Earlier this year South East European firm Karanovic & Nikolic carried out a survey of in-house counsel in its region.
The exercise canvassed over 400 in-house lawyers in Serbia, Croatia, Macedonia, Bosnia & Herzegovina and Montenegro on topics relating to managing legal risk, departmental capacity, budgets, services and executive expectations.
Although the in-house counsel expressed many opinions comparable with their Western European counterparts, there were also aspects which were purely local.
Most respondents were concerned with identifying and keeping track of new legal risks due to changes in regulations and legal practice, followed by efficiency in performing tasks that go beyond existing experience and effective fulfilment of daily tasks in scope and quantity.
This concern is highly logical due to the fact that the majority of the Balkan countries are in the process of harmonising their legislation with EU standards and norms. In this sense, many laws are being updated and redrafted, which makes following new applications and policies extremely challenging.
Croatia, on the other hand, as the newest member of the EU, is now exposed to a whole other variety of risk, in that it is now highly-regulated and supervised in its execution of recently-adopted legislation.
When specifying which main areas of legal risk pose the biggest problem for corporate legal departments, the vast majority replied that general compliance is by far their biggest concern. This, we believe, is largely due to the increased volume and frequency of regulatory changes in the countries polled.
Although general compliance was the biggest concern of 31 per cent of the respondents, 17 per cent of respondents felt that employment, health and safety at work was their largest concern and 16 per cent thought that operational and contractual issues were their primary concern. This was followed by 15 per cent who listed tax issues and 15 per cent who stated data protection.
When choosing to engage external counsel rather than to manage matters in-house, the two leading areas proved to be dispute resolution (40 per cent) and employment (17 per cent). This was followed by tax (11 per cent), M&A (8 per cent), IP (7 per cent) and other (8 per cent).
In large, opinions on legal risk management were similar throughout the region. The tesearch showed that in-house counsel are largely dealing with similar issues throughout the region and differences in company size, industry and markets did not change the overall priorities of the respondents. Also, when opting to engage external counsel for matters rather than to use in-house capacities, the tendency is to do so when the matters at hand are highly complex and there is a significant risk for high financial repercussions.
A particularly interesting indicator of the (mis)management of risk is that 52 per cent of companies in the region do not have an adopted system of regular risk monitoring and analysis. This will be one of the largest challenges that corporate legal departments will face in the future.
For those respondents with integrated risk management procedures, the majority carried out checks several times per year or at least once a year. The areas primarily covered in risk analysis were contractual relationships with suppliers, customers and other entities, internal policies and procedures, regulatory compliance, and employee and tax compliance.
Legal department budget
A high percentage – 58 per cent – of respondents said they did not know what their annual budget was. This illustrates that in this region budgets are still not used as a strategic tool for the prevention of risk or the management of the legal function.
Legal departments are dealing with issues as they arise ad hoc rather than anticipating and planning where their budgets will be spent and how budget planning can aide with the prevention of potential hazards to which the company may be exposed if they have not adopted mechanisms for monitoring and optimising legal risk.
For those who did define budgets, 18 per cent said that their budget was less than €10,000 (£7,900) while 17 per cent said that their budget is between €10,000 and €15,000. This also leads to the conclusion that company size and international presence has a determining role in the budget planning process.
The structure of in-house budgets were not included in the survey and it is unclear what exactly is included in legal department budgets – this is a topic for further exploration.
It was generally unclear to what extent legal department budgets increased or decreased from last year. Respondents primarily answered this question with “I don’t know” (42 per cent), while 31 per cent responded that their budget had decreased and 27 per cent answered that their budget had increased.
However, when asked if budget cutbacks or reductions would influence departmental effectiveness in terms of monitoring and control of legal risk, 39 per cent answered “I don’t know”, 35 per cent answered “no” and 26 per cent said “yes”.
Overall, the regional in-house legal departments do not utilise their budget as a means of risk prevention, but may consider to plan their budget in a manner that would include actions that should be systematically taken in order to aid in the prevention of risk.
In-house counsel were spread across the board on their top priorities for the future development of their department. The improvement of team expertise was a top priority for 24 per cent of the respondents. In contrast, 22 per cent believed that gaining a better understanding of the business aspects of their business will take precedence over all other priorities.
In-house counsel are increasingly expected to participate in the business decisions of their company and to advise executive management in making strategic business decisions. In this regard, one of the largest problems noted by the survey results was a lack of human resources capacity in corporate legal departments.
Over 77 per cent of respondents noted that legal departments are relatively small with between one and five team members and are not expanding, which influences their ability to adequately respond to crisis situations, the ever-growing list of demands from executive management and the increased workload which was noted by 85 per cent of respondents.
In specific areas of services, in-house counsel are finding themselves particularly challenged by employment matters, financial services and investment, data protection and competition matters.
Although the majority of corporate legal departments are satisfied with the overall communication and cooperation of their department with their company leadership, a large percentage felt that certain areas could use improvement.
Even though 54 per cent of respondents felt that the legal team has a large impact on the decision-making process in their company, 34 per cent answered that there was room for improvement in the communication and work process in different areas of their company. Another significant area where legal departments expressed a wish to improve was the human resources capacity of their legal team so that they are better equipped to manage the growing scope of work and increasingly shorter deadlines.
A series of events followed the research process and gave in-house lawyers the opportunity to discuss their concerns and best practices with their peers. The discussions confirmed the results that the top issue facing legal departments in the region is their limited capacity – both in terms of human resources and budgetary constraints.
These constraints significantly limit their ability to systematically and strategically manage legal risk, which impacts many other areas of corporate management. Corporate legal departments are increasingly acting as corporate advisors and are expected to understand the intricacies of the business and to help executives in the decision making process. In this regard, external counsel can be instrumental in assisting with preventative measures and to take the burden off of legal departments and save their time and resources.
Patricia Gannon, managing partner, Karanovic & Nikolic