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 second installment…
In last week’s article, we introduced the topic of legal procurement and discussed why legal is the final frontier for procurement professionals. This week we dive deeper into legal procurement and explore the driving forces behind this growing area of expertise.
A legal overview
To really appreciate why legal procurement is such a new and interesting concept, it is important to have an overview of the legal industry which we will briefly outline.
The legal industry has largely operated unchanged in either its business model or approach to clients for well over 100 years. In terms of business structure and ownership, most law firms are based on a traditional partnership model that emphasises medium term returns to Partners and discourages investment into technology and innovation that have a longer-term return.
From a business model perspective, law firms’ entire remuneration, financial structure and metrics are still built around the billable hour, with tiered hourly rates based on the number of years in which a lawyer has been practicing. This model does not incentivise law firms to create efficient processes and it is very difficult for their clients to determine if they are receiving value for their money. This model also allows for certain behaviours to be fostered, such as inaccurate time reporting, poor time management, over-engineering legal documents or advice, scope-creep, and inappropriate resource allocation. In general terms, it can be fair to say that the current legal industry does not provide transparency over costs and rewards inefficient practices.
In search of greater price certainty and cost control, more clients are demanding fixed fees, capped fees or other alternative fee arrangements. In isolation, however, a fixed fee (or similar) is not resolving the issues of certainty or control, partly because law firms are very poor at estimating fees, and also because neither clients nor law firms have developed solutions to control scope.
To further illustrate this point, what most commonly happens after a fixed fee is agreed is that law firms find that matters soon run over costs and time allowances (remember they are based on billable hours), scope starts to change and is not managed or controlled. The law firm soon throws the fixed fee out the window and reverts entirely back to basing bills on hourly rates.
With the rise of pricing directors and pricing specialists in law firms, we will start to see a greater degree of sophistication and accuracy around price estimates and alternative fee arrangements, which will be a welcome relief to the legal industry. The issue around scope control is more complex, and whilst some legal teams and legal procurement professionals have their own approach for trying to manage this, there is a significant need to address this across the industry. Lawcadia is the only legaltech solution that is purpose built to manage scope control and hold law firms accountable for their service and pricing, and we have had great feedback from industry (both procurement professionals and in-house lawyers) to date about the need for such a solution and the improvements that this will bring.
Pressure to change
Every company and government organisation has felt the downward pressure on costs. Procurement have been leading savings initiatives and process improvements across the Asia-Pacific region, and the legal department is not immune to this.
In the past, the legal budget was considered by CEOs and CFOs as a black hole, an unknown, complex area that was impossible to budget for, but a mandatory necessity in a risk averse and compliance focussed environment.
This has changed, and these days in-house legal departments are no longer protected from corporate cost-cutting or the need for transparent processes when it comes to the selection and engagement of suppliers.
“In house counsel are looking to demonstrate their value back to the organisation, and part of that is how they effectively manage and deliver commercially savvy and responsive legal services,” according to a representative of the Association of Corporate Counsel Australia.
As observed in a 2016 report, many legal teams are shifting work in-house as well as “turning to process redesign, legal project management and use of technology to improve in-house legal team productivity”.2
As this highlights, legal departments are now striving to be more cost savvy and sophisticated in their approach to managing the legal category.
Demand is down, yet prices are up
The demand for legal services in Australia has been down year on year since 2012, and is a trend that is unlikely to change. Despite the downward shift of demand, law firms are continuing to raise their hourly rates as they attempt to claw back their profitability. However, the increase in billing rates correlates with a significant decrease in realisation, dropping to 79% against the standard rate – illustrating that clients are not paying the standard rates and that firms are more willing to offer higher discounts to win work.2
Power shifts to the client
Historically law firms held the power in their relationship with corporate clients, however this is now shifting to the buyer, presenting an interesting change of dynamic. On the one hand are the law firms, who are resistant to change, and constrained by their traditional business model; and on the other hand, are the in-house legal teams who know they need to change the way in which they buy and manage external legal services, but are limited in the tools and knowledge they have access to.
Research by the Buying Legal Council, the international trade organisation for professionals tasked with sourcing legal services and managing legal services supplier relationships, highlights the most common buying tactics used by legal teams: reducing the number of legal services suppliers, creating panels of preferred suppliers, and using RFPs and tenders for larger matters.2
Despite these initiatives, however, there is still not sufficient transparency or accountability and many General Counsels are frustrated.
Procurement enters the legal industry
Without a doubt the legal industry in Australasia is prime for disruption. It is also the ideal opportunity for education around procurement principles and practices that can be applied to legal – the introduction of legal procurement. As we see it, legal procurement is focused on legal spend and make the buying of legal services more transparent and inform data-based decision making throughout the procurement life-cycle.
According to leading legal procurement expert Dr. Silvia Hodges Silverstein, “Procurement brings skills, processes, discipline and focus to complement the service-specific knowledge and experience of the internal users, the in-house legal department”.4
Procurement can support and assist their legal counterparts. According to the Buying Legal Council’s 2015 research, the top five reasons companies involve procurement is:
Change is coming to the legal industry and legal procurement will start to have a much greater role to play in its future.
1 Walsh, K. (2015). Cut-throat environment as in house counsel slash legal spend. Australian Financial Review. Retrieved 5 December 2016.
2 Buying Legal Council. (2016). 2016 Legal Procurement Survey.
3 Hodges Silverstein, S. (2016). [Presentation at the APAC Legal Procurement Forum 2016].
4 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.
5 Hodges Silverstein, S. (2015). Research report: The state of legal procurement. In Silverstein, S.H. (Ed), Legal Procurement Handbook (p. 126-132). USA: Buying Legal Council.