Check Out This Year's Model: Ford Gets Mileage Out of Fewer Lawyers /
By David Hechler
Corporate Counsel
February 19, 2010
David Leitch didn't know what he was in for when he became general counsel of Ford Motor Company five years ago.
One thing he wasn't expecting was another crisis. He'd dealt with two in his previous jobs. Leitch was chief counsel of the Federal Aviation Administration on the worst day in the history of American flight: Sept. 11, 2001. And he'd been deputy counsel to President George W. Bush when the United States invaded Iraq two years later. The Ford job figured to be an easier ride.
So much for expectations. A year after Leitch became general counsel, Ford's sales collapsed — from 2006 to 2008, the company lost a cumulative $30 billion. One response: It laid off a third of its 300,000 employees worldwide.
Percentage-wise, Leitch's department took an even bigger hit. Through an equal number of voluntary and involuntary departures, Leitch cut his staff by 40 percent, from 200 lawyers to 120 — an extraordinarily large reduction, even in the current economic environment.
Leitch acknowledges that the downsizing was painful. By the end, he said, "I thought we were really cutting into the bone." But his misgivings have dissipated: "As I sit here now, I realize it was necessary." Plus, Leitch said, "people have adapted, and are more efficient and effective than they ever thought they could be."
His department continues to perform at the same level, he said. And it hasn't increased its use of outside lawyers to make up for the loss of in-house attorneys.
We last visited Ford's Dearborn, Mich., headquarters in 2006, when we were about to name its office of general counsel the first winner of our Best Legal Department award. Even then, crisis loomed. The ability of Ford's lawyers to retain their focus in the face of adversity was one of the reasons we chose them.
Later that year, the company plotted a sharp change in course. Chief executive Bill Ford turned over the wheel to Alan Mulally, the company's first CEO from outside the auto industry. (Bill Ford remained chairman.) An engineer by training, Mulally had worked his way up the corporate ladder during 37 years at The Boeing Company.
Even before the leadership change, Ford had begun to sell its noncore businesses, like the Hertz Corporation.
Mulally embraced that strategy. He believed Ford's luxury car brands, for example, were distractions that had created fiefdoms within the company, and in short order he shed Aston Martin, Jaguar, and Land Rover. The sale of Volvo to a Chinese company is expected to be completed early this year.
Three-and-a-half years into the Mulally era, most observers — inside the company and out — seem convinced that Ford has made the right moves. The carmaker appears to be on the verge of a remarkable comeback. In stark contrast to General Motors Company and Chrysler Group LLC, Ford didn't require bailouts from the government, and wasn't forced to slog through bankruptcy. Rather, Ford's restructuring was voluntary and highly creative. The financial team that led the way included in-house lawyers whom executives call "full business partners."
With the money that it raised on its own, Ford was able to upgrade its product line — a move that's paid off handsomely. The company posted a $2.7 billion profit for 2009, its first full-year profit since 2005. And Ford's share price, which was below $2 early last year, is back in the double digits.
We returned to Dearborn this winter to see how Ford and its lawyers managed to stay on track. No one wants to go through a crisis, but that's when the good ones are at their best, and when clients value their services the most. Some of Ford's lawyers have flexed muscles they hadn't used in a while. Leitch, for example, drew on his government experience to help Mulally prepare for congressional hearings in 2008.
Leitch, now 49, added that the past few years have been educational. On the pages that follow, Corporate Counsel lays out some of the lessons he and his staff have learned. There's an additional one you won't see, but it underlies the ones you will, and it was mentioned by several lawyers and executives. A crisis is the wrong time to start making improvements — it's far better to have them in place before the storm hits.
Lesson One: Lawyers Need a Chair at the Big Table
Ford treasurer Neil Schloss got up from his small conference table, walked to the wall unit behind his desk, and picked up a photograph mounted on a poster board. It showed Schloss and assistant treasurer David Brandi standing in front of a group of ten people: his finance team. The picture ran in a cover story last June in Treasury & Risk magazine praising their work. "See," said Schloss, pointing to three men in the photograph, "there are the lawyers."
Schloss didn't grab the picture to brag. He wanted to prove that lawyers are an integral part of his finance team. The three in the photograph — Douglas Cropsey, Lou Ghilardi, and Corey MacGillivray — have been particularly important recently, and not just for filings and prospectuses.
"They go further because they're business partners," said Schloss. He called managing counsel Ghilardi the company's historian, someone who knows every deal that's been done for the past 20 years. Because treasury employees frequently rotate on and off the finance team, Schloss said that Ghilardi and the other lawyers he works with (like corporate secretary Peter Sherry, Jr.) are especially valuable.
Ghilardi agreed that in-house lawyers, who often stay with a company longer than their business clients, add continuity.
"Further, in-house lawyers are more familiar with the client's business than any outside adviser," Ghilardi said. That's why they should "assert themselves, particularly during challenging times, in formulating business strategy and solving business problems" — not just legal ones.
The finance team completed a dizzying number of deals over the past few years, but none was more important than the $23.5 billion loan it nailed in 2006. Or more nerve-racking. The company mortgaged virtually everything it owned, including its famous logo. The deal was a first for the banking market, Schloss said. And it wasn't the kind of transaction that was easy to explain to the chairman — especially when that chairman was named Ford.
Asked about that, David Leitch shook his head as he recalled the conversation: "We had to go to Bill Ford and say, 'You know that blue oval with your name in the middle? We're going to pledge it as security for the biggest home equity loan in history.'"
Yet that early move was key. At the time, investment bankers were reportedly urging all three U.S. automakers to leverage their balance sheets, but only Ford leaped. Without the liquidity it raised, it's hard to see how Ford could have avoided the fate of its Detroit rivals, who were trapped when the markets froze in 2008.
The deals accelerated last year, culminating in a complex debt swap. Through tender and exchange offers, Ford eliminated $10.1 billion of debt using $2.6 billion of cash and 468 million shares of common stock — reducing its annual interest payments by more than $500 million. One obstacle to the restructuring, said Ghilardi, was that the 2006 loan agreement restricted Ford's use of cash from its auto business to reduce certain kinds of debt. The lawyers' solution: use cash from Ford Motor Credit Company LLC (the company's financing subsidiary) to repurchase some of the debt on favorable terms.
The integration of lawyers into the business isn't limited to Schloss' finance team. And they don't sit in a legal silo waiting to be summoned. "We don't think of the lawyers as a bunch of people who get wheeled out for legal issues," said Lewis Booth, Ford's chief financial officer. "We think of them as part of the management team, and they're in all our discussions."
No discussions are more important than the ones presided over by Mulally, where Leitch literally has a seat at the table. The CEO began holding Thursday morning meetings shortly after he arrived in September 2006. They're attended by the heads of all business units and functions, who bring binders full of color-coded slides that detail their workloads. Green slides indicate a task is going well; yellows are marginal, but with plans to fix them. Red means there's a problem with no clear solution. Each executive has only five minutes to update the others at the meeting, and only presents a few slides.
The meetings have "changed the company," Leitch said: "It's not just the meeting — it's that the meeting has filtered its way down into the organization." As at many companies, executives at Ford were reluctant to confess that they sometimes needed help. To Mulally, needing help isn't a sin, but refusing to say so is. According to Don Lough, who manages product litigation, "The worst thing you can be accused of now at Ford is sitting on information that other people should have had."
Having a seat at Mulally's meeting means that Leitch can offer advice before an issue becomes a dispute. And the CEO appreciates that. Mulally called Leitch a "dynamite leader," adding: "This has been a challenging time in the automotive industry. David and his team have been right there on every discussion, every key decision."
The meetings also allow Leitch to solicit help when his department has a problem. What are some of the issues the general counsel has brought to the table? To answer that question, he showed us some slides from December 2008, redacted to omit any privileged or business-sensitive information. Yellows included a patent troll defense case, greenhouse gas litigation, and several international matters, like an illegal strike in Russia. But the global hot spot that month seemed to be Canada. A red slide highlighted a dispute with the Canada Revenue Agency.
It wasn't the company's biggest legal problem, but it was one on which Leitch needed help. It was essentially an argument between U.S. and Canadian tax authorities, Leitch said, about transfer pricing — how much revenue and profit each country should receive from Ford's extensive cross-border transactions with its Canadian affiliate. In this case, Ford had already paid the U.S. Internal Revenue Service according to its allocation of revenue and profit. But Canada believed that it had not been allocated enough revenue and profit by Ford. It reassessed Ford, and required the company to pay 50 percent of the amount plus interest while the dispute raged on.
A multidisciplinary team with representatives from the finance and government affairs departments was appointed to tackle the problem in the follow-up meetings. Ultimately, Leitch said, Ford and the two countries agreed to what he called an "appropriate" solution, and they did so relatively quickly. Most important to a company working furiously to improve its liquidity, Ford did not have to make a second tax payment.
"It's never an easy thing to take into the [executive] group a very large issue that has a red status against it," Leitch acknowledged. "But it's very important that everyone knows the true status, so that we can work together to resolve it."
Lesson Two: Communicate Candidly Up, Down, and Out
When Mulally first began holding his meetings, he noticed something that bothered him. The executives were keeping their remarks short. They were presenting their coded slides. But all the slides were green.
Finally, the CEO spoke up. "Hey, we've lost billions of dollars," he told them. "There must be some red slides out there."
A week or two later, Mark Fields, president of Ford's operations in the Americas, presented a slide about an important product that had been scheduled to launch. There were problems, and it had been delayed. It wasn't clear how or when the mess would be resolved. This was the first red slide. When Fields finished, all eyes turned to Mulally. Slowly the boss began to — applaud. At first, Leitch remembered, no one was quite sure what to make of this. Finally Mulally said, "This is exactly what we need!"
His subordinates understood that the CEO wasn't just talking about candor.
"He was making it safe to bring problems into the open," said Leitch. The general counsel added, "If someone brings in a red, and you humiliate or berate them, the next week everything will be green — even though it's not. And you've just made the process worthless."
Mulally's meetings have inspired Leitch to hold similar ones for his staff. A dozen lawyers representing the legal department's practice groups come with their binders, discuss issues, and share slides. At first Leitch needed the sessions to prepare for Mulally's, but they've opened new dialogues within the department, and brought everyone closer together as a team.
The emphasis on candor means more than sharing problems with colleagues. There's a new feeling at the company that it's OK for people to disagree. John Casesa, a longtime auto industry analyst turned consultant (who doesn't do work for Ford), said Mulally's actions have given employees permission to speak their minds. Casesa has talked to people who told him: "For the first time in my career I can make a dissenting comment without retribution."
This new openness is particularly important to lawyers who work on Ford's communications to the outside world. Financial disclosures, for example, can be especially tricky when a company is in distress, and the market hangs on every word. Business executives have been known to omit information that the lawyers believed was material.
It's during discussions like these that CFO Booth depends on lawyers like Lou Ghilardi and Raphael Richmond to "tell me if they think my judgment is incorrect," he said. Richmond, who plays a leading role in the company's filings, "will sit down with me and take me through the K or the Q and tell me where she wants us to really focus," Booth said.
There's a special danger when the CFO meets with midlevel lawyers. "It is easy for someone in my position to impose myself on a meeting," said Booth. "What it requires is for all of us to sit down in the meeting and have a debate among people who don't feel threatened by the hierarchy. Because if I ever were to use my position to say, 'This is how it's going to be' on an area that has shades of gray, then I'm never going to discover those shades of gray."
In Ford's case, some of the disclosure issues were quite delicate. Executives had obviously considered the possibility that it could face bankruptcy. The auto industry is highly interconnected through shared dealers and suppliers. If GM, Chrysler, or both failed, they could easily pull Ford down with them. But how much did the company need to say about its own bankruptcy risk in its filings? "We didn't want to make it a self-fulfilling prophecy by taking it too far," Leitch said.
In the end, the 2008 10-K didn't talk about Ford going bankrupt. But in eight pages of risk factors, it did talk about the severe pressure under which the company would be placed if a competitor or supplier faced "uncontrolled bankruptcy." The most delicate disclosure, according to Ghilardi, was the section on Ford's liquidity, which ticked off the risks if industry sales were below — or supply costs were above — company forecasts. The conclusion: "We do not believe that these reasonably possible scenarios cause substantial doubt about our ability to continue as a going concern for the next year."
Lesson Three: Sharing the Pain Has an Upside
The importance of candor from the top down was underscored when the law department faced its biggest challenge — forced layoffs. From 2006 into early 2007, the departures were voluntary. Most of the involuntary cuts occurred in 2008, and ended in January 2009. Leitch said that no more are planned.
It hasn't been easy keeping spirits up. "Maintaining morale during that period, and keeping the hearts and minds of those who were left behind, was a challenge," the general counsel acknowledged. The lesson he learned? "Be completely forthright," he said. "Tell employees as much as you can, as soon as you can: "Because at the end of the day, people respect honesty. They know difficult decisions had to be made."
The leaders of the litigation group took that lesson to heart. Given that the group employs the most lawyers, and lost the most, they had a heavy burden. They decided the best approach was to hold short meetings to update colleagues when they had information.
"It was designed to limit the impact of rumors," said John Mellen, who heads the group. There were about a half-dozen meetings in all. He and Don Lough, who heads the product litigation subgroup, gathered the entire litigation staff in a conference room and told them what they knew, what they didn't, and when they expected to know more.
The meetings didn't last long. Some were as short as five minutes, the longest no more than 15. Mellen tried to stress that they were handling the process "as fairly and humanely as possible." And he made sure to emphasize each time before they left: "We will get through this."
The sessions weren't dictated, or even suggested, by Ford's human resources department. Mellen and Lough felt they were important not only for the people who departed, but for those who remained. According to Lough, the people who stayed on needed to see how their former colleagues were treated "because those are their friends." Though the meetings were sometimes awkward, Mellen said many lawyers thanked him for holding them.
Cutting colleagues wasn't easy. Company secretary Peter Sherry, who heads the law department's corporate group and has been with the company for 30 years, said it was "personally painful" to lay off "very qualified" lawyers. The saving grace was that many have since landed good jobs. Still, Douglas Cropsey, one of the lawyers on the finance team, vividly recalled the anxiety.
"At night, it was gut-wrenching to think about the prospect of having to uproot your family. But during the day," he said, "the volume of the work kept you focused."
Told about the 40 percent cut, Jon Bellis called the number "extraordinary." Bellis chairs the law department consulting group at Hildebrandt Baker Robbins, and has been surveying in-house staffs for 25 years, beginning when he worked at Price Waterhouse. His most recent, the 2009 Hildebrandt law department survey, examined cost-cutting measures instituted at large companies from the end of 2007 to the end of 2008. Overall, less than a quarter of companies laid off lawyers, and only 9 percent cut more than a tenth of their staff. (According to the survey, 16 percent cut none, and 48 percent actually increased their legal ranks.)
"Ford is the most extreme reduction I've heard of at any large law department," Bellis said.
Clearly, not everyone believes it's a good idea to cut lawyers during a crisis. It may be the very time you need them the most. Schloss said of his finance team: "In bad times, we need more resources, not less." He added: "I think legal is probably very similar."
In good times, he pointed out, transactions are easy and disclosures are clean: "You could probably deal with less [legal staff]. When things are difficult, you probably need more. We are somewhat countercyclical to the environment." The finance department, he noted, shared equally in the cuts.
Asked about the rationale for laying off lawyers, Mulally didn't address the question directly. Instead he spoke of the necessity of making companywide cuts: "Saying goodbye to talented co-workers and friends is never an easy decision, but we needed to size our business for the real market."
Leitch seemed to have doubts at first about the deep cuts to his department. But he didn't petition the company for a pass. "I thought it was important for the office of general counsel to participate in the shared sacrifice that everyone agreed was necessary to turn the company around," he said. Asking for special treatment could have rendered his department less effective "if people concluded that we weren't team players."
More recently he's discovered an upside. "The reductions gave us confidence about what we could achieve," he observed. "The people in the office learned a lot — I've learned a lot — from feeling that our backs were against the wall. We had to figure out ways to accomplish more with what we had."
The litigation group has been particularly resourceful. It's long had four teams: product litigation, general litigation, regulatory, and in-house discovery. In the past, lawyers were assigned to one. But the reductions have sometimes required them to multitask. A general litigation lawyer may be asked to help out when the discovery team is overloaded, and vice versa. The lawyers are becoming utility players, and more agile.
Making a virtue of necessity? Perhaps. But Katherine Kjolhede saw the big picture. Until last May she managed Ford's employment litigation (which is handled separately from general litigation); now she's the general counsel at Ford Credit. The key to Ford's downsizing, Kjolhede said, was that it was early and consistent. What about the lawyers — should they have been placed in a special category? She didn't buy that claim either. "If every other division is shrinking," she said, "it's hard to justify giving lawyers a pass."
Lesson Four: Go heavy on Process, Add a Pinch of Attitude
Mulally arrived with a plan to unify Ford as one team, and a process to get there. The vision was important, but the really big deal was the process. It's not only inclusive and transparent, it's very much data-driven — the kind of approach you'd expect from a former Boeing engineer. And it resonated with the lawyers.
At Ford, they seem to measure everything. They set performance targets, and measure how they're doing. They project forward, compare backward, check the side mirror to eye the competition. The slides Leitch carries around in his binder are filled with numbers. Each has a column called "metric" in which he states specific goals for the matter at hand.
It is this aspect of the crisis at Ford that Leitch found so different from the others he's weathered.
"The big difference for me from the crises when I was in public service," he said, "is that [the crisis at Ford] involved finance and economics. It was more measurable in terms of the problems and the progress." It's hard to know how you're doing when you're fighting terrorism. It's a lot easier to measure a company's performance, and "there's a comfort in that," he said.
When we visited four years ago, we saw a department that embraced data — especially in its approach to litigation. Litigation chief Mellen is a lawyer with lots of numbers in his head. Having overseen 900 trials to verdict during the past 17 years, he has a good idea of what Ford's cases are worth. And he's learned to make do with a smaller in-house team. But wouldn't those in-house cuts result in higher outside counsel bills, wiping out the supposed savings?
Mellen reported that that hasn't happened. In fact, he said, the company has lowered its litigation spending since 2005 by 27 percent (excluding IP, which is handled by a separate group). Virtually all of its law firms have adjusted their fees to accommodate the company's changed circumstances. Many volunteered to do so without having to be asked, Mellen said. In some instances, to save money, trial lawyers partner with other firms that handle discovery.
What makes this all the more remarkable is that Ford has long had flat fee arrangements with its outside firms that would be the envy of the Fortune 500, were the deals more widely known. About 80 percent of its litigation caseload — which constitutes 70 percent of its outside counsel spending — is paid on a flat fee basis. That hasn't changed much over the past decade. When Ford doesn't pay flat fees, nearly 95 percent of the partners trying its cases work for hourly rates of less than $300.
One change Mellen said he's particularly pleased about is the way the law department now shares information. It's essential for executives to understand the litigation risks and find the risk tolerance they're comfortable with, he said. Leitch's biweekly departmental meetings have brought a new discipline to the entire process. "There was no equivalent of that" in the law department before Mulally started his companywide executive meetings, Mellen said.
Mulally brought something else to Ford that's influenced the law department: attitude. It's not just a determination to succeed and a relentless work ethic. It's an optimism in the face of adversity. The CEO exhorts his colleagues to enjoy the journey, even if they're traveling through a monsoon.
"You hear a lot about tone at the top when it comes to compliance," Leitch said. "But tone at the top also matters for outlook, attitude, and perspective."
Leitch acknowledged that he's found it difficult to emulate this aspect of the boss's approach. "I will never achieve that consistent level of optimism," he said, shrugging. Some days he's frustrated and impatient, and finds it hard to trust the process. "But as a leader," he continued, "you need to set the tone for the team that you lead. Some days I do better than others."
At Ford, and inside its legal team, there's a growing sense that better days are ahead. |
