3 February 2017

Defining the value of legal procurement

Insights

This article was published by PASA – Procurement and Supply Australasia. The link to the original article can be found here.

Lawcadia have produced a 5-week series on buying legal services in Australasia, written specifically for PASA. Each week, we are bringing you the next chapter. Here’s the third instalment…  

Over the past two weeks you have heard from Lawcadia about the relatively new area of legal procurement and the market drivers that have brought about the rise of procurement’s involvement with the buying of legal services. This week, we explore the challenges in defining the value of legal procurement.

How long is a piece of string?

Improving value is an important KPI for procurement, however one of the reasons procurement struggle in the legal category is that it can be very hard to measure the success of procurement strategies. But please don’t let this deter you! This article provides some insights into how to manage this.

Whilst the legal department may not necessarily have KPI’s against improving quality, reducing costs and measuring process improvements, procurement teams certainly do, and therefore they face a unique challenge when working in the legal area, which can be extremely complex and specialist.

In the legal category, “procurement’s skills are sought to manage cost and negotiate price, measure best value, manage the purchasing process efficiently, [and]compare law firms more objectively,”1 states legal procurement expert Dr. Silvia Hodges Silverstein. However, as you can anticipate, as this is still a relatively new area there are many different perspectives on how to approach this.

Lessons learnt – the good, the bad and the ugly

In our discussions with procurement professionals and in-house lawyers from both corporate and government, we discovered that there are many different types of initiatives undertaken in the pursuit of measuring value. There are some that have merit and others have been rich learning opportunities (aka failures).

Starting with those that have failed spectacularly, is the concept of cataloguing legal work. In principle, the idea of being able to catalogue legal services makes sense, however in practice it just does not work in the legal category. One procurement team spent years cataloguing legal bills and were still not being able to meaningfully compare or predict future legal spend. What we have found is that across the spectrum of legal work in any given organisation, there presents low risk, low cost, routine legal work that can, to a certain extent, be categorised, however the remainder of the legal work involves complex, specialist advice which cannot be packaged neatly, priced and compared.

Another strategy that does not work in the legal category is overly focusing on price to evaluate selection. When this happens, law firms can behave in ways that are not ideal. As legal procurement consultant, Jason Winmill observes, law firms have developed “counter-measures to protect and advance their economic self- interests. These responses increase the difficulty (and reduce transparency) for sourcing professionals in this space”.

Some behaviour that have been reported include law firms under-cutting on price in order to win the deal, and then ratcheting up fees and claiming scope-creep. Other firms might allocate juniors to the tasks that a senior associate should be looking at, potentially compromising the advice being given. As one General Counsel said to us, laws firms are like the game “whack-a-mole” – when you squeeze them on price they will always find a way to claw back their profit margin.

Managing supplier relationships with law firms needs to be strategic and focused on minimising these bad behaviours and rewarding and incentivising law firms who act with integrity, provide accurate, transparent pricing and deliver excellent service and good advice.

Understanding the difference between cost and value

Procurement can be invaluable in helping General Counsels get the best value, and cost is only one dimension. Legal procurement and pricing consultant, Steph Hogg, points out that the outcome of the legal work rests on the GC; it is their neck on the line, and for this reason she says that it is imperative legal should have the ultimate say. “Procurement is there to ensure good value for money, but it is not necessary to direct where that money is spent.” It is the in-house lawyer that is best placed to make these decisions as they know what they want and will be the best judge of quality advice.3

Putting a number to “better value for money”

When it comes to putting a number against the savings derived from procurement initiatives, there are a number of approaches that we have observed. These fit under the four key procurement deliverables introduced in our first article – pay less, use less, alternatively source and eliminate.

“Legal procurement negotiations often focus on % discount off hourly rates, however this is a flawed metric unless it results in a net reduction in total legal costs for a matter.”

1. Pay less

In legal, this deliverable focuses on negotiating a reduced fee for the same scope of work. In its simplest form, this involves negotiating a reduction from the initial fee quoted, and these savings can easily be measured. This may also involve a competitive open tender process or a RFP process to the organisation’s law firm panel. Savings can be identified in terms of a reduced fee quote when compared against either the highest or the average of the quotes received.

Legal procurement negotiations often focus on % discount off hourly rates, however this is a flawed metric unless it results in a net reduction in total legal costs for a matter.

2. Use less

When submitting RFPs for legal matters, we emphasise the importance of detailing scope and also asking law firms to provide an outline of anticipated out-of-scope work. Once in-house legal has a thorough understanding of what scope is included in quotes, there is an opportunity to reduce the scope, which in turn reduces costs. For example, where five witness statements are indicated by a law firm as being required for a litigation matter, it may be that the same outcome can be achieved with three witness statements, therefore reducing the scope and the matter costs.

3. Alternatively source

Procurement may be able to assist their legal colleagues in identifying different legal services providers with a lower cost. For example, out-sourcing some aspects of a matter to a quality legal process out-source (LPO) provider can result is significant savings. Again, these savings can be measured by comparing the cost that would be incurred if a law firm undertook the work against the cost incurred by having the LPO provider undertake that work. Discovery during litigations and some corporate due diligence are two examples of areas where this approach has achieved significant savings for clients.

4. Eliminate

For some matters it can be appropriate to pursue a strategy that eliminates known costs. For example, if a company can accurately determine legal costs for a litigation matter in advance they may decide to settle or get the matter successfully dismissed pre-trial, which could save them the anticipated or known costs.

Eliminating also involves developing proactive systems and programs to reduce the potential need for legal service in the future. Compliance training, risk evaluation and process improvements would fall in this area – all factors which are difficult to measure yet can save millions on future legal spend.

Using the above metrics, organisations can calculate the overall savings that they are achieving by implementing legal procurement processes. For example, GSK saved $23 million USD through negotiations and improved service just in their ancillary litigation services.4

Another example is Aon’s legal department, based in their Chicago office, which during 2015 spent 30 percent less on legal matters when they incorporated legal procurement practices and processes.5

$ are not the only metric

We recognise that measuring value by cost savings is not the only metric, and as such we have dedicated on entire article on metrics and measurements which we will explore in more detail.

 

Works cited

1 Hodges Silverstein, S. (2012). You better know their names and understand their metrics: Corporate procurement influences the law firm selection. Strategies: The Journal of Legal Marketing, V14. Retrieved 5 December 2016.

2 Winmill, J. (2015). Successful legal sourcing. In Silverstein, S.H. (Ed), Legal Procurement Handbook (p. 187-192). USA: Buying Legal Council.

3 Jodi Bartle. (2016). Procurement and Legal – A Perfect Storm. GC Magazine, Summer 2016. Retrieved 7 December 2016.

4 Gardner, H.K., & Hodges Silverstein, S. “GlaxoSmithKline: Sourcing Complex Professional Services.” Harvard Business School Case 414-003, September 2013. (Revised February 2016.)

5 Bushey, C. (March 2016). How lawyers are like office supplies. Crain’s Chicago Business. Retrieved 23 November 2016.

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