The Law Department as Informed Purchaser
Richard Stock - Lexpert (February 2007 at p. 107)
Governments and large, decentralized multi-national corporations and institutions such as banks and insurance companies will have many individuals responsible for retaining external counsel. It is not the case everywhere that the law department is the central authority for retaining counsel. Human resource professionals may be responsible for instructing external counsel in labour and employment matters; the CFO for tax issues. Regulatory specialists, claims managers and many others will also often act directly in securing external counsel. In some instances, lists of preferred firms or individual lawyers have been prepared, relying on input from the law department. Occasionally, preferred counsel are identified through formal competitive processes aimed at balancing costs with effectiveness for legal services.
The Corporate Counsel Barometer survey of law departments conducted nearly a year ago revealed that “ better cost control ( 61% ) leads the list of changes foreseen in the role of outside counsel over the next two years”. The reality in multi-jurisdictional or decentralized organizations is that the accountability to achieve high quality, cost-competitive and consistent legal services across the organization is either unclear, or it is shared. The primary complaint from law firms 2 – 3 years after securing a partnering agreement with a corporate or government client is that the configuration and volumes of work do not follow as planned. The responsibility for such concerns is difficult to pinpoint.
The Australian National Audit Office (ANAO) released “Legal Services Arrangements in Australian Government Agencies” in August 2006. Public expenditures for legal services continue to rise in Australia, as much as they do in Canada because of the expanding volume of legislation and because of the increased focus on legal issues ( inquiries, tobacco, etc. ). A sound management practice in government and in many corporate settings requires a progressive approach to legal procurement by business units, and certainly by law departments. To this end, ANAO has promoted the concept and role of “informed purchaser” as a best practice in procurement for legal services.
There is good portability of the “informed purchaser” concept to a corporate and institutional setting. The fundamentals are also readily applicable to highly centralized, smaller corporations where the General Counsel is accountable for the cost and effectiveness of all services obtained from law firms. An informed purchaser is an identifiable person or group with the organization with the following attributes:
- a deep knowledge of the organization’s “business”
- knowledge of the law and legal practice
- skill in coordinating legal services arrangements
- the ability to link legal services arrangements to their daily implementation
- skill in ensuring value for money for legal services
The essential attributes suggest that in-house legal units are best placed to be informed purchasers. Still the Auditor’s report claims, and our experience corroborates it, that experienced purchasers may not be “informed” purchasers because they may not know how to buy cost effectively. For this reason, the competencies of a select number of individuals in the law department must include strengths in legal procurement, as well as in risk management, quality control and general procurement processes.
More About Competencies
It has been 10 years since some of the banks and insurers, CP Rail, Petro-Canada and others created preferred counsel lists and converged the number of legal service providers. Indeed, it requires a considerable amount of professional and administrative time and skill to prepare projections and specifications, manage a tendering process, evaluate proposals for professional and economic contributions, and negotiate agreements with a few firms while still managing conflicts of legal and business interests. Much more than “beauty contests,” but still fairly basic stuff.
Procurement in legal services in 2007 is extending the role of the informed purchaser to accountability for what happens after the 3-year agreement is signed with the law firm. The informed purchaser should:
- be able to accurately update the 3-year demand forecast for legal services at least once a year, and to anticipate some demand for unique projects, complex work and crises on a contingency basis
- understand the inter-relationships of the five profitability variables (volumes, rate, leverage, expenses and realization) in the law firm business model and their application to different legal specializations
- predicate cost-competitiveness for external counsel on total price rather than hourly rate
- be proficient in case and matter budgeting methodologies and in evaluating detailed estimates for legal matters
- master non-hourly based pricing protocols designed to stimulate efficiency and to provide incentives for successful outcomes
The role of informed purchaser of legal services cannot fall to all 10 lawyers in a 10-lawyer law department. The knowledge, skills and time to manage procurement must be concentrated and practiced. Many law departments would do well to configure the responsibilities of team members to reflect the need for progressive management practices.