The Five Pathways of Corporate Legal Strategy

Robert and I would like to thank The Conglomerate and its readers for providing us with this valuable opportunity to share our thoughts on a topic we research and teach at our respective business schools: corporate legal strategy. In several guest posts, we’ll discuss various issues related to this subject. This first post will discuss the framework we developed called the five pathways of legal strategy. The pathways framework describes the various strategic legal scenarios available to companies and the elements necessary to navigate within these scenarios.

The Wall Street Journal recently published an article that mentions how companies are increasingly insourcing legal services by expanding their in-house legal departments. As with many prior examinations of in-house legal departments, the article emphasizes the cost-cutting benefits of insourcing. The article discusses an important trend involving the rising status of in-house legal departments; however, it neglects to discuss how companies are increasingly looking to their legal departments as strategic partners and value co-creators.

An article we wrote that was recently published in the MIT Sloan Management Review examines corporate legal strategy and the value-creating activities of legal departments. According to our five pathways framework, every company is situated within a spectrum of five different areas of legal competence: avoidance, compliance, prevention, value or transformation.

Avoidance involves attorneys reacting to legal mishaps. Attorneys serve in a reactive emergency role or enable questionable legal practices, and when these issues become public we often read about them in the front pages of a newspaper. Think of MF Global. Most companies choose instead to operate in the compliance pathway, in which in-house attorneys serve, and are perceived by managers, as “cops” who ensure compliance with existing laws and regulations. The next pathway called prevention is the first step towards strategic legal decision making. In this pathway, managers work with attorneys to mitigate future and identifiable business risks. Each of these three initial pathways fit within the traditional domain of risk management.

The remaining two and much rarer pathways involve managers working with attorneys to generate legal strategies that create identifiable, measurable value for the firm. The value and transformation pathways are distinguished by the high level of attention that top managers (C-level executives) pay to legal matters and their focus on value creation, not just risk management. A value pathway is achieved when a legal strategy can be causally connected to a financial metric, such as revenues that can be accounted for on a financial statement. The final transformation pathway is achieved when the legal strategy creates value, provides a source of long term competitive advantage and is integrated in the company’s underlying business model. Increasingly, legal departments are being called on to help companies navigate towards a higher legal pathway. How this is achieved will be the subject of our next post.