This posting was created for Legal OnRamp, and also is posted there.
In the Value discussions of the past two years, many have focused on the fee and value pressure placed on law firms by buyers, typically General Counsel. General Counsel, we are continually reminded, are being pressured by Chief Financial Officers and other C-level executives to control and drive down the cost of legal services, often utilizing the skills of sourcing professionals. But the value chain does not stop there. We assert that the foundational pressure to control legal spend is driven by ultimate bosses — the shareholders and their indefatigable push for shareholder value, particularly in an era when profit is excruciatingly difficult to achieve. As owners of mutual fund shares that will determine quality of retirement life, professionals from the outside-legal community to need augment their focus on near-term income with the longer-term focus on shareholder value of the companies they serve….and to embrace a more robust effort to achieve it. That is to say, it’s time for outside counsel to focus on the needs of the customer’s customer, the shareholders.
These conclusions returned to our minds after hearing a recent presentation by DuPont’s Tom Sager at the RAND Corporation’s May DC-area conference on Alternative Litigation Finance in the U.S. During keynote remarks, Sager spoke to his team’s efforts over the years to transform the DuPont legal department from a cost center to a profit center by carefully managing legal costs and also by pursuing litigation aimed at “recovery.” In his presentation, Sager cited a multimillion-dollar recovery a few years ago that transformed a potentially flat or negative quarter into a positive one and in fact added 4 cents’ return per share. These words reminded us that inside counsel, like all corporate executives, focus on shareholder value, as outside counsel rarely do. The sentiment was echoed in last week’s WMACCA General Counsel Forum, when Dominion Resources Inc.’s General Counsel Jim Stutts reminded the audience what executives on the top floor talk about: “Money!”
Many years ago, the relationship between professional services fees and shareholder value was pioneered by the brilliant English Price Waterhouse tax partner Mike Maskell, who frequently won competitions over other providers by pointing out the shareholder value of Price Waterhouse tax recoveries based on international tax planning. Maskell’s concept went something like this:
Ceteris Paribus, a dollar saved (or recovered) is a dollar to the bottom line. So, if a company has profits of $1 million at a time when the stock is trading at 20x earnings, and if that $1 million can be attributed to legal department savings or recoveries, then the market value of that $1 million legal-department-driven profit is $20 million in shareholder value. Not a bad message for the C-suite, the board and the shareholders.
Naturally, we need to be wary of using this kind of logic. In the real world, nothing ever “remains the same” and stock prices are generally driven by future growth expectations. Nevertheless, investors and analysts will handsomely reward well-managed companies who demonstrate a steady decrease in the ratio of SG&A to Sales.
Good legal counsel and advocacy can potentially save companies many multiples over lawyers’ fees, but wasteful spending is simply wasteful spending. In the current economic environment, legal departments are in a position to receive better legal counsel at a lower price than they have historically paid and if outside counsel want to stay in the game, they need to keep their eyes on this fact: It’s not just about value, it’s about shareholder value.
-Steve Bell , Chief Client Development Officer
and Bill Turner, Director of Practice Management
Womble Carlyle Sandridge & Rice PLLC