When asked about the biggest challenges faced today by legal departments in the hospitality industry, the response from Stephen Barth, founder of HospitalityLawyer.com, could be summarized in one word: compliance. Barth, who has more than two decades worth of experience in hospitality operations, has recently seen an upward momentum of the number of U.S.-based hospitality businesses expanding internationally. As companies continue to broaden their presence beyond the heavily saturated domestic market, “The role of the corporate legal counsel has never been more critical,” Barth notes.
Any U.S. business that has operated in more than one state is familiar with the myriad of legal frameworks across the nation; however, the magnitude of varied regulations is even more complex from an international viewpoint. In order to ensure compliance with foreign regulations, Barth says that these internationally expanding companies are getting savvy about bolstering their legal resources. One major trend among these companies is that they are seeking legal counsel from U.S.-based firms that are highly knowledgeable of the regions to be penetrated. These companies rely heavily on third-party input in order to ensure that all of their franchises are in compliance with local regulations as they get established.
During its ongoing global expansion, a high priority for Darden Restaurants, the first restaurant company ever named to the FORTUNE “100 Best Companies to Work For” list, has been to limit the criteria of suitable franchisees. When Darden recently began to expand beyond the U.S., its legal department decided to only seek franchisees that already have established restaurant support infrastructures and proven management teams in place.
According to Katrina Lindsey, Darden’s senior vice president, Division General Counsel, Employment and Litigation, this precautionary measure is necessary to ensure optimal success. “Franchisors in today’s legal landscape are becoming increasingly accountable for the actions of their franchisees,” says Lindsey. “For that reason, it is important that we deepen our relationship and establish trust with each franchisee. We must also be careful to maintain an appropriate distance, so we aren’t running their individual operations.”
An important consideration throughout Marriott International, Inc.’s continued expansion has been security. The global leading lodging company’s international operations must adhere not only to local regulations and conditions, but also to the high standards Marriott is reputable for providing around the world. Marriott Senior Vice President and Associate General Counsel Jeff Holdaway explains, “It is crucial that Marriott continues to evolve its security and compliance landscape in order to maintain a safe and secure environment for all of our guests and associates, no matter where in the world they may be.”
COST EFFECTIVE ALTERNATIVES
Another significant legal challenge faced by businesses in today’s hospitality landscape according to Barth is that “they need to be more informed on the financial aspects of their businesses than ever before.”
That sentiment rings true for Holdaway who has recently seen an increase in the amount of work that is allocated to the company’s in-house counsel. Because in-house counsel is more intimately involved with the business, Holdaway says that it has a greater understanding of Marriott’s culture and overarching structure. It is therefore more optimally positioned to handle matters that fall across multiple jurisdictions and meet the company’s overall legal objectives.
However, Holdaway also realizes that delegating every matter to in-house counsel wouldn’t be cost effective for the legal department’s limited budget. For some types of matters, there isn’t a great enough need to justify the hiring of specialized in-house counsel. Other times, in-house counsel might have limited experience with a certain type of matter that the company doesn’t frequently face. For these reasons, Holdaway and his colleagues have strategically established a small network of firms that offer different niches of expertise.
“There is a constant evaluation of whether work is more beneficial to keep in-house or have outsourced,” Holdaway explained. “We start by assuming that a matter should be handled in-house, and we then determine whether considerations of capacity and expertise should override the in-house preference.”
When matters do need to be outsourced, Holdaway and his team have a selection model in place to help determine the most effective alternative. This models weighs a firm’s expertise with its rates and fee structure in order to ensure that matters are managed effectively, in terms of both cost and end result.
While Darden’s legal department previously preferred to use a single full-service firm for all of its outsourcing needs, Lindsey and her team now find greater value in forming deeper relationships with different firms that specialize in a wide range of areas.
However, this approach has introduced greater complexity in negotiating fee structures. “We try not to push our billing model on outside counsel because it might not comply with the way each firm compensates its lawyers,” Lindsey explains. “It has become important for our department to find an alternative fee arrangement that ensures that the law firm makes a profit at a fair cost to us.”
At Marriott, Holdaway and his team also continue to evaluate alternatives to the traditional billing rate as the costs associated with outside counsel continue to rise. Just as no one firm is fit to meet all of the company’s needs, Holdaway has found that there isn’t one single billing structure that is appropriate for all contexts.
“Establishing appropriate billing rates and structures for outside counsel has recently become an area of extreme focus,” Holdaway states. “Some matters are suited for fixed-fee rates, while others work well for contingency fees, blended single rates, or traditional hourly arrangements. It’s important to find the right fit for each engagement.”
Consistent with the changing approaches to billing at Darden and Marriott, Barth has seen a growing trend of businesses across the entire hospitality industry moving away from the standard hourly billing rate and further pursuing such alternative fee arrangements. He advises, “I strongly recommend that legal departments leverage technology to help project their bottom lines. Whether engaging in traditional or more modern billing methods, it important to calculate projected costs in order to quantify savings.”
THE PAST, PRSENT, AND FUTURE OF TECHNOLOGY
Naturally, the role of technology in today’s legal operations extends far beyond billing arrangements. According to Barth, the technology investment of the hospitality industry as a whole is at a tipping point. He elaborates, “Technology companies are familiarizing themselves with the needs and pain points of corporate legal departments in order to develop the innovations they need to break down silos and put parameters in place that protect their customers.”
To date, legal software solutions have made a big difference in managing several hundred thousand files within Marriott’s legal department. Holdaway emphasizes the impact e-filing systems have had on the department’s productivity, establishing collaborative review processes between in-house and outside counsels. “Technology is essential in managing what is a very document-intensive profession,” Holdaway states. “We would be incredibly overwhelmed without it.”
Lindsey agrees with Barth that the need to break down silos among Darden’s legal department is imperative. “Many regulatory schemes affect different areas, but litigation touches all aspects of the business,” she explains. “This means that it is essential that our in-house counsel is able to obtain the information it needs to weigh in on certain types of decisions and put together the most suitable project management teams.”
Lindsey and her team rely on the department’s Serengeti legal matter management, e-billing and analytics software to learn more about the business’s operations, including the impact litigation has on its profitability. For example, the solution has opened Lindsey’s eyes to the total cost breakdown of employment litigation claims per employee. In addition to the monetary effect that litigation disputes have on the company, Lindsey was able to measure how these actions take employees away from their routine responsibilities and impact restaurant operations’ overall productivity. “The decrease in employee activity due to these depositions has had a greater impact than the monetary loss,” Lindsey states.
While Darden’s legal department does rely on Serengeti to perform detailed performance analyses, the solution has also provided more visibility into its past, present, and future operations. She elaborates, “We are putting forth an effort to be more transparent in what we do and why. While we do generate rearview snapshots of our efforts, we find more value in our forward-looking forecast because it helps our department predict what we can expect from the changing legal environment.”
Holdaway agrees, adding, “The reports we generate do more than provide a snapshot in time; they push us to see ahead, allowing us to make more strategic decisions.”
As the legal departments at both Darden and Marriott strive to achieve more success with smaller budgets, technology has made huge impacts. “The ability of our legal department to seamlessly communicate and share documents with our outside counsel is the holy grail,” Holdaway says.
“These resources give us a way to wrap our minds around company knowledge, change the way we look at the world, and identify new ways to improve our efficiencies,” Lindsey concludes.