Breaking Down The Silos That Separate Business People And Lawyers

by Doug Park on March 3, 2010

In many companies, business and legal operate as separate silos. On the business side, there is business development, corporate development, marketing, finance, and human resources. On the legal side, there are in-house attorneys and outside counsel. Business sees legal as a cost center, not as a value driver.  Unfortunately, this separation of business and legal prevents many companies from fully benefiting from legal advice and results in wasted time and money.

Case Study: The Divide Between Marketing And Legal At Yahoo!

A senior marketing manager at Yahoo! told me a story that illustrates the point.  She said that the marketing team spends substantial time and effort to develop a marketing campaign, which is then reviewed by in-house counsel.  In-house counsel will often come back and explain the legal problems with the plan, which might include intellectual property, privacy, and cyberlaw issues, or potential litigation down the road.  As a result, the legal team will either nix the entire project or force marketing to substantially revise the plan.

But marketing complains that in-house counsel does not understand the business objectives of the plan, or that in-house counsel is too risk averse.  The consequence is that marketing wastes time and money.  Further, the legal team might force the wholesale revision of a plan whose purpose they don’t fully comprehend. The effectiveness of the original plan is unnecessarily diluted.

This is precisely what marketing thinks, causing unnecessary tension between marketing and legal.  Legal is shaping marketing’s activities when the direction of influence should run in the opposite direction.  At the least, legal should be facilitating marketing’s objectives.  In order to do that, the attorneys need to understand marketing’s goals and marketing’s role in promoting the company’s success.

Too often, both within a company, and between a client and outside counsel, business and law are unfortunately treated as separate silos.  This is largely because lawyers are limited in their ability to integrate business strategy and organizational management concerns into their legal advice.  Thus, business people think like business people, and lawyers think like lawyers.

Two Solutions: Legally Informed Strategy And Business Education For Lawyers

1.  Legally Informed Strategy.

One solution is Legally Informed Strategy.  Under this approach, strategy and organizational priorities are simultaneously considered with legal concerns.  Business strategy drives legal advice.  Successful implementation of this approach requires a deep understanding of strategy, organization, and law.  A combined Strategy, Law, and Organization lens is needed for Legally Informed Strategy to work.  Properly implemented, Legally Informed Strategy produces superior advice and results.

2.  Business Education For Lawyers.

However, many attorneys, including corporate lawyers, do not possess the business knowledge or experience to provide Legally Informed Strategy.  Many business lawyers could benefit from education and training in strategy and organizational management.

First, consider outside counsel.  In 2009, the Wall Street Journal reported that law firms recognize as much and are sending their corporate attorneys to executive education and leadership development programs to learn finance, management, and strategy.  Why?  So that lawyers can better understand their clients’ businesses.

Similarly, the Association for Corporate Counsel (ACC), the organization of in-house counsel, recognizes that corporate counsel need additional business education and training.  ACC now offers a Mini-MBA for in-house counsel to boost business knowledge. If any set of lawyers would understand business, you would think it would be in-house lawyers.  However, even lawyers in that domain of the legal profession understand that they must have a stronger understanding of strategy and management.

In future posts, I will elaborate on how executive development for attorneys benefits both them and their clients.

I would like to hear what you think.  Do you agree that the separation of business and law into separate silos leads to suboptimal advice and outcomes?  Do you think that lawyers can add value to their clients if they possess better knowledge and understanding of business?

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The Risk Of Using Location Based Services: Higher Insurance Premiums

by Doug Park on February 23, 2010

Do you use location based services, such as Foursquare, Twitter, or Facebook? If so, you may start paying a price in the form of higher home insurance premiums.

Why? Because social media, geolocation, and location based services alert others as to your location. Specifically, people can figure out when you are or are not at home.  Social media companies like Twitter are trying to strengthen their location based services through acquisitions.

A website called Please Rob Me links Twitter updates of people who say they are not home to locations using Google Maps.

In light of such information available to the nefarious, insurance companies see using geolocation services as an increased risk. It should not surprise that they are looking into ways to build that higher risk into insurance premiums.

Darren Black of Confused.com explains:

“I wouldn’t be surprised if, as social media grow in popularity and more location-based applications come to fore, insurance providers consider these in their pricing of an individual’s risk. We could see rises of up to 10pc for people who use these sites.

Criminals are becoming increasingly sophisticated in their information gathering, even using Google Earth and Streetview to plan their burglaries with military precision. Insurance providers are starting to take this into account when they are assessing claims and we may in future see insurers declining claims if they believe the customer was negligent.”

If you use geolocation services, you should be aware that insurance companies see you as a higher risk.  Confused.com suggests taking the following steps to manage this risk.

1. Don’t put your home address or home phone number on social networking sites.

2 Don’t follow people you don’t know on social networks and use block others from seeing your profile if you don’t know them.

3. Disable or use judicially location-based services on Twitter and Facebook.

In addition, you might consider:

4. Disabling geolocation services on your browser.  Firefox explains its location based services and gives instructions on how to disable them here.

5. Waiting until after you come home to post updates about vacation.

6. Not asking your friends online whether they are on vacation, or how they are enjoying their vacation.

7. Limit who can see your posts.  By modifying your privacy settings, Facebook allows you to restrict who can see your personal information and posts.  You can do the same on Google Buzz and Twitter.

Of course, location based services provide many benefits.  They make search results more geographically relevant, help companies give tailored discounts and offers, help you find nearby services, and help provide security for pets, children, and the elderly.  The point is to be aware of the potential downsides of geolocation services.

Does anyone have other suggestions for managing this risk?  Do you think the risk of using location based services is overblown?

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Why Strategy, Law, And Organization?

by Doug Park on February 18, 2010

Good business lawyers understand that legal problems are necessarily business problems. Yet, understanding the law, by itself, is insufficient to understand and solve complex business problems.

In this short post, I advance a simple argument: A combined Strategy, Law, and Organization lens provides superior solutions to difficult business and legal problems. Examples include mergers and acquisitions and intellectual property. Strategy is the lynchpin because strategy is about action. Organization puts the focus on the legal structure of business deals.

The Transaction Cost Problem: Revisiting Roche/Genentech

I recently discussed how the high transaction costs of writing intellectual property agreements inhibited research and development collaboration between Roche and Genentech.  Transaction costs, and their attendant risks, became an intractable problem when the companies were separate entities.  Transaction costs greatly decreased after the acquisition because one entity owned all of the intellectual property.  The problem of allocating intellectual property rights by contract was solved, and the risks of intellectual property allocation could be managed and optimized.

  • How big of a factor were the transaction costs of allocating intellectual property rights in the merger decision?
  • If, as Ronald Gilson contends, lawyers add value as transaction cost engineers, why did the lawyers fail to write agreements that satisfied the business people?  Was it even possible to write a contract to cover the intellectual property issues that spanned organizational boundaries?
  • Did factors other than transaction costs drive the merger decision?

Why A Combined Strategy, Law, And Organization Lens Is Needed To Solve Business And Legal Problems

Why is knowing the law, by itself, insufficient to understand problems that both are business and legal in nature? Because such problems cut across easy, clean categories.

Oliver Williamson, the 2009 Nobel Co-Laureate in Economics, explains how a combined lens of law, economics and organization informs strategy:

This review shows that a combined law, economics, and organization theory approach leads to different and deeper understandings of the purposes served by complex contract and economic organization.  The business firm for these purposes is described not in technological terms (as a production function) but in organizational terms (as an alternative mode of governance).  Firm and market are thus examined comparatively with respect to their capacities to organize transactions, which differ in their complexity, so as to economize on transaction costs.

(emphasis added)

Applications

Consider two quick examples of how a combined strategy, law, and organization lens enhances understanding of business and legal problems.

1. Mergers and Acquisitions: Mergers and acquisitions economize on the transaction costs of contracting in the market.  The Roche/Genentech example powerfully illustrates how a merger or acquisition can dramatically reduce the transaction costs (i.e., risks) of contracting and promote business strategy.  However, mergers and acquisitions involve much more than transaction cost reduction.  From the legal side, mergers and acquisitions are about getting the legal structure of the deal right.  In addition, though, risk can be optimized, or turned into a positive, through a merger or acquisition.  As I will discuss in future posts, risk management and risk optimization are important considerations in successful merger and acquisitions.  Within the context of a company’s strategy, when and how do risk optimization considerations affect how merger and acquisitions should be done?

2. Intellectual Property: Transaction costs of allocating intellectual property rights are related to strategy and organization.  First, organization theory implicates legal decisions and activities.  Whether transaction costs are high or low affects the effectiveness of undertaking intellectual property activities within the firm or to writing intellectual property agreements with other parties.  Second, decisions about organization are decisions about strategy.  How the firm does its intellectual property activities is one element of strategy.  Since transaction costs are but one small influence on strategy, how do legal and strategy interact?  Business priorities should drive legal moves.  Legal considerations should not dominate business strategy.

Discussion

Again, the question is: Why strategy, law, and organization?

Certainly economic analysis, and transaction cost analysis in particular, provides insights into law and organization.  Economics also informs strategy, or  choices about how the firm will compete.

The important point is that strategy is the practical application of economics.  Strategy is what leaders and managers formulate and execute.  Leaders do not develop and implement economics.

As the two examples demonstrate, strategy is about making decisions concerning risk management and risk optimization.  Economics educates the analysis of risk management and risk optimization.  Strategy provides the framework for choosing among alternatives in light of competitive priorities, and provides the direction for achieving those priorities.  By contrast, economics does not provide the competitive priorities, or tell leaders how to pursue those priorities.  In this way, Legally Informed Strategy and a combined Strategy, Law, and Organization lens go hand in hand.

For these reasons, a combined Strategy, Law, and Organization lens provides superior solutions to complex business and legal problems.

NOTE: The full citations for the two articles mentioned are:

Ronald J. Gilson, Lawyers as Transaction Cost Engineers, in The New Palgrave Dictionary of Economics and the Law. Peter Newman, ed. New York: Stockton Press, 1998. p.508-514.

Oliver E. Williamson. 2005. “Why Law, Economics, and Organization?” Annual Review of Law and Social Science 1: 369-396.

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Intellectual Property Rights, Merger And Acquisition Strategy, And Transaction Costs

by Doug Park on January 21, 2010

Do the transaction costs of allocating intellectual property rights in collaborative R&D influence merger and acquisition strategy? When it is difficult to write intellectual property agreements, does it makes sense for managers to turn to a merger or acquisition as the solution? The answers have consequences for how business strategy and legal strategy interact.

What Are Transaction Costs?

Transaction costs are costs incurred in participating in economic exchanges through the market, as opposed to doing an activity within a single firm. An example of a transaction costs is negotiating and writing a contract to allocate intellectual property rights of a R&D collaboration between two companies. See Ronald Coase’s classic 1937 paper The Nature of the Firm for the original statement of transaction cost analysis. (Note that Coase did not use the term transaction costs. Oliver Williamson, the 2009 Nobel Co-Laureate in Economics, first used that term.)

Case Study: The Transaction Costs of Allocating Intellectual Property Rights In The Roche And Genentech Merger

In March 2009, Roche completed its acquisition of Genentech by purchasing the remaining 44% of Genentech stock it did not own. Among other things, the merger will facilitate collaboration between Roche and Genentech in developing personalized medicine. Roche is a leader in diagnostics — technologies doctors use to determine which patients will respond well to which drugs. Genentech pioneered diagnostics with Herceptin, a breast cancer drug that contains a genetic test to identify suitable patients for the treatment.

This excerpt from a Business Week article summarizes the management benefits of eliminating the transaction costs of allocating intellectual property rights:

When they were separate, Genentech and Roche rarely tried to co-develop diagnostics, because it took too long to work out patent rights and other legal logistics. “Now there’s no intellectual-property discussion, there’s no negotiation—we’re the same!” Scheller says. “You wouldn’t believe how much easier it is.”

Three points regarding intellectual property and merger strategy immediately come out.

  1. The transaction costs associated with dividing intellectual property rights deterred collaborative work between the companies.
  2. The acquisition eliminated the transaction costs, thereby facilitating collaboration.
  3. The merger aligned incentives for collaboration and innovation.

Discussion

The article raises questions about the relationship between the transaction costs of intellectual property agreements and merger and acquisition strategy. Two questions deserve further analysis:

1. What causes transaction cost failures in the intellectual property context?

2. When does transaction cost failure influence merger and acquisition strategy?

The takeaway is that the economic analysis of intellectual property agreements informs important business activities, including collaboration, innovation, management, and mergers and acquisitions. Using transaction cost analysis to analyze intellectual property agreements and business activities is a prime example of how Legally Informed Strategy adds value to clients. By understanding how transaction costs connect to a company’s activities, business and intellectual property attorneys can write contracts that better meet their clients’ priorities.

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Why Consult A Business Lawyer Early In A Business Transaction?

by Doug Park January 18, 2010

Business lawyers often argue that involving a lawyer early on in a transaction is cheaper than fixing a problem later. Clients sometimes want to negotiate a deal on their own and then have a lawyer write it up. The concern might be cost or the attorney’s grasp of the business issues. Further, an attorney who [...]

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Do More New Lawyers Mean Lower Wages For Lawyers?

by Doug Park January 13, 2010

Do more lawyers mean lower wages for lawyers? The legal blogosphere has been abuzz since Mark Greenbaum argued in the Los Angeles Times that too many new lawyers drives down lawyers’ wages. However, Mr. Greenbaum’s argument is based on misunderstandings of competition in the legal industry.
To summarize, Mr. Greenbaum contends that there are too many [...]

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Compensation and Reputation Risk Under New SEC Disclosure Rules

by Doug Park January 11, 2010

The Securities and Exchange Commission’s (SEC) new disclosure rules mandate disclosure of material adverse risks created by compensation policies. A prominent corporate attorney’s recent analysis of compensation program design and risk focuses on process, but completely ignores reputation risk.
Reputation risk based on the amount of compensation, regardless of adherence to established procedures, is “reasonably likely” [...]

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Apple Acquires The “i-phone” Trademark In China

by Doug Park January 7, 2010

Apple has finally ended its iPhone trademark problem in China by acquiring the rights to the “i-phone” mark from Hanwang Technology. The acquisition ends a dangerous intellectual property and marketing situation for Apple.
As I wrote in an earlier post, because of an apparent oversight in coordinating its marketing strategy and trademark strategy, Apple faced the [...]

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What Venture Capitalists See For 2010: IPOs, M&A, But Not Cleantech

by Doug Park January 5, 2010

What do venture capitalists like in 2010?  Not cleantech.  But they are optimistic about more big IPOs and mergers and acquisitions coming through.
An article in the New York Times discusses the technology sectors that VCs are bullish on.  VCs are excited about startups developing applications for the Android, less so for iPhone application companies. VCs [...]

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Pfizer, Alternative Fees, And Competition

by Doug Park December 30, 2009

Companies are increasingly forcing their outside counsel to offer an alternative fee for legal work. Pfizer is the latest example. The pharmaceutical giant recently formed the Pfizer Legal Alliance, a group of nineteen law firms who will provide legal services for the entire year for a flat fee.
Pfizer’s general counsel, Amy Schulman, leads the company’s [...]

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