The Great Value Creation Conundrum

In my last blog piece, I suggested in-house lawyers should see themselves at the hub of value creation in organisations. My view is that too many in-house teams allow themselves to be put in the boxes of “reactive” and “defensive” by their non-lawyer colleagues. As a result, they are portrayed as “Dr No,” “LastMinute.Com” and the “Deal Prevention Team”; nicknames no-one wants. The danger is that if the in-house legal team ends up believing this bad publicity, the whole organisation misses out on their creativity.

Unsurprisingly, I got varied reactions to my post. Some welcomed it as a fresh approach to the whole issue of doing more with less. Others considered it far too rare meat to be digested in their busy lives. Another dismissive group prefaced a lot of sentences with phrases like “In the real world”. I even had one comment that implied that I had been taking consciousness-expanding substances.

Please keep your comments coming, as they are grist to the mill. Meanwhile I will ratchet up the debate further by introducing the Great Value Creation Conundrum (the “GVCC”).

The GVCC is a simple thing; how do you show that a lawyer creates value?

Take the example of the in-house lawyer who stops colleagues from engaging in a criminal activity. He or she will say their action saved the company and those colleagues from criminal sanction. Did it? Others would say that claim presupposes them being caught and successfully prosecuted.

Take another example, the in-house lawyer who negotiates an M&A agreement. They will say they added value by their skill in getting the best terms for their organisation, for example, by building legal protections into the agreement.

But take a step back; such an agreement that is negotiated at arms length will have a market price. The headline price does not usually change as a result of what some, condescendingly, refer to as “wordsmithing”. In fact, in the negotiation of the details, the parties trade such matters. Such trading is an internal transaction price change. Logically, therefore, the lawyer is not creating value, just engineering value shifts. In fact, you have to subtract the cost of the lawyer from the transaction value, so reducing the net value.

These two simple examples highlight the GVCC. When faced with such views, how does the lawyer prove that he or she creates value? Inherently, we know that in both cases the lawyer’s involvement did result in a benefit for the organisation. A company that trades lawfully would welcome the lawyer’s intervention. It is inconceivable that a firm would want to cross the line into illegality. Similarly, no corporation, serious about its business affairs, would undertake an M&A transaction without a lawyer.

Here is the rub. In a manufacturing economy, value creation is literally mechanical. You put the raw materials in your machine, you press a button and hey presto! Out comes a widget. In the professional services world, the process of value creation is not mechanical. The lawyer’s contribution to the outcome is not a straight line of causation. It may well be diluted or at least mixed with the efforts and expertise of others. That is the Great Value Creation Conundrum.

My next blog will consider a model for value measurement. In the meantime I am off for nothing more consciousness expanding than a cup of tea.

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