Much talk has been devoted lately to whether the growth of in-house law departments will take market share from Big Law, or, posed more in the language of economics, whether in-house lawyers are a reasonable substitute for outside counsel.

Confessing that I have not devoted concerted effort to exploring the issue, I suppose my own view is along the lines of “yes and no,” “sometimes, to be sure,” and “it really all depends.” After all, some types of repetitive issues that require intimate knowledge of the business dynamics and political realities internal to a corporation are ideally suited to in-house talent. Other less repetitive, more urgent and/or more massive, issues lend themselves to outside counsel. So, it seems, it shall ever be.

But what about a third type of legal-cum-business issue that is not suited either for the structure and capabilities of in-house departments or outside counsel? What about issues that are (a) large scale; (b) not likely to be repeated in similar form, soon or ever; (c) divorced from corporate politics or internal dynamics but nevertheless organizationally complex; and yet (d) not demanding of exotic or specialized expertise? This type of issue is not something an in-house department could attack efficaciously, because of its scale, its one-of-a-kind nature, and the irrelevance of special insider corporate knowledge, nor does it lend itself to the strengths of outside counsel, since it does not require expertise beyond that possessed by a well-trained junior associate.

What kinds of issues might these be?

The US financial system is actually right in the midst of dealing with one: the requirement that large banks and other “systematically important financial institutions” (“SIFI’s,” to the aficionados of these things) engage in “resolution and recovery planning,” known in the vernacular as preparing “living wills.” The goal of this humongous exercise is straightforward enough: In the wake of the Global Financial Crisis, the US government wants to make sure that large banks who get into financial trouble can be sorted out faster than Lehman to avoid widespread panic that infects the entire financial system. (Thank you, 2010 Dodd-Frank Act.)

But late last summer, the Fed and the FDIC (who jointly oversee this process) sent letters to 11 banks including virtually all the biggies—Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and UBS—telling them that the living wills they had submitted were “not credible” and requiring that the banks submit new and satisfactory plans or face the prospect of selling off units to shrink and simplify their corporate structures. The shortcomings focused on, among other areas, our old friends, derivatives, according to The New York Times’ coverage.

The basic problem is that the banks can’t really tell you very much about the basics of derivative contracts they’ve entered into, such as the counterparties to or the notional value of all their outstanding derivative commitments (to identify just one type of contract at issue here that would have to be unwound), much less the expiration date, assignability, termination or cancellation provisions, etc., etc. This has been unkindly, but perhaps accurately, called “too big to manage.”  Put in language a systems engineer would understand, the banks haven’t been able to construct searchable databases of all the terms of all their material contracts across the globe.

Now, there are reasons for this, including:

• Most of these global institutions are historic amalgams of predecessors, each with its own operating systems and cultures;
• They tend to be run as an assemblage of P&L’s that pay little attention to and cut across country borders and legal entity boundaries;
• All of these contracts—lawyers’ work product—have customarily been created one by one by one, by hand, not designed for reuse and certainly not in the form of structured data.

To understand this better, I refer you to an article just published by The Clearinghouse in their Banking Perspective, “How Smart Resolution Planning Can Help Banks Improve Transparency, Profitability, and Reduce Risk,” by Paul Lippe of Legal OnRamp, Jan Putnis of Slaughter & May, Dan Martin Katz of IIT Chicago-Kent College of Law, and Ian Hurst of IBM.

The article speaks for itself, but one of the highlights is pointing out the imperative for banks to “get resolution planning right” because the alternative is almost certainly intense lobbying for more stringent size and leverage limits, and harsher penalties for non-compliance. This is not an optional exercise, and the Fed’s and FDIC’s universal rejection of the first round of submissions by the banks tells you there is much work to be done.

It’s often observed that regulatory complexity, of which this is an example in spades, is here to stay, and that it should be, ceteris paribus, a blessing for Big Law. Hard to argue with. But here, to return to where we came in, we have a powerful example of a legal-cum-business issue where Big Law may need to upgrade its toolset.

Law firms excel in the small, focused team, or even single-lawyer, mode of artisanal production, whereas challenges like the resolution planning process require systems approaches. Law firms excel at reasoning-based and subjective functions, not structured and objective, systematically quantified analysis.

Here’s where law firms can learn from the technology industry.  If Silicon Valley has taught us anything, I hope we’ve learned that the only sane way to address issues of massive complexity is through systems.  The good news for law firms is that new tools are becoming available (the article describes one such, OnRamp’s implementation of Watson) to address these “mega-scale” issues and even give law firms a chance to dip their oh-so-cautious toes into the water of the future.

Back to the banks:  A major lesson of the GFC is that global banks didn’t understand their true risk profiles as well as they thought they did—certainly not their risk profiles under market stress. (Michael Milken, who knew a thing or two about market stress, joked-with-a-barb that “You always have all the liquidity in the world: Until you need it.”)

Here’s what that means, in roadmap form: A living will is essentially a:

Simulation of the largest possible series of transactions in a bank’s lifetime. This type of analytical exercise is common in electronic systems design or software testing, but unprecedented in law and finance. It is axiomatic across the technology industry that to manage complexity requires standardization, modularization, and simplification.

To do this in the context of resolution planning is to follow this structured flow:

• Capture or grab all existing contracts;
• Check them for completeness and create a folder structure to house them;
• Convert them into searchable HTML;
• Analyze them with pre-defined data points, precise questions that yield yes or no answers;
• Be able to group the contracts by family (such as all the contracts with Counterparty X);
• Incorporate the ability to generate a wide variety of reports;

The good news is that not only will those nosy regulators be willing to leave your bank alone if you can come up with a comprehensive and powerful resolution plan, but you might actually find yourself with a competitive advantage. Imagine knowing all about the entirety of your contracts worldwide. It will be almost impossible for your competitors to believe.

And it will give you a weapon: As Umberto Eco said, “What matters is to know something that others don’t know you know.”