Legally Informed Strategy improves business transactions

How does Legally Informed Strategy add value to business transactions?  I have previously argued that this is one way to break down the insidious barriers between business and legal silos.

Another part of the answer turns on an attorney's role in a business transaction.  In a typical business transaction, an attorney advises on the legal structure of the deal (e.g., what type of merger or acquisition should occur).  The attorney negotiates deal terms primarily from the perspective of reducing legal risk and minimizing transaction costs of the deal.

Moving From Transactions To Legally Informed Strategy

In addition to suggesting the legal structure for a transaction, an advisor who intimately understands the client's business, market space, and competitive dynamics can add Legally Informed Strategy.  Legally Informed Strategy goes beyond the structure of the transaction to how the transaction connects with strategy and management objectives.  Legally Informed Strategy ensures that legal moves are integrated with business goals.

The approach requires knowledge of the value chain, the competitive environment, and the company's strategy and business model. By incorporating these elements into the advice, Legally Informed Strategy works to ensure that the structure of the transaction not only protects the client's interests against downside risk, but also advances the client's business objectives. This approach optimizes business and legal risk by putting a greater emphasis on business goals than traditional legal thought. The result? The company can create more value from a transaction and capture more of that value.  The emphasis is on how the advice implicates strategy.

Legally Informed Strategy provides clients with added value by advancing strategic objectives. In today's economic environment, every business is looking for added value. Added value provides clients with more value than merely discounting fees. Discounting fees is addition by subtraction. Some firms are even increasing fees while not adding any value. Clients are pushing back against higher fees without receiving greater benefits in return.

Legally Informed Strategy in Action: Mergers and Acquisitions

When a company merges with or acquires another company, the purpose of the deal is to create and capture value from the transaction. Three phases characterize the transaction: due diligence, the transaction, and post-deal integration. The transaction itself involves a host of legal issues, for instance, minimizing tax liability, allocating rights and responsibilities, and transferring intellectual property licenses and other agreements.

The deal structure must consider business issues in addition to legal issues. Leaders must deal with business risk after the transaction closes. For example, if intellectual property is a prominent part of the transaction, the questions might include:

• Are there barriers to transferring the intellectual property that the buyer cares most about?
• How will the acquirer incorporate the company's intellectual property into its existing R&D and product development efforts?
• How will the companies reconcile different approaches to R&D and innovation?

Where intellectual property is not a driving force behind the deal, the parties must consider issues like:

• How will the buyer and seller integrate their sales forces?
• How will the buyer and seller handle differences in organizational culture and incentive structures?
• How will the top management teams be merged?

Answers to these questions should influence the organizational structure and control aspects of the united entity. Some of these issues may fall within the scope of the merger agreement, but not all will. Even where they do, contractual mandates will often fail to capture organizational nuances and realities.  Knowledge of the acquirer's organizational and management structure is needed to answer the questions. The buyer's existing business model will also have a large influence on the answers. With its focus on core business issues, Legally Informed Strategy can add value to business transactions.

What are other ways that this approach can increase the value of your deals?

Douglas Y. Park
Twitter: @DougYPark

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Some lawyers will say that they do not need to have a deep understanding of your company. They might say it is not their role to advise on business issues, and thus they do not need to concern themselves with the particulars of your strategy and management practices. This belief is one reason for the gap between how lawyers and clients view business situations.

Yet, a lawyer who does not know the fundamentals of your business will be hard pressed to give advice that squares with YOUR goals. Let's be clear about this. Learning the fundamentals of a company's strategy and operations is not easy. Board members at Lehman Brothers and Merrill Lynch did not understand the specifics of those companies' businesses. Legally, directors are held to a higher standard than lawyers about knowing the corporation's business. And directors can be held liable for failing to sufficiently inform themselves about the corporation's decisions.

However, lawyers can add value to clients if they understand the client's business. The question is how can lawyers obtain this understanding.

For lawyers, Legally Informed Strategy provides one approach to the problem. This means bringing business strategy to legal advice. Legally Informed Strategy uses a combined Strategy, Law, and Organization lens to tackle difficult problems that your startup faces. The approach explicitly recognizes that many business and legal decisions are inherently connected, and that such decisions require particularized knowledge of the company. Legally Informed Strategy advances your company's objectives through integrated strategy and legal insights.

Conclusion

Sure, your lawyer can be a technician or a transaction cost engineer who minimizes the legal risks associated with deals and legal decisions. However, an attorney who clearly understands your business can more effectively help you achieve your goals.

Douglas Y. Park

Twitter: @DougYPark

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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 those specializing in corporate law, 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 attorneys 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?

Douglas Y. Park
Twitter: @DougYPark

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Strategy, Law, and Organization provides focus

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

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)

The Transaction Cost Problem: Revisiting The Roche/Genentech Merger

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?

Applications

Consider two quick examples of how a combined 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.  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.  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 business 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.

The two examples demonstrate that 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 than an approach that considers only one of these factors.

What do you think about this approach?

Douglas Y. Park
Twitter: @DougYPark

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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.

The Benefit Of Having Legal Advice Early On

In a recent blog post, John L. Watkins, Esq. of Chorey, Taylor & Feil, APC in Atlanta presents a persuasive argument for getting a business lawyer on board at the beginning of the transaction. The problem with waiting far into the deal is that the client may have to remodel or completely tear down what has been negotiated. The process of legal remodeling or tearing down a document can be costlier and riskier than getting legal advice early on.

As to cost, Mr. Watkins notes: "the irony is that involving a lawyer from the beginning and doing the transaction correctly will probably be no more expensive than either a last minute tear down or a remodeling project."

Mr. Watkins summarizes the legal reasons for getting a lawyer's advice at the beginning of the negotiations:

Business lawyers are used optimally when they are involved early in the process, and certainly before the key terms are struck. Lawyers can provide valuable input on how the transaction might best be structured. Lawyers can also identify key terms and conditions that should be included to protect the client’s interests. Lawyers can also advise the client on whether terms proposed by the other side are carry unanticipated risks.

Discussion

Bringing in an attorney early on a business transaction usually results in a better outcome for the client. Yet, part of the reason why clients sometimes minimize the lawyer's role is the belief that the attorney does not adequately understand the business implications.

A business lawyer who understands how the deal fits into the client's strategy, the competitive environment, and how the client creates and captures value can add value by providing Legally Informed Strategy.

This discussion raises the question: How can attorneys add value to business transactions? We would love to hear your thoughts.

Douglas Y. Park
Twitter: @DougYPark

If you enjoyed this post, please subscribe to the blog by RSS feed or email.  You can find the subscription option on the sidebar to the immediate right.  Also, click the Facebook Like button below and Like the DYP Advisors Facebook page.

NOTE: DYP Advisors, Inc. has no business relationship with John Watkins or Chorey, Taylor & Feil, APC.