team by actively contributing to business strategy discussions. Two-thirds agree GCs value comes from contributing to discussions on increasing shareholder value."1
Here are some of the specific and tangible ways we have found that legal departments can achieve this competitive edge.
Competitive Advantage 1: Optimized Spend
Clearly managing spend enables more flexibility in pricing competitively. And, for those industries where financial instruments are the product, every fractional point shaved off cost drops straight to the bottom line. But durable advantage won't come from merely cost cutting; it requires creating a culture of optimizing spend, which means that all parts of the enterprise need to have clear visibility to costs, cost objectives, and tools to help manage spend.
Critically, a culture of spend optimization means everyone has a clear sense of value, tying costs to business outcomes so it's obvious when it makes sense to pay more to get more. For corporate counsel, this challenge requires striking the right balance between inside and outside counsel. Legal automation is essential to optimize outside legal spend. By adopting new capabilities such as real-time invoice tracking and optimization of AFAs (via analytics), superior spend management can quickly turn into a critical competitive edge.
Competitive Advantage 2: Enhanced IP and Brand Management
One of the key ways a company can establish and maintain a defensible market position is to acquire and cultivate intangible assets such as intellectual property and a strong brand. In the 2012-2013 timeframe, the top 100 most valuable global brands grew their net worth by 7 percent to $2.6T. Their stock outperformed the broader market by a wide margin.2
Again, legal automation is a critical tool in the protection of these assets. To confer a competitive advantage, the legal department should use automation to optimize its IP asset management, managing IP records and enforcement (e.g. infringement cases), tracking IP-related spend, and even expediting the patent process using self-service tools such as invention disclosure and workflow.
Moreover, using data to find risk event patterns can enable programs to help customers manage their own risk — and improve their own service to their customers — generating a win-win-win situation all along the value chain.
Competitive Advantage 3: Proactive Regulatory, Compliance and Risk Management
Regulatory compliance is frequently seen as a burden and a necessary cost of doing business. Companies invest in making sure that they can defensibly "check the boxes" with their internal audit team and with their external regulators. Firms that operate under staunch regulatory regimes have learned that there can be value in moving beyond this mentality to one of optimizing their regulatory risk posture. This allows them to not only manage compliance costs effectively, but to act on business opportunities, including acquisitions, product investments, and organizational growth, with the confidence that a significant compliance down-side is highly unlikely.
While proactive planning for compliance is extremely useful, it is not uncommon for the legal team to find itself in a reactive position with respect to compliance. For instance, one large financial services organization had its core business threatened by the perception of regulators that it had been lax in managing compliance with regulatory obligations as well as fiduciary duties.
The legal department responded by formulating a program to head off these concerns. Using the centralized position of the department in this federated, they were able to put in place a series of initiatives to help the business lines document their policies and procedures, track issues and incidents, and measure overall compliance posture. They now maintain a central repository of all of the information relevant to tracking, managing, and reporting all of these compliance issues, enabling them to keep their business running without disruption.
Competitive Advantage 4: Predictive Decision Making
Claude Shannon, a WWII cryptographer and the father of information theory, once called information the "negative reciprocal value of probability." The process of assimilating and expertly interpreting business facts derived from legal operational and spend data can actually influence the future by changing probabilities and guiding decision-making. In fact, this sort of intelligence may be the most powerful way for the legal department to help the enterprise successfully compete.
A legal automation solution such as TeamConnect focuses the intelligence on the underlying facts that help a company to proactively conduct commerce more fluidly, with less operational and compliance risks, and with lower costs — all of which sum up to making a company more competitive in its markets than it otherwise would be.
Competitive Advantage 5: Commercial Acceleration
Few would question the importance of being first in business. A head start in a new market can give a company an enormous advantage in market share and brand establishment: a company's castle and moat. Furthermore, efficiencies in time and money — both in terms of cost and in terms of business agility — are quintessential components of success in the everyday business of business.
Legal's challenge is to develop and maintain expertise in key commercial areas like contract creation and incident response, while doing so in a way that is both faster and better than the competition's legal departments.
Forward thinking legal departments use timeline metrics in their key performance indicators and dashboards. Tracking these metrics in an environment of continuous improvement can help the legal department become a commercial accelerant, giving the company the edge over the competition.
It is clear that the vision of the legal department as a castle-builder, asserting and fortifying a durable competitive advantage, is not fanciful. There are concrete ways and real examples where this approach is bearing out. Moreover, the leadership role of the general counsel as a critical contributor to the overall success of the business continues to advance.
Compared to the tactically successful legal department, the visionary castle-building legal department does the following:
-Operates with more forethought than afterthought;
After maximizing operational efficiencies, contributing to the company's durable competitive advantage is the next step on a legal department maturity curve. In order to successfully achieve this goal, a best-run legal department must foster a culture of competitiveness, and take the lead in identifying and implementing programs to consistently enhance the competitive advantage of the broader organization.
 STUDY: "GCs in the Boardroom and Beyond", NYSE Governance Sources & BarkerGilmore, April 2014