Amid disruption, how can legal departments innovate with confidence?

External forces are spurring the evolution of the legal department

CEOs and legal departments appear aligned on the disruptive forces challenging organizations. Both the EY CEO Outlook Pulse Report – September 2024 (pdf) and the EY Law study cite geopolitical influence, regulatory pressures and emerging technology as the top-ranked external forces helping to create the greatest challenges for legal departments in the near and mid-term future. These forces are making it increasingly vital for legal departments to anticipate critical change that could impact the business, operate with greater speed and efficiency, and develop the expertise needed to handle increasingly complex matters. “There’s never been a greater time to be an in-house legal professional,” notes Esa Niinimäki, Chief Legal Officer, Nokia. “Given the disruptive forces on several fronts, we as legal professionals are able to add value to our business on a very broad spectrum.”

Rapid developments in technology are also prompting the evolution of the legal department. These technology changes are increasing the complexity and volume of risks facing organizations, but they are also creating opportunities for organizations to boost efficiency and offer new products and services. Consequently, legal departments are often under pressure to determine how the business can pursue these opportunities under an acceptable level of risk. Speed of response and a deep understanding of the technology are table stakes for legal departments in such instances.

Internal barriers are slowing the momentum of change

As external forces push the evolution of the legal department forward, internal pressures are slowing its progress.

Budgetary constraints are cited as a primary culprit, even as 83% of respondents expect their budget to increase over the next 12 months, with 40% anticipating an increase of 10% or more. However, these budget increases are often allocated for specific projects or line items and cannot be used for other things like hiring additional talent or procuring new technology. As a result, with growing volumes of complex work, budget increases are falling short without changes to the operating model.

Indeed, budget is the most commonly cited impediment to the effectiveness of the legal function’s sourcing strategy, making it difficult to secure the expertise needed to keep pace with business requirements. Most legal departments are looking both internally and externally to source work, however, implementing more innovative and cost-effective sourcing approaches is a slow process for some, as one-quarter of legal department leaders face resistance to sourcing changes and one-third lack alignment on sourcing objectives. Also, working with external providers is presenting challenges for nearly all legal departments. Coordinating with and managing multiple external providers is the most commonly cited challenge by 69% of legal departments that may be influencing sourcing decisions. 

Budget is also the most commonly cited constraint on the legal department’s technology and data strategy, with 65% reporting that it is a challenge. As a result, cost-cutting measures are a requirement for most legal departments to fund future innovation. Ironically, 63% of legal departments plan to increase the use of technology over the coming 12 months to help control costs.

Few legal departments report that they have fully implemented new technology capabilities such as integrated reporting and dashboarding, automated horizon scanning for regulatory change or IP management automation, though most plan to do so in the future. Similarly, less than one-third of legal departments have implemented generative AI (GenAI) for specific use cases. Fifty-six percent say their legal department is still ideating or experimenting with GenAI, and while many plan to use it in the future, only 25% report that it is a high priority for the legal department.

For 87% of legal departments, the slow evolution around technology is resulting in a variety of data-related challenges as data is disorganized or held in different locations (52%), legal and business platforms are disconnected (44%) and access to accurate data is limited (41%). Data challenges are also impeding the implementation of technology, such as GenAI and contracting solutions, that rely on high-quality, accessible datasets. “When I think about the future,” Lenovo’s Sarah Rosser says, “I’m excited about the possible benefits that AI can bring but from my experience so far confirms that it’s still the foundational elements such as process, knowledge and change management that will still be vital to make it successful.”

Further, fewer than one-third of legal functions have full-time dedicated data scientists, product managers or business analysts to provide the advanced support needed to keep pace with the evolving technology landscape. 

For legal departments to play a more strategic and impactful role, they must also evolve. Many legal departments have taken on this challenge with varying levels of success. “Many legal departments continue to be too static in their thinking and ideation,” notes Ashley John, Head of Legal Operations for Anglo American. “Given the pressures departments face from all angles, there needs to be an evolution in the way that legal delivers value to the business.”

Based on insights from the study, it is clear that any transformation should first be about understanding the problems that the business and the legal function face, along with the priorities that legal must support. Legal departments can then shape how they allocate budget, control costs, collaborate with the business, source work, upskill talent and use technology to enable – rather than drive – change. Once the groundwork is in place, legal departments can continue to innovate and evolve in coordination with the business.

There are six steps that can help legal departments set the foundation for change: 

1. Gather deeper insight
2. Delve deep into spending habits
3. Develop a diverse sourcing strategy
4. Engage talent by increasing development, wellbeing and culture-building initiatives
5. Build clarity and alignment across the business on managing risk
6. Use technology as an enabler

1. Gather deeper insight that will enable better planning and decision-making

While three-quarters of legal departments conduct some degree of annual planning, most do not undertake deeper assessments that can help them better prioritize the most critical challenges, anticipate significant events and prepare for the future. Additionally, less than a half have documented their operating strategy and goals.

Only 11% of legal departments have conducted stakeholder interviews in the last 12 months, while just 20% have established a continuous feedback cycle for ongoing operating model improvements. Stakeholder insight and feedback – from legal and other functions – are crucial for legal departments to understand and analyze to better focus resources and identify challenges that may be blocking progress.  “Plans and decisions are made in the business. Being present there provides immense learning opportunities and builds confidence in the fact that we as legal professionals have a lot to give!” notes Sinikka Ilveskoski, Vice President, Legal & Compliance, Wärtsilä Marine.  

Additionally, only 17% of respondents say their legal department has measured their operational maturity against peer benchmarks. This assessment can help with prioritization as the most sophisticated approach is not always required to provide the right level of support for the business. Although no single operating strategy will work for all legal departments, the key is to understand what is possible and use that together with stakeholder insight to shape the right approach. “To be a more effective business partner, General Counsel need to increasingly think like business leaders, as well as being lawyers,” advises Tellmann. “A broader lens and strategic focus are vital.”

Establishing metrics that allow legal departments to track performance and demonstrate how they are enabling the business is also crucial. While some legal departments focus on litigation and risk-related metrics, far fewer focus on performance and efficiency measurements. “A quantifiable value methodology that is agreed to with key stakeholders and contains functional performance metrics with targets to hit can help legal departments demonstrate value,” asserts Ashley John from Anglo American. “This methodology should be a central plank of the legal function strategy and can even be embedded in compensation metrics.”

Metrics should align with legal department goals and challenges. Also, because the legal department plays a more strategic role in enabling the business, performance and efficiency metrics should be part of the equation.

2. Delve deep into spending habits

Given budgetary constraints, the study shows that most legal departments are planning to increase the use of a variety of tactics to control costs. Some, such as technology and automation, legal project management and knowledge management, are efficiency drivers.  Others, such as the increased use of legal process outsourcing, resource allocation and alternative fee arrangements, are direct cost reduction approaches. Yet only 24% of legal departments have conducted a spend management assessment in the past 12 months and 38% have automated invoice review.

Delving deeper into actual expenses, spend patterns and industry standards can provide greater insight into cost drivers and value received. Combined with stakeholder insight on priorities and challenges, this will allow legal departments to make more informed budget decisions. Also, tools that detect invoice anomalies can help ensure that billing guidelines are being followed.

Additionally, the study found that roughly a half of legal departments partially charge back expenses to business units and 29% fully charge back all legal expenses. Chargebacks can help increase transparency around legal spend and potentially reduce costs as they encourage functions to carefully consider requests and proactively address potential legal issues to help minimize unnecessary expense. If a chargeback system is contemplated, legal departments should take care to align with other business units about when and how chargebacks will happen and the value that is being delivered in exchange by the legal department.

3. Develop a diverse sourcing strategy that addresses top business challenges and needs

More legal departments are recognizing that they need to deliver work in a different way. Indeed, 75% report that rethinking sourcing strategies is a priority, yet only 21% have completed a review in the past 12 months of their internal and external sourcing practices. An assessment that includes a data-driven analysis of spend and the stratification of sourcing options compared with industry benchmarks is an essential step to take before embarking on any significant changes.

A thorough assessment should first include feedback from the in-house team and details on how, where and why work is being done along with what is and isn’t going well. Next, this information must be analyzed along with business challenges and priorities, work volume and complexity, and budget to help shape an approach that aligns appropriately with business needs. Lastly, the benefits and challenges of different sourcing approaches should be considered as one approach may not be the best for all needs. “Legal departments should find a way to mix and match suppliers because a luxury sports car isn’t always the right solution,” asserts Tellmann.

Sourcing changes may be complicated by biases around how legal work should be done or enterprise approaches that prioritize a particular approach such as outsourcing or use of in-house centers of excellence (CoE). Following the three steps above will help legal departments build a strong business case for the approach that makes the most sense for the business.

The study finds that, over the coming year, legal departments expect to draw from an increasingly diverse mix of internal and external resources as they adopt new ways of working that allow them to access specialized expertise, align work with the appropriate talent, achieve greater efficiency and reduce costs. For example, 60% of legal departments plan to increase the use of a Big Four organization or alternative legal service provider and 53% plan to increase the use of an internal business center or CoE over the next year.

Some legal departments are also creating bespoke approaches for specific business needs. For example, as Rosser shared, “tactical response teams can focus on interpretation, impact and compliance with new regulations as other teams continue to provide more regular duties and projects and ensure continuity of support and minimize disruption to day-to-day activities.”

4. Engage talent by increasing development, wellbeing and culture-building initiatives

All legal departments report that they need access to additional expertise, and 64% plan to do so by upskilling or reskilling current talent. As a result, talent retention is a high priority for 57% of legal departments.

The study revealed that many legal department leaders are engaging talent by implementing initiatives to improve the work experience and far fewer are focused on activities to develop talent or provide career advancement pathways. However, the 2024 EY Work Reimagined Survey showed that the top drivers of motivation as reported by in-house legal teams are better wellbeing programs, career advancement opportunities, compensation and purpose and culture of the organization. As a result, legal department leaders should ensure that they are focusing on initiatives that will truly make a difference for their teams. Additionally, legal department leaders should consider how the rapid evolution of GenAI and agentic AI may impact legal work and how they may want to develop different soft skills and expertise in talent today to prepare for the future.

“It’s very important that we show internal lawyers the opportunities for growth and for future positions. Some of the opportunities we provide our lawyers include gaining exposure to management or moving into the business divisions they are supporting,” noted Hiroshi Mori, Group Chief Legal Officer, Mitsubishi UFJ Financial Group. “Using that experience, lawyers can then provide even better support on related matters and projects and contribute to developing the company’s strategy and its future.”    

The study also reveals that there is increasing awareness of the impact that change and transformation may have on in-house talent as many legal department leaders are working to foster psychological safety by creating a positive culture where people can speak up (72%), develop a purposeful vision and culture (60%), increase internal communication around change (44%) and encourage experimentation (44%). “Regular engagement surveys, monthly team webinars and skills gap assessments are important tools we use to stay connected with team members and guide leadership on things that are going well and areas that need attention,” explained Fiona van Lede, General Counsel of Randstad N.V.. 

5. Build clarity and alignment across the business on managing risk

Eight out of 10 legal departments say their organization expects to increase investment in risk management over the next 12 months, yet many organizations have not aligned around a detailed and actionable risk management program. This presents an opportunity for legal departments to work with stakeholders across functions to help ensure a coordinated approach.

6. Use technology as an enabler, not a driver of operational excellence

Legal departments need data and technology to help inform decisions, increase efficiency and add value. Indeed, 75% of legal departments report that their top digitization priority is developing or refining their legal technology or data strategies. However, technology is often treated only as the driver of change rather than an enabler, so it frequently fails to be truly impactful. To make better use of limited budgets, legal departments should focus first on how they are setting their strategy before selecting the technology that supports it.

The foundation for a successful digitization strategy is rooted in a clear understanding of the business needs, problems and opportunities that require solutions. Feedback from business stakeholders and the in-house team is critical. “Technology should remove friction and pain points so it’s important to engage with internal teams to identify the things that are standing in the way and then work out the best solution and what can be automated,” asserts Robertson.

It is also imperative to consider how the digitization strategy will complement the sourcing strategy and current processes. The most leading-edge technology or approach may not always be the best choice for every situation so it’s important to understand what the business needs from the technology. Indeed, the study reveals that picking the right technology and demonstrating early success are the factors identified by most legal departments that help generate positive ROI on technology investments.

Legal departments should also establish and assess goals and success metrics to determine whether their technology investments are delivering the expected benefits and to help shape future business cases. “A small successful pilot with tangible results is a great way to justify larger investments, but it’s still important to highlight the overall business benefits,” advises Rosser.

Even though 96% of respondents acknowledge that ROI influences their technology investments, few legal departments go beyond general time and cost savings to consider other metrics. Looking more closely at all aspects of ROI may provide legal departments with critical insights that can be used to develop and prioritize more impactful technology initiatives.

Legal departments should also consider working with the CIO to identify a technology business partner or engaging an external provider to support implementation which can aid in both ROI and budget prioritization. A technology partner can draw from other successful implementations and help to tier technology requirements, develop a roadmap and sequence the technology in a way that increases implementation success and value.

EY member firms do not practice law where not permitted by local law or regulation. The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.