The Legal Department as a 'Profit-Center'

Legal services performed by an in-house legal department are traditionally viewed as a (necessary) administrative, compliance or transaction expense. The notion that in-house lawyers could also be considered a “profit center” to the company is not one held by many business managers – or most in-house counsel for that matter.

But in-house counsel can indeed create value for their companies. During my tenure as in-house attorney for an international biotech and specialty software company, I ran our department as a “profit center” for the company’s benefit.

What I mean by “profit-center” is that a legal department can expand its activities beyond their primary role as manager of the company’s legal affairs. In addition to compliance, regulatory and other legal matters, in-house legal departments can create value by contributing directly to the company’s bottom-line.

The foremost role of the legal department is providing legal services to the company. The activities outlined below should not interfere with that function, but rather compliment it while creating additional value for the company and strengthening the relationship with the business and finance units.

Track Performance Against a Definitive Budget

The budget tool can be used quite effectively in a number of different ways to contribute to a company’s bottom line. The legal department, just like any other organizational unit, should manage its finances by closely tracking its expenses, including those involving its use of outside counsel, against an annual or quarterly budget established prior to the start of the company’s fiscal year.

By managing the legal department within the budget, the in-house counsel can contribute to the company’s bottom line by controlling legal costs. Yet, while the use of an annual or other periodic budget is typically used in managing legal expenses throughout the year, in-house counsel should consider making more effective use of the budget tool for specific company projects.

For example, should a company decide to close down a site and implement a workforce reduction, the in-house legal department will be an integral member of such a project. At the outset, in-house counsel should establish a number of scenarios, e.g. worst, best and “realistic” and assign a budget to each of these scenarios.

These scenarios will be based on different assumptions concerning such items as number of likely employee claims, costs of litigating or resolving claims, role of outside counsel, etc. In-house counsel could present these various scenarios and corresponding budgets to the team leader and reach an agreement that the realistic or worst case scenarios are to be taken into account in the overall project budget.

If in-house counsel actually manages his or her responsibilities concerning the project by incurring expenses that fall below the budgeted expenses in the overall budget, the legal department would contribute directly to the company’s bottom line in a clear and visible manner.

The project manager would quickly recognize the success in improving the bottom line by reducing expenses – even if the project manager and the business organization in general – may need to be reminded of this success by in-house counsel from time to time. Of course, managing these expenses, in particular when outside counsel is involved, may require outside counsel to share in some of the risk with respect to the project.

Outside counsel increasingly recognize the need by legal departments to engage in risk sharing and will seek to accommodate in-house counsel’s project budget proposals, in particular when the risks involved in the project are understood and are manageable.

Pursue Enforcement Actions

Not every business deal is successful, at least when measured in the short term. Consider the following two scenarios.

A key account manager informs the legal department that a software customer did not get the expected financing, and, therefore, cannot make any further license payments. The customer will return the software, but the key account manager recommends to wait on any collection action against the customer because the financing round may still close in the future.

In another scenario, the vice president of business development tells in-house counsel to go easy on a strategic partner that has breached a customer agreement because that strategic partner is critical in landing a large project.

In other words, business considerations may often favor a business solution over a legal enforcement or collection action, even if the business solution translates in a “let’s wait and see what happens” attitude by the legal department.

In these cases, the legal department should have an institutional long-term memory. All incidents that may give rise to legal action, in particular a collection or enforcement action, should be calendared, taking into account the applicable limitation period. Obviously, in-house counsel will need to explain to the decisionmakers in the business organization that delays in any enforcement action may substantially lessen the prospect of successful enforcement or collection. For example, the longer the company delays legal action to protect its intellectual property rights, the more difficult it may become to obtain injunctive relief.

The main point, however, is that things change in business – sometimes quickly but just as often over longer periods. A strategic partner may become irrelevant over time. The company may adjust its business model and pursue a different customer base. High-growth spurts may dictate that the limited resources of the legal department be directed to “papering” new promising deals.

Yet, in all of this, the legal department should not forget or forego any opportunities to pursue enforcement or collection action stored in its institutional memory. It may be time to go after the former strategic partner if the business reasons for “going easy” are no longer there.

In those cases, the legal department should, prior to starting any legal action, consult the business organization as well as the finance department to clarify the impact of any successful enforcement or collection action, or any settlement in the process, on the bottom line.

For example, if the account receivable from the non-paying customer has already been written off, any future collection or enforcement may contribute directly to the company’s bottom line. If no revenue had been recorded from a strategic relationship gone bad, and the legal department manages to procure a favorable settlement resulting in a settlement payment for breach of the strategic relationship, the cash again contributes to the bottom line.

In all of these cases, the legal department should communicate closely with the decision makers in the business organization to ensure a common understanding that any monies collected or settlement procured are recognized as additional cash from a transaction already “written off” by the business organization.

Develop Licensing Opportunities

The legal department may be also charged with protecting the company’s technology and innovation through managing the company’s intellectual property portfolio by preparing patent applications, or by supporting the company’s IP department in managing such a portfolio.

As a result, the legal department is keenly aware of the scope of the company’s intellectual property to the extent it has been, or is in the process of being protected through patent or copyright filings, or through confidentiality or secrecy agreements for protecting trade secrets.

Again, things change in business. The company may have filed a number of patents on promising technology or may have invested significant efforts in protecting certain trade secrets. At the time of filing, the company may have thought that this technology may be the next “killer application” propelling the company’s future business development into the stratosphere.

But then the company’s focus shifted, or the new technology did not garner the necessary internal champions to become critical for the company’s future success. The legal department should have an institutional memory of the company’s IP portfolio. It should consider developing commercialization opportunities for any IP in the company’s IP portfolio that the company does not deem critical for its current or future success. The commercial opportunities could involve the transfer of the underlying patent(s), or a licensing program of the technology to one or more licensees.

Business-minded in-house counsel are well-suited to pursue these commercialization opportunities since they should be able to tap into a network of IP professionals, in particular outside IP counsel, that could facilitate introductions to potential licensees. Any such commercialization would have a direct impact on the company’s bottom line.

Scour Assets Post-Acquisition

Finally, the acquisition of a business is a great opportunity to apply the approaches discussed above. In-house counsel will obviously have been intimately involved in the acquisition process, including due diligence of the target.

While legal due diligence is not focused on uncovering revenue or income opportunities, it creates a list of contracts and intellectual property assets. It is a good starting point in determining if the acquired business did not pursue enforcement actions that it could or should have pursued, and whether it has non-core IP that could be commercialized.

Sven Riethmueller is international counsel at Goulston & Storrs. His practice focuses on representing European and other foreign technology companies in their business dealings in the United States, as well as representing U.S. technology companies with their overseas activities. Mr. Riethmueller holds an A.B. degree summa cum laude from Dartmouth College and a J.D. from Columbia University School of Law. Born in Germany, he is bi-lingual in English and German.