Finding value in your firm's law team
Today's difficult economy demands that firms find new sources of competitive advantage. Recent research by Professor Robert Bird finds an answer in one of the most unlikely of sources – a firm's legal environment.
For too long, Bird explains, companies have overlooked an opportunity for capturing marketplace value right in their own offices. "We know that corporate counsel can skillfully evaluate risk, manage litigation, and confront regulatory challenges. We also know that the legal department is too often shunted aside when big business questions arise."
When executives roll out a new product or consider a merger, lawyers are usually consulted for their legal advice but rarely their business advice. "Legal experts can be an incredible source for corporate decision making," Bird's research shows. "Lawyers and non-lawyers alike can use their knowledge of the legal and regulatory environment to discover new markets and expand on existing ones."
Examples of using law as an opportunity already exist. While most executives viewed Sarbanes-Oxley as yet another regulatory burden, a visionary few used SOX to improve their firm's investor ratings and streamline financial controls. These firms used compliance with SOX as a vehicle to consolidate key financial processes, eliminate redundant information systems, broaden responsibility for financial controls, and integrate distant business units with new acquisitions. These SOX firms have attracted the attention of investor rating services which evaluate the strength of the financial control environment as a positive factor. Such rating services have a significant impact on investor relations and the firm's cost of capital.
Bird's research identifies numerous examples of the business benefits of a legal perspective. When the head of PepsiCo's Frito Lay division became concerned over the increasing threat of health-related product liability lawsuits, he worked closely with in-house attorneys to find a solution. Instead of simply perceiving these lawsuits as threats, managers and lawyers reframed the problem as an impetus to create new products. Reformulating existing products to satisfy consumer demands for healthier foods, in 2004 PepsiCo became the first consumer products company to remove trans-fats from its snacks, and as a result, captured a significant first-mover marketing advantage from the decision. "These events are scattered throughout firms and in the pages of academic journals," Bird explains, "but are rarely tied together as pieces of a firm's overall business plan."
A large retail firm being sued for firm-wide sex discrimination was burdened with a cumbersome judicial consent decree. The firm could have responded by challenging the consent decree in court, looking for loopholes, or by simply paying a penalty and promising to follow the law. Instead, the company instituted an automated hiring promotion system that allowed applicants or employees to enter into a pool for any position that met their qualifications and interests. The system reduced the effect of subjective biases, expanded the pool of applications for every position and promoted the advancement of employees that otherwise might not have sought or attained higher positions. For example, when one female employee applied for a job as a cashier because she believed "that's where women went," the automated system bumped her to a higher job level based upon her extensive prior experience. This system was so successful that Home Depot voluntarily expanded it beyond the jurisdiction where it was originally imposed by the consent decree; the system is now used company-wide.
Professor Bird's innovative work has received accolades from academic circles: "Pathways of Legal Strategy," was published in the Stanford Journal of Law, Business and Finance and received a junior faculty best paper award. The article explains that firms knowingly or unknowingly interact with their legal environment in their ordinary operations. Bird discovered that while some firms avoid legal obligations altogether, some merely comply with the letter of the law and overlook hidden value. "Each possibility is available," Bird says, "but most companies just comply with the law and move on. That's a lost opportunity for firms."
Bird is currently finishing a working paper that is already cited in the literature: "Law, Strategy and Competitive Advantage." This paper explores how a firm's past experiences might influence whether its executives view the legal environment as a threat or an opportunity. The experiences of individual managers with government regulators or the legal system might influence how strongly they perceive rules as barriers. The presence of legal advice in-house or outside the firm might impact the strength of relationships that develop between lawyer and manager. Certain heavily-regulated industries that interact with government officials and navigate complex regulations on a regular basis might be in a better position to think strategically about law than their less-regulated counterparts. "We just don't know why one firm uses law skillfully and another does not," Bird says. "Considering the possible sources helps answer this important question."
Bird's work has also attracted attention from other universities. Presenting at the University of Michigan's Ross School of Business, Bird spoke with fellow instructors interested in incorporating legal strategy into scholarly research. "We were intrigued by this timely and innovative concept," said Lynda Oswald, the Michael R. and Mary Kay Hallman Fellow and Professor of Business Law. "We invited Professor Bird to speak to our faculty, and his research was well received."
Faculty from the Opus College of Business at the University of St. Thomas also invited Professor Bird to speak about his research. The focus of the lecture was to help students understand the importance of the legal system in the business environment. "We held a forum that was well attended by students and faculty," explained Michael Garrison, Professor of Ethics and Business Law and Department Chair, "and his work helped our undergraduates think of regulation as a opportunity and not just a cost."
Professor Bird was also invited to present at two universities in Turku, Finland. Faculty there were interested in how principles of strategy applied to an emerging scholarly movement in Europe known as proactive law. "The University of Turku and the Turku University of Applied Sciences were most gracious," Bird said, "and offered a wonderful opportunity to interact with international scholars interested in the intersection of law and business." In addition, Bird is serving as a special topic advisor for a forthcoming issue of the American Business Law Journal on the topic of "Law as a Source of Strategic Advantage."
There is much that can be done to take advantage of legal opportunities. Top leaders can treat their company counsel as full partners in the business planning process. Managers can involve lawyers earlier in contract negotiations and budding legal problems. Formation of teams with legal and non-legal experts who work closely together can help develop creative and effective solutions that impact regulation.
Furthermore, non-legal personnel who manage compliance, ethics, or other regulatory-related functions can be given greater decision making power to exploit opportunities and participate in decision-making. They should also be allowed to take a more proactive attitude toward planning for anticipated changes in the law. If, through government contacts, a compliance department learns that change is on the horizon, preparation can cut costs, avoid last-minute efforts to comply, and earn goodwill with regulators. The less a decision-maker perceives a legal rule as an immutable barrier, the more likely potential opportunities for competitive advantage will become evident.
Work in this area is just beginning and Bird analogizes the research to early debates over the role of information technology in the 1980s and 1990s. "About twenty years ago," Bird said, "firms openly questioned the value of IT. Some executives saw little benefit beyond back order processing. Writers questioned whether it could provide a competitive advantage at all. Law today is like IT twenty years ago. Law is now the last great resource of competitive advantage, and with ongoing vigilance, managers can unlock this untapped opportunity inside their own companies."
Bird, Robert C., "Pathways of Legal Strategy," Stanford Journal of Law, Business and Finance, vol. 14, iss. 1, pp. 1-41.
Bird, Robert C., "Law, Strategy, and Competitive Advantage," http://ssrn.com/abstract=1327795.