Don't kill the lawyers - they could be your competitive advantage

Never mind the lawyer jokes: in business, using them at various stages of the contract cycle can make all the difference.

There's an old joke that goes something like this: How many lawyers does it take to screw in a light bulb? Answer: None. Lawyers only screw us. Rightly or wrongly, the prevailing attitude in the corporate world seems to be that when it comes to deal-making or legal compliance, lawyers are a necessary evil.

Not so fast, says Michael Friedman, an associate at law firm McMillan Binch Mendelsohn in Toronto. Last year, he and two colleagues started an Integrative Legal Strategy course at the Rotman School of Management that aims to recast the legal system as a source of competitive advantage rather than a commercial anchor. The idea came while Friedman was completing a combined MBA and law degree and realized students were being taught very specific elements of the law rather than how it can impact the bottom line. “Law has always been portrayed as something that's inaccessible to anyone but a lawyer,” says Friedman. “We've been told that it's very technical, so we just pass it off to someone else.” But for smart managers, Friedman stresses, “the law becomes a very powerful tool, because it's simply an input into your business.” The trick is to involve lawyers at various stages of the contracting cycle–before, during and even after–rather than simply relying on them to rubber-stamp deals or ensure compliance.

Take mergers and acquisitions. A lawyer can add pre-deal value by suggesting reorganizations or figuring out ways business units can be spun off or sold, thus ensuring the appropriate party bears the brunt of the transaction risks. Friedman points to private-equity giants, such as New York-based Kohlberg Kravis Roberts & Co., that have leveraged the law to gauge the potential of a company to meet certain strategic benchmarks before investing in it. “Rather than viewing a contract simply as documenting a deal for the future, smart businesses use it as a source of information,” Friedman says. “Lawyers can set up incentives so that payments only get made if certain benchmarks are met.”

Jit Mistry, president and CEO of Alterra Asset Management, a private asset-management firm based in Oakville, Ont., says he was able to cut transaction costs by involving lawyers in the structuring of a new U.S.-based private real estate fund recently launched by his firm. “In terms of product design, documentation, filing requirements and right down to how the offering gets marketed,” he says, “we recognized that we needed a [legal] team that was there early at the planning stages.”

It's a similar story for Stewart Lyons, executive vice-president of Canadian Satellite Radio Holdings, the owner of Canada's recently launched XM Canada satellite radio service. Together with company chairman and CEO John Bitove, Lyons spent the past five years working with lawyers to help understand the regulatory complexities needed to obtain a licence. The added challenge of forming legal relationships with the publicly traded company's U.S. partner, and with carmakers, retailers and hardware manufacturers, all added up to a huge legal challenge. “When you start a business from scratch, you have to create all those relationships out of thin air,” says Lyons. “And that's where the law is key, because if you make a mistake, you pay for it and your business suffers.”

Fair enough, but all of this raises an obvious question: Doesn't involving lawyers every step of the way ultimately mean more money in their pockets and less in yours? Not necessarily, says Friedman, who's the first to point out that a lot of the strategic work people rely on lawyers to do, “they can do themselves.” Smart companies, such as global conglomerate General Electric, figured this out in the late 1990s after skyrocketing litigation costs forced its executives to establish an alternative form of dispute resolution that ultimately saved them a bundle.

Cultivating this type of competitive knowledge organically takes time, Friedman says, but it can also provide a business with a leg up on its competitors. “Take a company like Magna that has very few labour disruptions,” he says of the auto parts manufacturer based in Aurora, Ont. “They've spent a great deal of time thinking about the incentives they want to offer to their employees, and that's all operationalized in the contracts they've drawn up with their labour lawyers.” Examples like this, Friedman notes, can help a company reduce “dead weight” transaction costs borne by competitors.

The message here, no doubt, is that lawyers can be your friends rather than your adversaries. But will this mean the end of humour at their expense? Unlikely, says Lyons. “There are still some ancient elements to law that will keep those jokes going. Things like the billable hour, which says you make more money the slower you work.”

Action plan: Legal briefs

Rotman instructor Michael Friedman says your business can use the law to competitive advantage in the following ways.

1. Identify risks. The reallocation and disbursal of risks during the deal-making process can often produce sustainable cost and revenue advantages.

2. Create more value. By treating lawyers as “transaction cost engineers,” businesses can actually add value to a merger or acquisition by cutting down on last-minute expenses.

3. Understand your rights. Lawyers can help businesses understand their patent, intellectual-property and licensing rights in order to prevent imitation from competitors.

4. Learn from past legal relationships. By applying business discipline to the consumption of legal services, costs can be lowered and the quality of advice can be improved.