Procurement romances the law department, writes Richard Stock
Multi-nationals such as banks, insurance companies, pharma, the full spectrum of technology companies, as well as manufacturers with global supply chains and distribution networks have complex legal requirements. The stakeholders affected by strategic sourcing for legal services can be many and varied within the company. A successful sourcing program goes beyond managing a process efficiently to save on legal costs. To secure stakeholder sponsorship, it must actively engage primary and secondary stakeholders at key intervals.
Who are the stakeholders?
The primary stakeholder for a strategic sourcing initiative should be the chief legal officer or general counsel. As a company executive, the chief legal officer can mobilize the support of key board members, the chief executive officer, the chief financial officer as well as other corporate executives. There are too many instances of very elegant, and potentially effective arrangements with law firms that are eviscerated by carve-outs and exceptions. This outcome can be avoided with strong stewardship of the program by procurement and legal. The chief legal officer’s role is to identify the range of legal stakeholders across the company, secure their support, and communicate the developments and results of the sourcing process.
Procurement faces one of two possible dynamics in its efforts to secure sponsorship. The first is a reluctant law department that is less than enthusiastic because the company’s executive leadership has mandated more systematic and cost-effective sourcing of all goods and services across the company. The second is one where legal is more engaged and has learned that many other companies have successfully completed legal sourcing programs – some of them over many years. Because this is a leading management practice, the CLO wants to “stay ahead of the curve” rather than react to a sourcing program that is imposed. In both scenarios, procurement should take two steps to “secure sponsorship” from legal.
It is no longer sufficient for procurement to say that it can manage an efficient sourcing process and that it will negotiate better discounts on hourly rates through a competitive process with a limited number of legal service providers. That may have worked 15 years ago. It will not work in the 2020’s for the relationship-based business that is legal services. This is especially true for companies that have completed their fourth or fifth wave of sourcing legal services in the last two decades.
The second step to effectively secure sponsorship is a meeting where procurement presents its formal program to legal. There are four parts to the program,
- a description of the Qualitative and Financial Objectives to be achieved during the reference period – possibly over several years,
- the Mandate setting out procurement’s precise role in point form,
- a detailed Work Plan setting out the necessary research, documentation, demand forecast / scope of legal services, the invitations for strategic partnering / RFPs, the analysis of law firm proposals, the schedule of meetings and negotiations, how best to measure the results, and
- the Logistics and Schedule
Procurement would be well-advised to liaise with one member of legal when preparing the program and its presentation to legal leadership.
Roles and responsibilities:
Many companies and their law departments are decentralized. Often, many individuals in business units and members of legal have their preferences for specific external legal counsel and how best to instruct them. Procurement should serve as the project manager for the legal sourcing program. Legal should be responsible to:
- supply data and other reports on legal spend and on the historical use of external counsel by legal specialty, by business unit and by jurisdiction,
- provide insight on arrangements and agreements which may currently be in place with legal service providers,
- ensure that the other members of legal and other business units are consulted about the forecast / demand for legal services and about their preferences for certain firms to be invited to participate in the sourcing process,
- identify a limited number of members from legal who will be required to read law firm proposals as well as the analysis and recommendations prepared by procurement, and
- identify those members from legal who will attend meetings with the law firms – a maximum of four representatives from legal and two from procurement representatives should be sufficient.
Apart from coordinating all communications with law firms and with other legal service providers during the sourcing process, procurement should manage all the logistics for the meetings with law firms. Experience demonstrates that success and effectiveness in sourcing and negotiating legal services depends on an intimate knowledge of law firm culture, law firm economics, and the variety of relationships that a company has with its law firms. These relationships can range from routine to specialized to highly strategic. Procurement must exhibit greater proficiency with non-hourly fee arrangements than legal if it is to be entrusted with negotiating arrangements with a company’s legal business partners in the 2020s.
Non-financial objectives are often as important as financial ones in the drive to source external legal counsel for formal multi-year agreements. These objectives include:
- reducing the number of law firms in order to reduce the amount of time the company’s inside counsel and business units spend maintaining relationships and instructing law firms. The time saved can be re-allocated to other priorities within the company,
- changing the configuration of law firms and how they work together for greater geographic coverage. Some companies have chosen to retain a handful of firms that can coordinate local, regional and country counsel. In effect, these firms serve as general contractors of legal services,
- simplifying reporting requirements, including billing and payment protocols, in order to reduce the company’s administrative load for analysis and processing payments. Under the right conditions, law firms will take on this work at no cost to the company,
- leveraging technology to achieve measurable improvements in service delivery and, possibly, in legal outcomes. Efficiency and effectiveness are critical key performance indicators, but are often mis-aligned with non-hourly fee arrangements,
- changing the ratio of risk / reward between the company and its legal service providers primarily through the use of alternative fee arrangements,
Financial objectives in sourcing external counsel can be quite straightforward. A target should be set to reduce the projected legal spend for the ISP / RFP reference period. It is not inevitable that legal fees should increase every year simply because law firm standard rates increase. However, the pathway to achieving significant reductions in legal expenses rarely includes greater discounts or hourly-based fee arrangements. That approach offers marginal savings to companies that have had formal sourcing programs in place for more than 10 years.
“Securing sponsorship” means obtaining a formal sign-off from legal for a detailed sourcing program. The program proposal must pass the S.M.A.R.T. test in that it must be Specific, Measurable, Achievable with the available resources, Results-oriented and Time-bound. Procurement and legal must regard each other as equal partners in legal sourcing. The way ahead must be clear. Accountability for specific steps must be unambiguous. Only in this way will “sponsorship” for a legal sourcing program be secured.