Yet rather than a binary outcome, the global economy actually faces multiple scenarios which could heavily impact global trade, many of which are the result of means meant to actually bypass the debt ceiling and avoid default.

Thus, it’s important to map out the potential impact of the different options so that companies and organizations can both understand the implications of different strategies and prepare for the surprisingly varied outcomes, many of which would still massively impact global trade.

The trillion-dollar coin

One of the most talked about but seemingly comical scenarios involves the minting of a trillion-dollar coin. This possibility utilizes the U.S. Treasury’s relatively uninhibited ability to mint money to generate the funds necessary to continue government spending without increasing the debt.

The issue is that this amounts to little more than turning on the money printer, a measure which has historically caused intense inflation, an economic challenge only starting to come under control. While this would keep the United States from default, inflation would not be the only cost, as confidence in the U.S. government and the dollar would likely take a significant hit. Global financial markets could see a bout of instability due to this decrease in confidence, which may make financing operations more difficult.

This workaround is nothing new, as the temptation for government to print its way out of a debt crisis has been a longstanding fantasy with often dire results. One can think of this as the Ford Pinto scenario, a classically dangerous vehicle rolled out despite far superior options being available.

Premium Treasury bonds

If the trillion-dollar coin scenario is the Ford Pinto, then the strategy of issuing a series of premium Treasury bonds is the Ferrari Daytona: more powerful, more refined, and slightly more likely to get you to your destination uninjured.

This scenario relies on a legal quirk, where the debt ceiling applies only to the face value of outstanding government debt. Here, what the government would do is reissue already outstanding bonds with an additional payment premium, basically promising a higher interest rate in exchange for a burst of upfront cash. This both avoids default by injecting additional revenues into the government’s cash flow and avoids the inflation-fueling effect that minting a trillion dollars would have.

In addition, the savviness of the solution may bolster confidence in the U.S. government’s ability to manage itself, as well as lessen the potential impact of future debt ceiling crises if found to be a workable solution. For global trade, the primary challenge would be the possible mixed market reaction, but the turmoil here would be light.

The primary threat would be the exact opposite of the trillion-dollar coin. Rather than sparking inflation, the premium bonds could result in deflationary pressure. For global trade, deflation in the U.S. could be a greater threat than inflation, sapping consumer spending and creating a myriad of other issues which are relatively exotic and potentially dangerous. Some economic concerns already exist that suggest that the U.S. could go into a deflationary cycle soon, so adding further deflationary pressure could add fuel to this concern.

The sticking point is that this scenario is unlikely given the remaining time before the U.S. hits the default point. Bond programs like this take time to set up and every day closer to default-day the United States approaches, the less likely premium Treasury bonds can be implemented. Depending on how the current conflict resolves, premium bonds may be a more tempting solution in the future.

14^th Amendment Constitutional crisis

The 14^th Amendment of the constitution states that: “The validity of the public debt of the United States… shall not be questioned.”

This gives an opening for president to declare the debt limit itself as unconstitutional and the issue null and void. But this does not mean that the potential impacts of a debt ceiling crisis would be swept away. Rather, they would hang over the heads of the global economy like a sword of Damocles as an inevitable court battle rages though the U.S. legal system.

An unfavorable Supreme Court verdict could plunge the U.S. into default with little warning, throwing the global economy into turmoil and actually making things worse than if the U.S. defaulted on the original date. Simply the heightened uncertainty preceding a verdict could make currency markets unstable and roil other financial markets until the constitutional crisis is resolved. Any instability in such markets will only make global trade more difficult and riskier.

In the long term, if this move were to be upheld, it could potentially strengthen international confidence in the U.S.’s ability to meet its debt obligations and bolster its stability by removing the possibility of another debt ceiling conflict. This would thereby bolster U.S. trade negotiating positions and reinforce its standing as a central hub of global trade.

Non-technical default

As addressed previously, another option available to the Treasury to avoid default in the technical sense is to redirect its remaining cashflow towards paying back debt holders. Think of it like having a pitcher and two glasses: there may not be enough water to fill both glasses, but instead of evenly distributing the liquid, you could instead focus on filling one glass to satisfaction. Doing so with bonds would keep the U.S. from technically defaulting and deter the worst of the consequences.

The issue is that, with more of the cash flow going to bonds, there will be even less to go towards government spending such as social security, pay for government employees/military, and economic programs. The likely result is a deep domestic recession which could spread globally. Yet for global trade, this would resemble a more traditional economic crunch, one already well-explored. Some rearranging of global trade away from the United States and a loss of trade prestige for the dollar would be probable, but not quite to the scale as a full default would have.

Full default

The fallout of a full default is simultaneously well-explored and completely alien, with few available historical examples to guide expectations. What is most likely is global economic distress and financial market chaos as the most risk-free asset in the global market suddenly fails. The shift away from the United States both as an economic hub and the head of the world financial order would be a likely and swift outcome, with a large scale-rearrangement of global trade.

Indeed, the global ramifications would be deep and contagious, likely pulling the rest of the world down with the United States into recession.

A full default is the worst-case scenario, one where winners are defined by those who lose the least. This remains an unlikely outcome, in the same way that a nuclear war is unlikely due to its promise of mutual destruction. In the same way, however, its possibility cannot be ignored.

Negotiated Settlement

The traditional way that the debt ceiling crises has been resolved in the past remains the most likely. Congress and the president will find a negotiated settlement to raise the debt ceiling in exchange for some level of concessions.

For global trade, the only likely result is slightly higher interest rates and some minor movement in the financial world, escalating as negotiations approach the deadline. Fears will fade and the mainline expectations for global trade will reassert themselves as if this never happened in the first place… until it happens all over again.

Among the other respondents, however, the feeling was not necessarily distaste for generative AI, although some of that did exist. Instead, many are still simply unsure exactly what generative AI is or what it can do. Yet, considering the pace at which law firms have adopted technology previously, this is an understandable feeling given that the public release of OpenAI’s ChatGPT occurred only in November 2022.

Overall, the report found uncertainty across the board among law firm respondents: 25% said they did not know whether generative AI should be applied to legal work, and 21% did not know whether it should be applied to non-legal work. These feelings even extended to other forms of AI outside of generative AI/ChatGPT, as 24% did not know whether their firm uses AI outside of the generative context.

Jason Adaska, Director of the Innovation Lab at Holland & Hart, has a team of data scientists working on potential generative AI applications for the firm. Adaska says that because generative AI has appeared on the scene so quickly, there is “an increasing bifurcation in the conversations that I have” between people interested in using it and those unaware of its existence.

“Some people, they’ve seen it in the media, they’re kind of up to date with it,” he adds. “They may not come from a technology perspective, but at least they know about the conversation. Even in March I had some conversations with people who say, ‘I didn’t catch that. What is ChatGPT, what is this word you’re throwing at me?’”

Discovering how generative AI & ChatGPT can help

Similarly, Arsen Shirokov, National Director, Information Technology at McMillan, has already begun having conversations with internal stakeholders and external vendors about ways generative AI can be applied in his firm. A sticking point he’s run into, however, is that unlike previous legal technologies that have had a distinct use case, generative AI’s applications are so expansive that they can be hard to nail down.

“Almost everywhere else in technology, you say what this product is: this is an IG solution, this is a business workflow solution, this is an architecture solution, right? …With generative AI, I think we haven’t figured that out yet,” Shirokov says. “We don’t necessarily know which generative AI solutions are for research, for example. Take ChatGPT: It can also draft things for you, but for review, you cannot feed the bunch of documents to ChatGPT yet and just say, review this.”

Until those questions are answered, many lawyers also remain unsure of how their firms will handle generative AI on a wider scale. Our report found that 36% of respondents said they did not know whether their law firm had risk concerns around generative AI usage. Additionally, 19% did not know whether their firm had issued warnings against unauthorized generative AI use; and 22% did not know whether their firm had banned unauthorized generative AI use outright.

“How are we going to get people comfortable not just with the technology, but with the fact that they are interacting with a machine, and yet it doesn’t feel like you’re interacting with a machine?”

Even those respondents who reported their firm had underlying risk concerns over these advanced technologies counted a lack of technological maturity as one of those barriers. “A lack of understanding of the underlying risks,” wrote one respondent when asked why their firm had concerns around generative AI.

“Lack of insight/ability to control algorithms, data sets, and assumptions/biases of generated results. Lack of disclosure of disclaimers, boundaries, and assumptions when results return. Lack of ability to assess confidence in generated results,” wrote another.

As a result, for those law firms actively considering embracing generative AI — the report found 40% of firms were at least considering its use — encouraging adoption may be as much of a knowledge and informational issue as a technological issue. To that end, Jessica Lipson, Partner and Co-Chair of the Technology, Data & IP Department at Morrison Cohen, said her firm has been treating communication as a “high strategic issue” in potentially adopting generative AI technologies. “How are we going to get people comfortable not just with the technology, but with the fact that they are interacting with a machine, and yet it doesn’t feel like you’re interacting with a machine?” Lipson asks.

Part of the answer may take a cue from the 1989 film Field of Dreams: “If you build it, they will come.”

Holland & Hart’s Adaska says he’s gained interest in his team’s generative AI efforts by simply letting attorneys play around with the tool themselves. “I think that’s the story of the last few months in this,” Adaska adds. “A number of people who maybe would have either not paid attention or have been skeptical are being won over by actually trying things they thought weren’t possible and being pleasantly surprised.”

I sat down with Andrea Harris, Group Chief Counsel at WPP, the multinational communication, advertising & technology company, to understand what advice she would give to her peers as they determine how best to maximize support for their organization’s ESG strategy.

“ESG is complex, and responsibility for a company’s sustainability and climate change agenda often sits across many functions, which makes this an opportunity for GCs,” Harris says. “While there are many stakeholders already involved — and even though Legal is taking on an ever-increasing workload — my experience is GCs and their teams can successfully navigate this and create impact at scale in their organizations.”

Harris is also a participant in Lawyer for Net Zero’s Leaders Programme and like the other GCs in the program, gains peer-to-peer insight and support to influence their companies’ sustainability initiatives.

Understand the businesses’ approach to sustainability

Companies are seeing their employees increasingly keen to be part of its sustainability agenda. This enthusiasm is to be applauded, but it needs focus to help deliver effective and large-scale impact.

For Harris, a crucial step that GCs and their teams can undertake is to really understand the business’ sustainability aims and strategy, how those link with the wider corporate strategy, and then focus on linking this with the legal team’s day-to-day work. GCs need to think about the impact of climate change across the whole value chain, from the suppliers to clients, Harris says, adding that GCs need to “think about how different business functions are impacted and how Legal is currently supporting these areas.”

Build cross-functional relationships

Another successful tactic used by Harris and that she suggests to her peers is building effective internal cross-functional partnerships. Because GCs are usually part of the executive leadership team and their teams are embedded within all reaches and levels of the company’s structure, they are in a unique position to do this.

Sustainability and ESG teams often have less resources and in the early days of their creation, could have fewer established relationships. This is an opportunity for Legal to partner with the Sustainability Team. GCs and their teams can help them push their ESG agenda out into the organization and support the ESG team with their ambitions. “With its connections Legal can play a key role in being a champion for its sustainability colleagues. You can be their eyes and ears, heart and soul out in the business,” she explains.

By fostering connections and partnerships within the business and facilitating shared learnings, Harris says she believes that legal teams can also limit ESG activities being siloed within the business. To support the silo-breaking, she urges making connections.

“The more GCs and their teams can network and share learnings between different parts of the business, the less chance there is of everyone having their own well-intentioned but small projects in silo and the greater the scale and impact they can create,” Harris says.

Support board and senior management

Many corporate boards now understand that sustainability is not simply a nice-to-have component but is actually a business-critical element. Indeed, Harris notes that WPP is very alive to this agenda. “The sustainability agenda is an issue the board has to think about, in the same we think about how our figures are doing, or our people,” she says, adding that the company’s CEO and executive management are driving the agenda and ensuring the right caliber of people are in place to achieve the organization’s goals.

In turn, Harris has been supporting the CEO and senior management by ensuring the correct governance structures are in place and that sustainability and climate change are standing agenda items at the corporate board level.

By keeping corporate directors up-to-date and putting in effective accountability and committee reporting structures, GCs can ensure ESG is embedded within the company’s thinking and focus.

Collaborate with peers

Finally, Harris advises GCs to join like-minded peers to stay fresh on current ESG trends and to find ways to maximize effectiveness in the corporate legal function’s advocacy for the enterprise ESG strategy.

For example, Lawyers for Net Zero’s program, which supports Harris and other global GCs in organizations such as Rolls Royce, Specsavers, National Grid, and Centrica in creating an impact on their company’s sustainability goals, is one such way to stay abreast of ESG developments.

“GCs and their teams are busy, and sustainability can get pushed slightly to the side as other priorities take over,” she says. “The Leadership Programme keeps you on track of what you were trying to deliver and helps you best support your sustainability colleagues.”

Another key benefit of gathering with GC colleagues across different industries who are facing similar challenges is knowledge-sharing. “Learning from my peers can be incredibly powerful as you not only see that it can be done but how it’s been done,” Harris states.

ESG will only increase in importance in the coming years, of course. And as Harris points out, there will be many opportunities for GCs to help to increase the effectiveness of their companies’ ESG strategies. Indeed, momentum begets momentum.

Shifting from linear to circular economies

Circular economic principles differ from the more standard linear economic process of take, make & dispose, and instead focus on adding value for customers through the entire product lifespan. Instead of centering strictly on reducing or abating the generation of carbon or other greenhouse gases, a circular economy reimagines waste as a new resource. Linear economies focus very little on the reuse or repurposing of products, whereas circular economies are centered on product reuse — rather than disposal.

A 2021 Presidential Executive Order on federal sustainability initiatives established a goal for federal agencies to minimize waste, advance pollution prevention, support markets for recycled products, and promote a transition to a circular economy. Specific benchmarks for this order note landfill diversion of at least 50% of non-hazardous solid wastes by 2025 and 75% by 2030.

Technology is nearly universal in government service delivery, and managers can relate to the inherent challenges in retiring and replacing old technology. The Victoria (Australia) State Government developed guidelines and an Application Lifecycle Rating matrix to help government officials identify which technology and programs are candidates for retirement and when to begin the transition process. Older software programs may pose integration issues, have limited vendor support or warranty provisions, and may exacerbate hiring challenges as legacy programs may not be a match for employee skills in the marketplace. Legacy systems also may pose cybersecurity threats or be poorly suited to be adapted to the changing needs of some government agencies or organizations.

Government leaders understand the importance of investing in tools and systems that allow for future growth, and which are modular in nature. Modular systems allow you to add on or expand in the future as your organization grows or its needs shift. Even before the global pandemic, for example, the IT Director for the City of Las Vegas noted that the organization struggled to keep pace with the demand for more connections and hardware. Similarly, the Sacramento Public Library found that while it had in the past simply upgraded with its previous technology vendor, a new bidding process was exploring relationships with new vendors and sourcing products that better suited the library’s current and future needs.

E-waste from technology obsolescence

Many technological devices simply aren’t built for longevity. The average laptop has a high likelihood of breaking within 3-4 years, and software upgrades make it increasingly difficult to utilize older models of smartphones. We exist in a technological mirage in which we buy new, but we don’t have to see the climatological impact of the upgrade-and-replace life cycle. It may be good to know, however, that 85% to 95% of a smartphone’s carbon footprint comes from the manufacturing process — in particular, the mining of rare earth elements for these devices. Mining of these elements is a dirty business, being highly toxic and damaging to local ecosystems. Lithium — the element in virtually every device battery — is often referred to as gray gold in reference to the unregulated labor practices, kidnapping, human trafficking, and violent conflict involved in the mining of this element.

Once a device is replaced, e-waste must be managed. E-waste generation globally has increased by 21% in the past decade, and it is estimated that just 12% of smartphone upgrades involve older devices being sold or traded-in for a new one. The United Nations has identified e-waste as one of the fastest growing waste streams, estimating that only 17.4% of e-waste globally is formally collected and recycled. Harmful elements — as many as 69 separate elements from the periodic table — can be found in electrical and electronic devices, particularly mercury, cadmium, and lead.

Why are we cycling through devices more quickly? Trends in edge-to-edge glass on phone and tablet screens mean that devices are increasingly breakable. Other causes include: intentional design elements such as batteries being glued in place; the use of proprietary screws in device cases to prevent opening; more sophisticated techniques such as slowing down older devices to spur replacement; and using federal agencies like the Department of Homeland Security to block independent repair shops from accessing replacement parts. Device manufacturers have gone to great lengths to ensure that individuals are more likely to replace rather than repair their devices.

Circular economic principles in practice

Due to their scale and leverage, government agencies have a unique opportunity to push for better environmental outcomes in their technology procurement including the ability to repair and increase device longevity and compatibility.

Some ways government agencies can make a difference by:

• • • • exploring bundled services that include devices, software, wi-fi, and a guarantee of a minimum battery life, as well as allow for older hardware to be used, including refurbished devices;
      • considering product lifespan in procurement decisions and, whenever possible, aim to purchase products that can accommodate in-house repairs;
      • prioritizing software systems that are modular in design and can be expanded upon in the future; and
      • engaging in competitive bidding processes to continuously seek out vendors that follow best environmental practices in procuring hardware and software.

Procurement decisions involving systems (software) and devices (hardware) that are made by government agencies are an important part of shifting away from a disposable culture to one that values waste as a resource. Extending the lifespan of both software and hardware and ensuring that when devices are retired that they are recycled responsibly further reduces the need for new raw materials, reduces e-waste generation, and opens up economic opportunity. Research estimates that $4.5 trillion in additional economic growth could be generated by 2030 through the advancement of circular economic principles.

In a recent interview, Tasha Grinnell, head legal and sustainability officer at The Container Store, underscored the importance of these issues for the company’s own ESG journey. Grinnell, who joined the company in early 2022 with a multitude of in-house legal experience across a number of industries, took responsibility for the packaging retailer’s ESG strategy later than year.

Three key drivers contributed to the decision to place ESG under The Container Store’s corporate legal function, Grinnell says. The legal team already was providing regulatory compliance for financial data, advising on product liability and safety, and had become central to ensuring the company’s ESG compliance to internal standards for new stores and the stores’ suppliers.

Key governance moves

The ESG program at The Container Store is still in its early days, Grinnell explains, with the strategy officially starting in 2021 with its initial ESG commitments reported in its first sustainability report in 2022. During that year, the company conducted a materiality assessment, which identified and prioritized areas of risk and opportunities across ESG topics important to the business.

One of Grinnell’s top priorities when assuming responsibility for the enterprise ESG strategy was to ensure the governance of the program was set up for success. At The Container Store, the ESG steering committee is the approving body of the company’s strategy set-up and execution. All of the voices of internal and external stakeholders — employees, investors, suppliers, and others — are represented to ensure full stakeholder feedback is considered on every initiative. “Our ESG leadership council is integral in The Container Store’s governance structure and is responsible for strategy execution,” Grinnell says. “Our leadership council consists of subject matter stakeholders from all areas of the business, including our leadership team, our associates, our suppliers, key business partnerships, our investors, customers, nongovernmental organizations, and our SG [social and governance] evaluators.”

The next priority areas for Grinnell that are currently underway, is memorializing comprehensive policies and programs that outline the environmental and social responsibilities for the company. For example, one of the recently updated key policies and procedures involves calculations of the baseline greenhouse gas (GHG) emissions for Scope 1 and 2 of the company’s stores, utilizing the Greenhouse Gas Protocol to calculate emissions. The policy execution also includes the company’s efforts to offset power usage of its stores, as well as its distribution and support centers, which derive 100% renewable energy from wind.

Coping with big challenges

No matter where companies are in their ESG journey, managing big challenges with a small team is almost universal. The Container Store’s ESG team is another example of the corporate adage that “1 equals 3” — the idea that one great employee is three-times as productive as a single good employee. Grinnell made it clear that the positive trajectory would not be possible without the everyday contributions of Ivet Taneva, the company’s Senior Director of ESG, and Ann Cunningham, a Senior Paralegal working as the internal ESG Project Manager. Both report directly to Grinnell.

Data volume and lack of automation slow progress — One of the biggest challenges for Grinnell and her 1½-person ESG team is the volume of data and lack of automation. Grinnell and Taneva now are in search of an enterprise solution that can capture all of the company’s ESG metrics. “Currently, we must work with several tools to streamline our key performance indicators — our aspiration is to move to digital when it comes to ESG,” she adds.

The team is using automation for efficiency in visualization and modeling around emissions and waste reduction reporting. To make sure the tool continues to meet the needs of the ESG strategy at The Container Store, a member of Grinnell’s team sits on the customer board of the company’s software partner to ensure the product fits its needs and external standards.

Employee education key to earn buy-in — Another challenge that The Container Store is prioritizing is employee education from the top of the organization down to local management of stores. “One of biggest hurdles is making sure those who have responsibility to report ESG information at the local level understand the purpose and value of the information that we are requesting, so that we’re receiving material information back from the business units in a timely manner,” Grinnell explains.

A key mechanism to strengthen the commitment and messaging to employees is the chief merchandising officer’s participation on the sustainability committee. The corporate merchandising division oversees a separate sustainability committee that the ESG team reinstated. The sustainability committee ensures that a good portion of The Container Store’s stock falls into the sustainable category. Having the chief merchandising officer on this committee is a critical tie-in to the corporate ESG strategy and helps ensure that products are sustainably sourced and that employees know about and understand the value and importance of sustainability.

Looking ahead, The Container Store is committed to meeting and exceeding benchmarks and standards that have been set by U.S. regulators, once they are finalized. Grinnell is confident in the team’s ability to execute, largely because of the intentional and strategic nature in which the ESG strategy and function was founded.

“The Container Store recognizes the importance of our impact on people, the planet, and the communities in which we operate, and we believe that it’s imperative to the success of our business to continue learning, proving, and advancing our vision in that area,” she says. “One way we’ve done that is by placing the ESG strategy into the legal department so that we can really implement and execute a strong, legally sound, and thoughtful strategy.”

The need to manage ever-changing corporate tax policies has created uncertainties for many tax department leaders, who fear they may not be able to fully anticipate all of the possible audit risk and exposure that their companies may face.

Tax jurisdictions around the globe are continually revising and upgrading the ways in which tax data can be collected and requiring tax departments to provide even greater transparency into their business’s operations. In the United States, for example, the Internal Revenue Service will receive $80 billion over the next 10 years, as a part of the Inflation Reduction Act of 2022, with more than half of that money being dedicated to tax enforcement, such as examinations, collections, criminal investigations, legal & litigation support, and digital asset monitoring.

Worldwide, the Organisation for Economic Co-operation and Development (OECD) rules around BEPS 2.0 (Base Erosion and Profit-shifting) included the move to a global minimum tax has created even more concerns, requiring tax departments to button-up how they function.

As tax department leaders seek to better manage how they’ll approach department operations, especially around compliance work, it may be necessary to make a review and assessment of what the tax team currently has at its disposal. Key questions in this assessment should include: How does the department gather data? How many people it takes to get specific tasks done, specifically compliance work? What are the current technologies the department uses, as well as others it can access from other parts of the business? And what are the other ways the tax department serves the overall company? As an advisor, or by providing data analytics to guide business decisions?

Changing the tradition of working in-house

Historically, corporate tax departments have primarily kept all or most of their work in-house, using an operational model that had as much work done within the department as possible. According to a 2019 Deloitte survey, more than 80% of respondents were “operating some type of centralized global tax delivery model” meaning most of their work was being done “in-house”.

As times changed and the volume and complexities of tax regulations grew apace, resource-challenged tax departments were moved to look for ways to improve the efficiency of the way they worked. The same Deloitte report noted that about 30% of respondents said they moved some work to a third-party vendor. Today the percentage of tax work that is being done by a third party is significantly higher, especially for tax compliance work. And while many departments benefited by having some or all of their compliance work done outside of the organization, there were concerns about the quality of the work being done and the potential risk to the business of having work done off-premises.

Risks and concerns related to outsourcing varies, of course, depending on where the work is being done. If its on-shore outsourcing (work that is being done outside of the organization by a third party in the same country) or off-shoring outsourcing (work being done out of country by a third party), many of the same risks and concerns are often cited by tax departments. These concerns include:

• • • • the quality of work;
      • the knowledge and skills levels of the outsourced workers;
      • loss of control over the quality of work or the processes used; and
      • change-over or loss of experience at the third-party firm. (For example, if a need arises to review past work for a current tax prep or audit, the tax department may not be able to access the people that originally did the tax prep.)

Despite the risks and concerns with outsourcing, a multitude of benefits outweighs them, including that outsourcing allows for:

• • • • tax department employees from tedious compliance tasks;
      • departments with limited staff can get compliance work done; and
      • department can do more strategic tax work including tax planning.

This is further underscored by a recent KPMG survey of more than 300 chief tax officers at large public and private U.S. companies that showed that more than 80% plan to use outsourcing or other managed services models in the coming three years. The survey also included the use of co-sourcing, which — although not a new concept — many departments are finding in most cases a better fit for how they work.

In a co-sourcing arrangement, tax departments can choose to have a third-party work together with the in-house team on specific projects. This allows the department to be involved every step of the way as the work is being done, alleviating concerns about potential errors, and creating more transparency into the third party’s work. A secondary benefit is that co-sourcing allows the internal tax team to work on different kinds of projects, which can help reduce burnout that comes from doing repetitive work.

Corporate tax department operational models must continue to evolve to accommodate continuously expanding global tax regulations. Many tax departments have long worked in a reactive way, with some leaders admitting that it’s a challenge to get all the work done from one tax season to the next. Clearly, this way of working isn’t sustainable, and it is one of the leading reasons for tax professionals burning out and quitting — in some cases, not just their current job but the entire accounting profession as well. In addition, many tax department leaders are being asked to provide more analytics and insights to their parent business, placing them in a business advisory role, according to the Thomson Reuters Institute’s 2022 State of the Corporate Tax Department survey.

In order to do address all these challenges, corporate tax departments will need to have the resources and bandwidth to ensure that their team members are free to step up into these new roles. That means, having an operational model within the department that allows this to happen is paramount.

Tanja Podinic, advisor to corporate legal departments and law firms through her firm Digital Legal Ventures and former Global Director of Innovation Programs at Dentons, says she has seen the same issue from the client side. At one general counsel conference she spoke at in March, she explains, only about one-in-five GCs said law firms approached them for feedback following an unsuccessful panel appointment.

Clearly, feedback is something that law firms require, and corporate legal departments would like to receive better service that could arise from feedback. So where is the disconnect?

Understanding the value

Podinic notes that oftentimes, the onus is on the law firms to initiate feedback mechanisms. But in many cases, before law firms have anything to solicit, legal departments themselves need to think more critically about the value they want their law firms to provide first.

“General Counsel are now expected to be strategic business partners to their organization, they have a key role in helping their organization execute on strategy and meet goals. As a result, GCs would benefit from law firms being their strategic business partners in a similar way.” Podinic says. “In order to place that expectation on law firms however, GCs need to be more open about their business priorities to enable law firms to collaborate and deliver value more effectively. This lack of stakeholder alignment results in missed opportunities for both, law firms and their clients.”

She gave an example of a GC looking to appoint a panel of law firms for their corporate litigation matters. Firms focus on what they think is of value to the client — offering discounted legal fees, use of technology, client secondments, etc.

There is a rarely a conversation to establish what the client would value most, what would result in the greatest impact for the client. The GC may need to deliver internal data privacy and cyber security training, could the law firm offer to do this training as a ‘value add’ in exchange for a slightly lower discount on fees? Alternatively, could a law firm leverage its own legal project management team to assist the GC to roll out an internal operations project more effectively? Such creativity requires transparency from both sides, and this is not the norm.

Feedback is another powerful tool that is often not used for fear of criticism. When engaging in feedback, it’s important to pinpoint exactly what expertise the law firm is expected to provide in a matter — both from the law firm perspective and the corporate perspective. “The thing is most law firms don’t really promote themselves in this particular way because it’s not what they are used to and they fear that the result may be negative,” Podinic adds.

“When you receive feedback and the feedback isn’t necessarily positive, you are almost forced to actually change something that you’re doing in order to be able to be successful in the future, or to actually not lose a client.”

Indeed, Podinic explains that while law firms are often asked to be proactive in asking for feedback from their clients, there’s nothing stopping legal departments or general counsel from providing feedback themselves and speaking more clearly about what they desire out of an engagement.

“More beneficial for the GC would be: We complete a really big matter, let’s do a quick assessment of how the law firm did. Whether or not they met our requirements, how were they to deal with? Were they pleasant or did they respond in a timely fashion? These are really basic metrics that can influence whether or not that particular firm is reappointed.”

The benefits of an open conversation

The mutual benefit to both parties is knowing exactly where the relationship stands. If the client experience was a positive one, then both sides will want that to continue. On the other hand, negative feedback from a client to law firm can also provide a necessary impetus for change, Podinic says.

“A GC is unlikely to remove a firm from their panel based on negative feedback, but it could strongly encourage the client relationship partner to improve the service to the client to ensure the relationship continues.”

“I think this may be one of the reasons why law firms are slow to change, there’s no formal feedback loop.”

A formal feedback loop doesn’t necessarily mean a data-heavy feedback loop, although that can certainly be part of the ultimate plan. Podinic notes, however, that especially for law firms first initiating feedback with a particular client, it’s near impossible to develop key performance indicators (KPIs) because the firm doesn’t understand that value the client wants them to bring. As a result, she cautions: “Let’s start small and then get to the specific metrics and the detailed data later.”

And the other key suggestion that Podinic had for beginning a feedback conversation: Be brave.

“Law firms, particularly partners have a hesitancy to ask difficult questions of GCs, and understandably so, they’ve likely fostered this relationship for many years,” she says. “But I think the reality is that open and honest conversations will lead to more satisfied clients, who will retain their existing law firm relationships.”

Reticent law firms may just find their clients are more receptive to having the conversation than they might have believed.

“I don’t think many GCs would make decisions to remove firms from their panel as a result of negative feedback,’” Podinic adds. “It’s less about disruption, and more about stakeholder alignment. Law firms need to get comfortable with the idea that being a client’s strategic business partner may mean they need to change how (and in some cases what) they deliver to their clients. The key is to support clients to achieve their priorities and goals as a business. At the same point in time, GCs also need to be open to this shift. Creativity and transparency, along with meaningful collaboration could unlock value for both, clients, and law firms.”

It remains to be seen whether the Treasury’s document will have any impact on de-risking, but experts expressed well-founded skepticism following its release last week.

De-risking has been a major issue in the United States since shortly after the 9/11 terrorist attacks and the enactment of the USA PATRIOT Act of 2001. At the time, embassies, money services businesses, and charities were the first sectors to be seen as too risky, or as posing too high a compliance cost, to banks. In recent years, however, de-risking has grown in the correspondent banking space and has left people in some regions and even nation-states unable to receive funds transfers — such as desperately needed remittances from family members — from the United States.

Treasury’s 54-page De-risking Strategy, which was mandated by Congress in the Anti-Money Laundering Act of 2020, probes the phenomenon of de-risking and outlines its causes, victims, and recommended policy options to combat it. Treasury said the administration of President Joe Biden “places a high priority on addressing de-risking, as it does not only hurt certain communities but can pose a national security risk by driving financial activity outside of regulated channels.”

De-risking has been a major issue in the United States since shortly after the 9/11 terrorist attacks and the enactment of the USA PATRIOT Act of 2001.

Wally Adeyemo, Deputy Treasury Secretary, stated that “broad access to well-regulated financial services is in the interest of the United States. [And] this strategy represents the next step in Treasury’s longstanding commitment to combatting de-risking and highlights the importance of financial institutions assessing and managing risk.”

Treasury said it engaged in “extensive consultation” with the public and private sectors — including banks, money service businesses (MSBs) of various sizes, diaspora communities that depend on these businesses for remittances, and other small businesses and humanitarian organizations to better understand the impacts of de-risking. Unsurprisingly, Treasury found that “profitability is the primary factor in financial institutions’ de-risking decisions” and that the costs of conducting adequate due diligence and doing other anti-money laundering or counter-terrorist financing (AML/CFT) work is a key element of the decision-making process.

Other factors fueling de-risking “include reputational risk, risk appetite, a lack of clarity regarding regulatory expectations, and regulatory burdens, including compliance with sanctions regimes,” the strategy paper states, also noting that banks interviewed by Treasury said: “They tend to avoid certain customers if they determine that a given jurisdiction or class of customer could expose them to heightened regulatory or law enforcement action absent effective risk management.”

The strategy document also states that the customers facing de-risking challenges “most acutely” include: MSBs that offer money-transmitting services, non-profit organizations (NPOs) operating in high-risk jurisdictions, and foreign financial institutions with low correspondent-banking transaction volumes, particularly those operating in financial environments characterized by high AML/CFT risks.

Strategy recommendations

The Treasury’s strategy document makes several counter-de-risking recommendations for the federal government, including:

• • • Promoting consistent supervisory expectations, including through training to federal examiners, that consider the effects of de-risking.
    • Analyzing account termination notices and notice periods that banks give to NPO and MSB customers and identify ways to support longer notice periods when possible.
    • Considering regulations that require financial institutions to have reasonably designed and risk-based AML/CFT programs supervised on a risk basis, possibly taking into consideration the effects on financial inclusion.
    • Considering clarifying and revising AML/CFT regulations and guidance for MSBs in the Bank Secrecy Act(BSA).
    • Bolstering international engagement to strengthen the AML/CFT regimes of foreign jurisdictions.
    • Expanding cross-border cooperation and considering creative solutions involving international counterparts, such as regional consolidation projects.
    • Supporting efforts by international financial institutions to address de-risking through related initiatives and technical assistance.
    • Continuing to assess the opportunities, risks, and challenges of innovative and emerging technologies for AML/CFT compliance solutions.
    • Building on Treasury’s work to modernize the U.S. sanctions regime and its recognition of the need to calibrate sanctions precisely, in order to mitigate unintended economic, political, and humanitarian consequences.
    • Reducing burdensome requirements for processing humanitarian assistance transactions.
    • Tracking and measuring aggregate changes in banks’ relationships with respondent banks, MSBs, and non-profit organizations.
    • Encouraging continuous public and private sector engagement with MSBs, non-profit organizations, banks, and regulators.

No short-term fix

Of course, Treasury’s strategy will not significantly impact the de-risking challenge in the short term. In the past, Treasury has hosted public-private sector dialogues and has encouraged financial institutions to rethink their de-risking practices, but nothing notable has been achieved.

Further, the U.S. government has no authority to force financial institutions to serve particular customers or even customer types, so the most viable government solutions to de-risking lie in making financial institutions comfortable accepting customers that may pose high financial-crime risks, while lowering the compliance costs associated with banking such customers.

Some of the recommendations above, particularly the promotion of consistent supervisory expectations, could potentially have a modest impact, but not in the short term, according to veteran AML compliance officers at two U.S. financial institutions.

The South Florida-based Financial & International Business Association (FIBA), a trade group, has long called on the U.S. government to address de-risking. “To me, the importance is that Treasury has issued a comprehensive document outlining the true reasons why de-risking occurred and [why it] continues to impact key areas such as correspondent banking,” explained David Schwartz, FIBA’s president and chief executive. “The strategies, however, are not new and do not provide a solution to this complex problem.”

Treasury plans to continue its dialogue with the private sector. “In the coming weeks and months, Treasury will be reaching out to partners in the public and private sector to coordinate the best path forward to implement the recommendations in the strategy,” the agency stated.

And these activities don’t include the time they need to spend on-boarding new clients, which can involve everything from gathering and analyzing years of financial statements to accommodating log-ins for each clients’ myriad banking and accounting systems.

Not surprisingly, this service model in the tax & accounting industry isn’t well suited for assessing cost-efficiency, especially since many accounting firms are moving to fixed monthly pricing. Accountants and bookkeepers are far too busy jumping among multiple tasks to record how much time they spend on specific activities, making it more difficult for firms to accurately track their costs. In addition, this way of working also leads to more rapid burnout among these professionals.

To solve this context-switching malaise, tax & accounting firms should consider switching to a service model that’s commonly used in many other industries: specialization. In many high-tech firms, for example, developers are no longer jacks-of-all-trades; instead, they’re assigned to specific tasks. Some code all day, some build prototypes, some are quality assurance specialists, and others focus solely on deployment. And coordinating all these activities is a project manager, who is responsible for implementing workflows and making sure that all tasks are completed accurately and on time.

And it’s not just software development companies that are using this model. Many larger tax & accounting firms have adopted this approach, and it’s one that smaller firms may want to consider as well.

Moving from generalists to specialists

For example, I work with a small accounting firm with a six-member CAS team, each of whom had to deal with the daily grind of doing everything for five assigned retail clients. Frustrations from this level of context-switching led to burnout and drove dissatisfaction that caused attrition among team members.

To solve this problem, the partners reorganized the CAS team into specialized groups. Each team now handles a specific set of accounting tasks for all 30 clients, including updating their assigned areas of each client’s general ledger. Here is how they assigned specific tasks to the CAS team:

• • • two members were assigned to an accounts receivable team and performed all A/R-related tasks;
    • two members handled A/P only;
    • one member handled clients’ payroll, working with each firm’s HR manager; and
    • the most senior experienced member served as controller and account manager, including the task of on-boarding new clients.

Since the firm implemented this specialization model more than a year ago, productivity and efficiency have significantly increased. Also, context-switching fatigue is no longer an issue, and specialists complete more tasks in less time. Job satisfaction has risen, and attrition has ceased. And with the firm expecting to add more than a dozen new clients every year, they’re actively looking to add additional headcount.

Implementing a specialization model in your firm

Depending on the size of your firm and the types of everyday activities conducted most often for clients you might want to consider other ways of moving to a specialized service model. For example, one person may be solely responsible for reconciling sales and booking revenue properly. Another might process invoices and bills, while another pays them. A junior member might start by doing nothing but analyze bank feeds, matching outgoing payments and incoming deposits to make sure everything balances. And a tech-savvy member might become the in-house on-boarding expert.

This last point on technical ability is important because a critical element of any successful transition from generalists to specialists is the quality of the accounting tools they have at their disposal. Right now, for example, your CAS team may be using their clients’ A/R, A/P, and payroll systems, which may not be the same ones your firm has chosen for in-house use. This places a significant burden on your accountants and bookkeepers, since they have to learn new systems every time a new client is brought on board. However, many accounting firms are choosing their own cloud-based accounting tools and requiring all new clients to migrate their information and records to these in-house systems.

As an added benefit, many of these accounting tools employ automation to streamline as many routine tasks as possible. For example, A/R-focused software can automatically download, analyze, enter, and reconcile sales transactions from most leading e-commerce and digital payment systems used by retailers and restaurants.

On the A/P side, automated accounts payable platforms can instantly capture and record each client’s paper and digital invoices and bills, categorize expenditures, approve funding requests and schedule one-time or recurring payments from one or more bank accounts.

And most online payroll platforms allow employees to enter their own regular, overtime, holiday, and vacation hours and then make automated payments to their bank accounts, accurately adjusted for taxes, healthcare insurance premiums, retirement contributions, and other pre-tax and after-tax deductions. These systems also track information needed for year-end tax reporting.

The best accounting automation tools can turbo-charge productivity among your accountants and bookkeepers, resulting in reduced stress and greater job satisfaction.

Making a successful transition

Whichever reorganization strategy your firm may choose, the key to implementing it successfully is convincing your generalists that becoming specialists is in their best interests.

There may be resistance at first, because even though they’re overworked, many of them take pride in owning the entire client relationship. Or, they may have concerns about having to double their client load.

Look for ways to emphasize the benefits of transitioning to a new specialist model. Consider bringing all of your accounting tools in-house, selecting systems that make it easier and faster for your team members to complete their assigned tasks for a larger number of clients. And sweeten the pot by letting them choose their preferred specialty area and the clients with whom they want to work.

Over time, offer your team members the opportunity to switch specialties and clients so they can deepen their expertise. If your firm is on a path toward adding headcount, offer a career track for those who want to become controllers.

Most of all, both during and after the transition, make sure you provide the support, resources, and incentives that your team members will need to flourish in their new roles.

Replenishment is a metric the Thomson Reuters Institute tracks to essentially account for timekeepers leaving a firm compared to timekeepers joining it. A replenishment ratio of 1.0 indicates a 1:1 ratio of timekeepers going in compared to those going out. Anything below a 1.0 indicates a shrinking timekeeper group.

It should be noted from the outset that both non-equity and equity partner tiers are in a long-term pattern of contraction. In fact, each tier only shows a single quarter of replenishment above 1.0 since 2010, with the tiers frequently trading places in terms of which is being replenished more robustly.

But since early 2020, a clear and often widening gap between the tiers can be observed. Replenishment of non-equity partners has hovered around 0.8. In contrast, replenishment of equity partners has varied relatively widely, dipping as low as 0.54 before recovering to 0.75 at the end of 2022. At that same time, however, non-equity partner replenishment jumped to 0.94, the first time that non-equity partner replenishment reached that high since 2016.

An increasing population of non-equity partners could be both a benefit and a detriment to law firms with two-tier partnership structures.

On the downside, non-equity partners naturally tend to bear little responsibility for business development and new client generation. Their contribution to the firm’s bottom line, therefore, depends on their productivity and individual profitability. One might hope that a lack of business development commitments would mean that non-equity partners have more time to devote to billable work. However, long-term patterns indicate that non-equity partners consistently underperform their equity partner counterparts in terms of hours worked per lawyer per month.

Going back to 2005, as far back as our data exists, there have been rare examples of non-equity partners approaching parity with equity partners in terms of productivity. However, the typical gap between the average equity partner and the average non-equity partner is between 7 and 11 hours per lawyer per month. Given the typical billing rates of these lawyers, that can translate into a sizeable gap in revenue.

On a more positive note, non-equity partners usually contribute to firm profitability in other ways. First, as the nomenclature would suggest, non-equity partners’ salaries do not vary based on firm equity, so they represent a fixed cost for the firm. In heady times, this can be a particular benefit as the payout to these partners will not vary as greatly as it would for equity partners.

In that same vein, the existence of a non-equity partnership structure creates an opportunity for law firms to offer a place of relative prestige — within the ranks of partnership — to lawyers who otherwise might not meet the criteria for full partnership. Many of these lawyers might be high performing in their own right and bring value to the firm in other ways, and they also might be at a greater risk to leave the firm if not for an upward option to non-equity partner status.

On a related point, the existence of a non-equity partnership tier can allow law firms to create upward mobility options for lawyers within the firm, while still closely protecting the denominator in the ever-important profits-per-equity-partner metric.

The upside of fixed-cost, non-equity partners, could potentially count against law firms during times of economic contraction, however. As these partners are a fixed cost, their relative share of firm expenses could grow as a percentage of revenue should the firm’s share of legal demand decrease, creating negative pressure on firm profitability.

Non-equity partners may also create profitability pressure based on the realization percentage of their rates. As partners, non-equity partners typically command among the highest rates at the firm; perhaps not as high as equity partners, but certainly above those of associates. Looking at the realization of non-equity partner rates against their equity partner peers, it is quickly evident that non-equity partners are once again trailing the pack.

There is a persistent two-percentage point gap between the collected realization of an equity partner’s standard rate compared to a non-equity partner. This will likely have a detrimental effect on the non-equity partner’s relative profitability.

Some of this differential may be due to compensation structures and who has ultimate billing authority. It would be natural to suspect that, if an equity partner is the billing partner on the majority of matters and that equity partner’s performance is based in part on realization, the equity partner would be more likely to pass write downs or discounts on to other timekeepers, including non-equity partners. This could explain why non-equity partners also lag in terms of billing realization itself. If non-equity partners absorb a larger share of write-downs and discounts, this will predictably drive their billing realization downward, and their collected realization will decline along with it.

There is no clear answer as to whether a two-tier partnership structure is beneficial to a law firm. Indeed, there are myriad factors at play, well beyond those examined here.

Perhaps the clearest answer to whether a two-tier partnership structure is right for a law firm, is also a clichéd yet popular lawyer answer of It depends. If non-equity partner costs structures and profit margins, coupled with the potential to retain additional experienced talent, can work in a firm’s favor to outweigh the potential downside of a large, high-priced fixed-cost staffing tier, then it certainly can be beneficial.

Given the complexity of the question, however, this is far from assured.

This article was written in cooperation with Bruce MacEwen and Janet Stanton of Adam Smith, Esq.