Why a (new) Legal Operating Model can enhance CSDDD-compliance

The Corporate Sustainability Due Diligence Directive (“the Directive”), which came into effect on July 25, 2024, is one of the major sustainability laws of the EU. Briefly summarized, the Directive strives for businesses to improve their value chains and prevent negative environmental and human rights impacts by requiring them to establish and implement due diligence measures for their own operations, subsidiaries, as well as their direct and indirect value chain partners. If (suspected) breaches have been identified, businesses are expected to implement measures to prevent, mitigate or end them.

The Directive includes a twofold enforcement mechanism, including both administrative and civil elements.  The Directive has given rise to several concerns among businesses. Companies are required to implement due diligence processes across a value chain that frequently includes hundreds, if not thousands, of partners. Consequently, both a different service offering and the ability to properly manage the increase in workload will be required from the legal department of those companies. In this article, we explain how establishing or re-evaluating a Legal Operating Model (“LOM”) could help businesses in meeting the requirements under the Directive. We also identify some opportunities and possible pitfalls during this process. 

Under the Directive, the legal department will (inter alia) be involved in designing processes to identify environmental and human rights impacts in the company’s operations and value chains, implementing remedies and mitigating measures where such impacts have been identified, implementing due diligence processes in the company’s value chains through contracts, tracking effectiveness of the company’s due diligence processes, reporting on the effectiveness and providing strategic advice on this topic to the management board. In the unfortunate event of actual negative impacts caused by the company’s value chain, the legal department may also be involved in complaint procedures or even legal proceedings. Furthermore, it is likely that the legal department will play a role in developing and implementing the climate transition plan required by the Directive.  

To properly manage all these tasks and requirements, the legal department must be able to centralize knowledge and contract management, handle the increase in workload, cooperate well with other departments and businesses, while still allowing for regional diversification in line with the business activities of the company. This concerns the development or adjustment of a LOM. A LOM is, in short, a structured framework or blueprint which outlines how legal departments operate to achieve their objectives efficiently and effectively. These objectives can vary from financial to core to forward-thinking. 

The extent to which a company's current LOM adequately addresses the future legal tasks and requirements under the Directive, must be reviewed on an individual basis for the estimated 4,000 – 5,000 businesses that will fall under the Directive's scope, taking into account the company’s size, industry and global reach. However, it is possible that in many cases businesses' current LOMs are not yet (fully) aligned with the Directive's objectives. This misalignment may stem from the current LOM's insufficient emphasis on the complexity of value chain due diligence, which was not previously required. Consequently, shortcomings may occur in areas like information exchange, knowledge management or (legal) data analysis and processing. Developing and implementing a LOM starts with a baseline assessment, to identify not only what the legal department currently is doing, but also what it should be doing based on the legal risk framework and long-term strategy of the company. The results could then lead to specific recommendations regarding the LOM, such as a change in service offering of the legal department, a policy for outsourcing of work or the use of new technological tools to, for example, analyze large volumes of contracts. Finally, the steps taken should be prioritized based on their impact, costs and necessity. 

One of the key causes of transformation failure is a lack of top-level support within the business. It is therefore critical that board level advocates explicitly support of the GC in moving forward with the development of the department's strategy and operating model improvements. In addition thereto, sufficient budget should be made available for the project. Involving everyone in a way that gives them a feeling of ownership over the transition to a new LOM, further increases the likelihood of success, because it can unite the entire legal department around a common goal.  

Creating or redefining a LOM is also an opportunity to examine management of spendings on legal. This is because the three principles that should be assessed when seeking to reduce costs in the legal department – assessing whether legal is doing the right work, whether the right people are doing the work (at the right price point) and whether the right technology and processes are being used – are often topics that are already included when re-evaluating an entire LOM. Depending on the results of the baseline assessment and the long-term strategy, the company can focus on improving, optimizing or re-imagining (processes of) the legal department to significantly save costs. 

We have seen client examples where examination of the legal department’s service catalog and implementation of self-service templates and contract triage criteria in a new Contract Lifecycle Management (CLM) tool resulted in significant reduction of legal spendings. In conjunction with example an outside counsel management policy supporting alternative fee structures, a new legal spend management tool, and the establishment of a consolidated panel of firms comprised of both traditional law firms and alternative legal service providers, cost reductions in some cases even accumulated to more than fifteen per cent.