Thinking ahead - what next after covid?

Legal service providers have progressed from discussing the impact of force majeure and frustration of contract, through to the practical implications of contract, property and employment law, the effect on supply arrangements, and so much more.

As with any crisis, though, there is a significant risk of focusing on immediate problems rather than planning for the ultimate solution. There is also a temptation to look at issues from a legal perspective alone, rather than through the broader context of the implications for the organisation, its survival and future prosperity.

Most in-house teams will now be heavily engaged in managing issues of the present. That work is, of course, important. But we must also think about what comes next –

• how does your organisation survive?
• what will the future look like? and
• what should the in-house team be doing to prepare for it?

Who should you be talking to?

As a starting point, though, you need to understand exactly what work is ongoing in and for your organisation – and where else you might look for guidance. In Leadership in a Crisis [insert link] the three stages of crisis management were considered – keeping the organisation afloat, being clear on where it was going and how, and talking about it. In the aviation world, these stages are seen as ‘Aviate, Navigate, Communicate.’

Some months and more than one lockdown later, most organisations have been through some part of all these stages, and will have put a great deal of work into them. Understanding who you should be talking to about them is really important.

• Core relationships. You must work closely with the senior team, with strategy and operational colleagues, supply chain and marketing teams, and key advisers. You must be in the loop for information and updates about the organisation’s financial and operational health, its performance and trends, and the analysis work being done by the organisation to identify trends, risks, and opportunities. Make it someone’s job in the team to liaise with each of these contacts, to record and report progress, to translate issues into the legal workplan and to communicate concerns.
• Strategy. Specifically, the legal team should be part of the strategy work which will inevitably be in train to identify strengths, weaknesses, opportunities and threats to your organisation. You should also be alert to strategic analyses of the factors impacting the business including changes in the economy, market pressures and competitive changes, financial impact and of course changes in regulation.
• Risk. Risk analysis is also key. Your organisation’s risk register will probably look very different to the one in place before the crisis. There will be new and emerging risks. The probability and severity of risks may well have changed, and you are likely to have many more risks which are assessed as high and very high in both probability and severity. Do you know what they are? Do they align to your own legal risk analysis? Are your team’s efforts focused and prioritised against them?
• Understanding the numbers. You must understand the financial situation of the business. That does not, of course, mean that you need to take on the role of the finance team, but you do need to understand the threats and implications which may arise. Does the organisation have enough cash and borrowing facilities to pull through, or will you need to be supporting emergency financing arrangements?
• The Board. Finally, you need to know what the Board knows. As an absolute minimum, the General Counsel or senior-most lawyer in the team needs to see Board papers and internal financial reporting, and to go through the implications with senior financial, strategy and operational colleagues on a regular basis. The senior legal team needs direct access to the Board, and to ensure that the legal message is heard.

How does your organisation survive?

You will, of course, be looking at the range of data, information, reporting and detail impacting your organisation. You may like to ensure that you are focusing on some specifics:

• Banking and credit arrangements. Are you familiar with your organisation’s banking arrangements, borrowings, bank covenants and the implications of breach? What are your banking covenants, when are they tested, and what are the likely results? Your finance team will, of course, be responsible for the numbers, but do you understand what the covenants are, and what happens if there are problems? Many financial arrangements are interlinked and breaches of bank covenants may well trigger repayment obligations in other borrowing arrangements, leasing and loan agreements. Are you and your banking lawyers up to speed with them. and does your Board know what would happen?
• Financial stability and survival. Will your organisation come through the crisis? There have been changes in the UK insolvency regime to provide temporary comfort in certain circumstances, but are they enough in your situation? Is your organisation solvent? As we approach the next accounting period, will it be able to confirm that it is a going concern, or will your accounts be qualified or subject to an accounting note about its status? How will that affect your ability to trade, to obtain credit from suppliers and service providers? You may see these as accounting issues, but they are critical from a legal viewpoint and you need to understand where your organisation is in these areas at an early stage. If problems are anticipated, you may wish to engage specialist advice from experienced restructuring lawyers without delay.
• Regulatory impacts. The approach to the crisis from regulators has been mixed. Some have adopted a policy of making allowances for the crisis. Others have brought greater stringency to bear in the light of possible risk to their sectors; still others have themselves suffered, and their operations have been affected. What is the position in relation to the regulators affecting your organisation? Are you familiar with the risk that changes in your operations may bring regulatory consequences?
• Operational implications. Your organisation will have been looking at day-to-day implications such as the impact on suppliers and creditors, staffing and property, but it is important to keep that focus as the pandemic continues. You may well have put in place interim arrangements which have served to date – but will they get you through the next stage? How stable are your suppliers and service providers? Are critical component or product suppliers at risk? All these present legal, as well as operational, issues and should be on your legal risk horizon.

What will the future look like?

Commentators have suggested that greater structural and cultural change has taken place in business and organisations since March 2020 than in the previous two decades. Technological solutions which may have been in place, but little used, have become central. Travel has become, at best, optional. CEOs and Boards with be looking hard at who they need in their organisations, where they should be based, what they should be doing, and whether their asset base is fit for their future operations.

This is where the integration of legal with strategy and risk is key and where lawyers can add real value. Just some of the questions – and the legal implications – are:

• What will your organisation do? It is almost certain that it will do different things to the pre-pandemic norm – but what are they? Do they require a different legal framework; are different regulatory requirements needed? Will new relationships be needed with new counterparties, which need to be formulated, negotiated and documented?
• How will it do it? The digital transformation of recent months has been extreme. Meetings are online. Products are researched, ordered and delivered digitally. Offices are empty. High streets are deserted. City rental prices have halved. How will this affect you – are you prepared for the data protection and data privacy implications? What are the implications around your organisation’s property requirements and commitments? What new skills are needed?
• Who will it need to do it – and where? Many organisations have already begun significant change processes; many more have them in preparation. What, though, are the legal implications? Are employment lawyers needed to provide specialist advice? Do you need to hold a consultation process to begin collective redundancies?
• What assets are needed? The physical assets needed for a pre-Covid business may be very different to those needed for the new business model. Properties may need to be closed or reduced in scale. New technologies may be required. Different people may be required in different places. How will that restructure take place? Will it be necessary to enter arrangements with landlords, service providers or others? Do you need some form of formal restructuring to release or reschedule liabilities such as rent?
• How will it achieve transition – and when? Many organisations are putting transition teams in place to plan, resource, structure and implement the changes required in the organisation. Have you considered putting a lawyer on that team to work with colleagues on spotting, planning for, and managing transition risks?
• What are the key risks? The organisation’s risk register is critical here and of course you should ensure that the legal team is fully engaged with it. Consider also whether there are implications for reporting – if you are a public company, what do you need to announce and when? How has the organisation’s risk profile changed, and how will that be documented in the annual report?

What should the in-house team be doing to prepare for it?

The post-Covid organisation is likely to be substantially different from the one which existed in early 2020. As such, the legal team really needs to address three different but interlinked scenarios:

• Business as usual
• Transformation
• The future organisation

Each needs a different approach – and in an ideal world, possibly a different team. Certainly, your in-house team needs to plan for, resource, monitor and report on each separately. A formal legal strategy should identify the key issues which we have discussed in the sections of this note about survival and what the future looks like, map them against the legal implications and risks, and ensure that they are appropriately resourced. They may well not be the issues with which the legal team is currently equipped to deal, and in the transformation phase may be skills – such as restructuring – which an organisation may need only once in its lifetime.

You will need to plan for operational resilience as well as for strategic change. There is likely to be a complex interaction of sourcing, supply chain, workforce, financing and operational issues, in many cases involving multiple jurisdictions. [See CLL Note Common Interfaces with other department processes]. Disputes will inevitably arise and require resolution. Day-to-day issues may become business critical – for example if a core supplier has financial or operational problems. The Board will need your advice on a regular and continuing basis to ensure that trading arrangements remain legal, compliant and are reported against current regulatory requirements. [See CLL note The Financial Reporting Framework]

Additionally, of course, the overlay of the Brexit situation must also be considered, with the possibility of further uncertainty and new regulatory obligations.

It may well be appropriate to prepare completely new plans for legal resourcing, starting with an analysis of the legal risks anticipated and the legal work needed to deal with them. You will also need to address the way in which you anticipate that work will be dealt with having regard to the volume, frequency and complexity which it entails, and the service requirements of your organisation, for example relating to speed of response and criticality to the operation. [See Further Reading]

Your legal strategy must take into account all of these issues – and critically be prepared in collaboration with the organisation so that it is a business document, not simply a legal one. You will need to ensure that it is a dynamic and living document. It will need to encompass uncertainty and ambiguity, and the possibility for ongoing and rapid change for the future.

As well as delivering different services, and dealing with different legal situations, it may well be that you need a different legal team in-house, and different external legal resources. Your legal resourcing needs to be targeted, focused, agile and cost-effective and you will find yourself under greater pressure than ever to respond, and to prove you are doing so at an affordable cost. You will certainly need to consider whether you need different law firms, alternative legal providers, new technology, north- or off-shore provision, and new legal advice structures.

There will be setbacks and difficulties [See CLL note Resilience and Recovering from Setbacks] but the skills of the in-house lawyer have never been more critical to the operation of your organisation, and in these difficult times, the opportunity exists for the in-house legal team to add real and constructive value and further to integrate itself with the organisation.

SOME FURTHER READING

CLL Resources:

Common interfaces with other department processes

Leadership during a Crisis

Resilience and Recovering from Setbacks 

The Financial Reporting Framework 

Other Resources:

In-House Lawyers’ Toolkit Tapp and Page Law Society Publishing

Liquid Legal Jacob, Schindler, Strathausen (Eds) Springer Publishing.