Dr. Silvia Hodges Silverstein is the editor of the recently released Legal Procurement Handbook, a collection of 27 articles written about the business aspects of retaining external counsel. Contributors include procurement specialists, law departments, law firm pricing officers, business development specialists, academics and consultants. CLOs and GCs should invest two hours to read the handbook and understand the state of the art and the multi-party debate on sourcing legal services.
Dr. Hodges Silverstein is also Executive Director of Buying Legal Counsel (www.buyinglegal.com), a not-for-profit organization supporting procurement and operations professionals tasked with sourcing legal services and managing legal services supplier relationships. With more than 300 members, the Council is still in its infancy, but making great strides.
I had the opportunity to discuss the tradecraft of "buying" legal services over lunch with her a few months ago. DuPont's former General Counsel, Tom Sager wrote the forward to the handbook. "The balance that needs to be struck in the procurement of legal services and all that flows from that decision is of critical importance to the representation, reputation and risk profile of the company and how these services are priced and effectively managed." He goes on to say that "the in-house attorney... is uniquely positioned to blend the sourcing discipline into the procurement process to ensure that the company's interests are adequately protected and advanced."
Over nearly 20 years, I have had the opportunity to help more than 75 companies retain law firms in 100 countries. In only a handful of cases were procurement or strategic sourcing involved in the proposal process, fee negotiations, selection and subsequent relationships with external counsel. A data-driven and disciplined approach to retaining external counsel is now with us. Law departments are only now beginning to upgrade the classic relationship-based, hourly-based model with leading-edge practices to select law firms, manage costs and improve performance.
Regrettably and regardless of the size of the company, most General Counsel and their procurement departments are behind the curve when it comes to collaborating with each other on behalf of their employer. Progressive law departments have understood for some time that a strong foundation of business data applied to legal services, market intelligence regarding the legal industry, and structured processes to define requirements clearly improve the quality and cost-effectiveness of retaining counsel. Law firms have this figured out as well. New job titles such as Strategic Pricing Leader, Head of New Business, Global Director of Client Value, and Chief Practice Officer underscore the seriousness of firms and the high stakes in the business of law.
Geraint Evans, Head of New Business at London-based CMS Cameron McKenna, makes the distinction between strategic and tactical buyers of legal services. His handbook article describes procurement's "tactical buyers" as those who tend to focus on supplier terms and conditions, discounts, payment terms, and master service agreements—an approach which can be divisive and counter-productive with both law firms and law departments. On the other hand, "strategic buyers" focus on the business objectives of the company and on its law department. They understand the legal category and legal market intimately. They are informed about the latest developments on alternative business structures, legal process out-sourcing, and alternative fee arrangements.
In her handbook article, Dr. Hodges Silverstein reports the 2014 findings of her research on the state of legal procurement. While procurement is not making the final decision on which firms get retained, their role and their functions have evolved so that
- procurement's role is that of buyer, influencer and gatekeeper – especially for mid-sized and larger companies
- almost 20 % of legal procurement professionals have a legal background, while most of the others have business degrees
- procurement is moving into higher-value legal services
- procurement gathers market data and conducts benchmarking studies
- procurement is more adept at fee negotiations and defining billing guidelines
US-based consultant Charles Green and Basel-based Bill Young highlight six areas of conflict as procurement moves from managing the buying process to being more strategic when retaining external counsel. Their handbook article "Procurement Needs A New Metric" considers price vs value assessments, commoditization of the final selection, reliance of the law department on implicit contracts with law firms after they are selected, pressure to be more involved in the early stages of scoping legal work and business objectives, superficial calculations of cost-savings, and the difficulty in managing legal spending for strategic and complex activity. Green and Young conclude by proposing a new performance indicator called "the spend control index" – something that is better aligned with corporate and business objectives.
Busy law departments should understand how capable or not their procurement departments are. Can they support the legal category beyond managing the process of a call for proposals and securing a discount on the hourly rate? How well do they know the current service providers? How up to date are they on alternative fee arrangements and alternative business models? Every General Counsel should be calling for a more robust legal services procurement capability within the year.
The Pricing Enigma
Danny Ertel is a partner with Boston-based Vantage Partners. His handbook article, "What's (Much) Better than a Discount?" argues that having a disciplined counsel selection process in place makes requests for discounts more credible. Otherwise, the trusted advisor relationship can be eroded. Ultimately, discounted hourly fees are a losing proposition. Rather than hourly-based pricing, Ertel advocates portfolio pricing – something that depends on collaborative discussion with the law firm and clarity about the type and amount of work that is needed.
Law firms are careful to limit the amount of financial risk that they take on when they move away from hourly-based pricing. A good start is to have solid and detailed historical data on hand. Procurement should be able to provide this. Just as important, shared planning assumptions about scope of work, expertise and staffing patterns, and cost-management will improve the value equation in the business relationship with preferred firms. The quest for efficiency and effectiveness will end successfully when expectations are explicit and shared. A discounted hourly rate is one step forward and two steps back. The best legal procurement professionals understand the trade-offs and embrace strategic sourcing as their preferred approach.
Over the last three years, a few Canadian law firms and quite a few US law firms have been hiring pricing and legal project professionals. Steven Manton is the Strategic Pricing Leader with Debevoise & Plimpton llp in New York City. His handbook article (Procurement and Pricing : The Benefits of Partnering) describes how this new breed of law firm pricing specialist simplifies the negotiations and supports ongoing business relationships with significant corporate and institutional clients. Manton observes that too many law firms tend to keep their business professionals in the back office when negotiating service and fee agreements with their best clients. I can think of five meetings with law firms when pricing negotiations, especially those that included AFAs, were much more efficient and produced better results all around because the law firms' financial experts were at the table.
Most law departments are still poorly informed about the details of alternative fee arrangements and legal project management. They are not adept at fee negotiations, in part because they believe that such talk will sour professional relationships and partly because all they know is discounted hourly billing. Law firm pricing professionals and corporate procurement specialists should present advanced-level seminars to law departments and law firm partners on strategic sourcing of legal services.
Jason Winmill is the Managing Partner of Boston-based Argopoint, a management consultancy focused on law departments. His handbook analysis suggests that there is a significant diversity in the approaches, skills, focus, scope, impact and results in the field of buying legal services. He outlines problems with the quality of RFPs, an overreliance on technology to support informed decision-making when sourcing legal services, insufficient support by rank and file members of the law department for disciplined sourcing, and a fragmented marketplace both nationally and internationally. Overall, the list of challenges is daunting but his article is a good primer for legal sourcing professionals wanting to make a strategic rather than tactical contribution.
Dr. Hodges Silverstein's handbook and her organization reflect the rapidly changing typography in the relationship between law firms and their best clients. General Counsel should quickly adopt a more cost-effective and strategic approach when managing this aspect of their business.
Originally published in CCCA Magazine, Summer 2015
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