Forms of Organization: Centralized vs. Decentralized

Forms of Organization: Centralized vs. Decentralized

Generally, the centralized departments are located in a corporate headquarters and provide legal services for the company in all of its enterprises and locations. In the decentralized law department, the headquarters contains only a general counsel and a few legal specialists. Operating divisions or regional organizations contain other groups of lawyers who function relatively independently of the general counsel, often report directly to the head of a business unit, and provide services to the various entities that make up the corporation.
Law departments can be organizationally centralized (all lawyers reporting to a general counsel) yet geographically dispersed. In this way, lawyers can be housed close to their clients while having a solid line reporting relationship to the general counsel.
The decentralized category is subdivided between those decentralized groups in which lawyers are assigned to subsidiaries or divisions of the corporation and report only on a functional basis to corporate headquarters, and those corporations that have established regional counsel covering geographic areas in which lawyers report more closely to a central general counsel. Within the centralized law departments, the most common internal structure is that organized along the lines of the corporation, rather than along regional lines.
Generally, the legal function closely parallels and is based upon the management organization and managerial philosophy of the corporation of which it is a part. Corporations with strong central management will have a centralized legal function. Corporations which place a great deal of emphasis upon decentralization will have decentralized legal responsibilities.
Another major variant is the placement of the patent function. In many corporations, the patent law organization reports directly to the general counsel and through him to higher management. In a number of organizations, the patent counsel reports directly to higher management. The more common alternative is for the patent counsel to report directly to the vice president in charge of research and development, or the vice president for engineering. In technologically oriented corporations, it is quite common for the number of patent lawyers to exceed substantially the number of lawyers employed in other type of legal work.
No valid generalizations can be made with regard to a preferred mode of organization for law departments. The legal groups of a corporation must function within the general organizational pattern of the corporation itself. Their philosophy of organization reflects the philosophy of the corporation. Since in our competitive economy, both centralized and decentralized management organizations have survived well, even among the larger corporations, there are proponents and detractors from both alternatives. The law department is the tail which cannot wag the general organizational dog. Whatever organizational structure is selected, the law department must align with the business organization.
A more specific case can be made with regard to the reporting relationship of the patent function. The acquisition, preservation, and safeguarding of intellectual knowledge is becoming ever more important in our technology economy. The initial procurement of patents requires engineering or other technologically related skills, and almost all patent lawyers are trained in some aspect of scientific technology. However, defense against infringement, the licensing of patents, the preservation of trade secrets, the sale of general technology, and like matters, with which patent departments are generally involved, are clearly lawyer-like activities based upon law and legal knowledge, rather than upon research or engineering background.
These activities relate closely to other legal activities carried on within the corporate law department. There are several aspects of antitrust law and problems of restraint of trade which can become very much a part of the activities of patent lawyers, and which require close coordination between general legal and patent groups. In those corporations where patent activities are organizationally separated from law and report to higher management through a technical executive, a lack of coordination and rivalry may develop between the two legal functions, or at best, there may be difficulties in communications between the two groups of lawyers. A good case can, therefore, be made for consolidation of responsibility for all legal activities under the general counsel of the corporation.
Although the burden of adherence to the ethical rules is placed on each individual lawyer for the good of both the lawyer and the employing corporation, adherence to strict professional independence should not be made more difficult by the internal organizational structure of the employing company. When the legal function is decentralized and employed lawyers' personal career advancement rests with the heads of the business units to which they are assigned, independent professional judgment is more likely to be compromised. Many examples of instances which could occur can be made.
A young lawyer, who knows that his/her career advancement may be in jeopardy if he or she calls legal problems to the attention of persons of higher rank outside his business unit, may not do so to the jeopardy of the entire corporation. If a lawyer's career success or compensation is tied to the net profits of a business unit, he or she may compromise sound legal advice to accomplish a profitable, immediate result with harmful, long-term effects. If a lawyer's future is dependent solely on a business unit head (and most business unit heads outrank most lawyers), he or she may be tempted to allow ultimately harmful actions to be carried out because this business unit head sees a profit opportunity by acting in a certain way.
Further, if a lawyer's evaluation depends solely on the business unit head, the evaluation may not be adequate in terms of valuing creativity, technical competence and task difficulty. These are generally strengths or weaknesses that can only be evaluated by another lawyer. The same holds true in the case of selecting new lawyers for the law department, engaging outside counsel and determining the skill and experience level needed for assignment of department lawyers to the many different kinds of legal work needed by various business groups.
Examples of serious incidents, which have occurred and which are related to a decentralized law department, are set forth below:

  1. Refusal of a business manager to make required securities law disclosures;
  2. Unauthorized and illegal investments made by subsidiaries;
  3. Authorization of outside counsel to institute a law suit by a business without recognizing certain fiduciary obligations;
  4. Commitment to acquire another company which raised policy issues and was of questionable legality;
  5. Engaging in certain transactions that jeopardized the company's licenses in certain states;
  6. Licensing controversies with various regulatory bodies;
  7. Uncoordinated and potentially harmful approaches to various regulatory bodies;
  8. Subsidiary retained inappropriate outside counsel;
  9. Outside counsel was retained to research questions of law, which had already been studied within the company;
  10. Inadequate legal expertise was retained to deal with a problem when expertise already existed within the law department;
  11. Reluctance to communicate with the corporate law department;
  12. Inadequate knowledge of policies and procedures of the company; and
  13. Unwillingness to accept cost-effective innovation, such as new technology.

Since centralization includes supervision, it creates an atmosphere in which there is a higher probability of building on prior experience rather than "reinventing the wheel" within separate, decentralized legal groups. Centralized technology and workload control can further reduce duplication of effort.
Where a centralized pool of lawyers with diverse legal talent and expertise is available to all business units through a centralized approach, centralization can also represent significant savings in terms of numbers of lawyers required to render legal services to the corporation. Decentralized law departments have a tendency to grow exponentially as each independent organization duplicates the legal expertise of other organizations.
Consistency in overall corporate philosophy and advice is more likely in a centralized law department. A decentralized law department may speak with many voices rather than one. Consistency in other areas is also enhanced through centralization. Hiring standards, training procedures and advancement standards can be uniformly applied within one organization, rather than many groups of legal entities. Improved lawyer morale usually results from the centralized approach, since individual lawyers are not isolated from their peers, and they have the opportunity to move with a larger group of lawyers.
Mergers, acquisitions and divestitures have driven law departments to regularly review their organizational structure and delivery system. With rapid changes, corporate legal practice needs change as client organizations appear and disappear. Corporate law departments are extraordinarily busy. Time spent on constant reorganization and realignment can take time, resources and energy away from effective client services. To ensure that reorganization time, energy and resources are minimized, a law department should be organizationally adaptable. It should be flexible and it should not require major reorganization with every client structural change.
Following are a dozen principles that law department leaders can use to assess whether their law department is flexibly organized. Positive answers to these questions mean that a law department will be able to minimize resources dedicated to constant reorganization and dedicate their time to effective and efficient client service.
Using these principles as a foundation for your organization will alleviate the need to continuously reorganize a law department:

1. The organization ensures that there is consistency of legal position. For many companies it is important to ensure that various business entities are speaking with one legal voice.
2. Clients know which law department member to contact. With constant reorganizations, lack of clarity and internal competition for clients, it is often difficult for clients to know which lawyer to call. Another problem occurs when clients can go "shopping" in the law department for legal answers that they like.
3. The organization is capable of easily realigning its resources. As the legal needs and demands for services change, the organization should lend itself to smooth realignment.
4. There is no redundancy of personnel, effort or resources in the law department. If the organization is organized around business units, silos can develop. Often silos will retain all of the resources needed by the business unit is serves. In this case, redundancies can occur and costs of the legal services rise.
5. Resources are efficiently and effectively shared by client organizations. This principle ensures that there is clarity in the organization mission. Lawyers serve the corporation and legal skills, abilities and experience is shared across business lines as necessary.
6. The organization effectively leverages its purchasing power. Purchasing power cannot be maximized if each lawyer or section is retaining outside legal counsel in an uncoordinated manner. To maximize purchasing power, selection and retention of outside counsel can be consolidated and managed.
7. The law department can manage high value strategic work in-house. Legal work can be analyzed by categorizing it into strategic, important and repetitive. Strategic legal work is defined as work which provides the corporation with a strategic advantage in its industry. Examples would be merger and acquisition work for some companies and intellectual property for others.
8. The law department environment is not internally competitive. The organizational structure should be clear enough and properly managed to ensure that lawyers are not competing with one another for clients. In addition, there should be an atmosphere and structure that facilitates placing the "right work" in the "right hands." Based on legal specialty, skills or experience, certain lawyers will be much better positioned to effectively and efficiently handle certain legal matters.
9. Communication among lawyers is facilitated. Lines of intra-law department communications should be clear and direct. Client communications should be without barriers and direct. Lawyers who act as client gatekeepers can often slow down the communication process. In addition, lawyers within the organization should have easy access to required practice and corporate information.
10. Obsolete or new in-house capabilities are easily eliminated, or added. If the corporation's needs change, legal needs may change. For example, a business unit or a product line might be sold. With the sale, some of the legal services provided may no longer be required. The organization should allow the general counsel to react quickly by either eliminating resources or redeploying them efficiently. The same is true for acquisitions. Additional skills and needs should be added seamlessly without the need to reorganize.
11. There is easy access to global law department management information. It is customarily the responsibility of the chief legal officer to manage the global legal services of the corporation. Organizational systems and processes must be in place to ensure that accurate and timely management information, including workloads and legal costs, can be readily produced.

12. Growth and career advancement opportunities are facilitated. To attract, retain and motivate top talent, law departments must provide career opportunities and individual growth. Opportunities to move up, out or over within the corporate structure should be available.

Using the principles above as a foundation for your organizational structure will help in avoiding, or at least minimizing, the unnecessary time, effort, aggravation, energy and personal stress associated with regular reorganization of a corporate law department.

The source of this article is "How to Manage Your Law Office." subscribers can access this publication online.