Sourcing External Counsel: Strategic or Tactical?
Author: Richard Stock - CCCA Magazine, Summer 2015 at pg 6
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.
As DuPont's former GC, Tom Sager, wrote in the foreword to the hand-book, “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 in-house counsel “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 helped 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. Regrettably and regardless of the size of the company, most GCs and their procurement departments are behind the curve when it comes to collaborating with each other on behalf of their employer. Law departments are only now beginning to upgrade the classic relationship-based, hourly model with leading-edge practices to select law firms, manage costs and improve performance.
In his article in the handbook, “Strategic versus Tactical Buyers,” Geraint Evans, Head of New Business at CMS Cameron McKenna LLP, 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 company’s business objectives and law department. They understand the legal category and legal market intimately. They are informed about the latest developments on alternative business structures, legal process outsourcing, and alternative fee arrangements.
Dr. Hodges Silverstein reports the 2014 findings of her research on the state of legal procurement in her article, “How to Win GSK's Business.” While procurement is not making the final decision on which firms get retained, its role and functions have evolved so that:
- Procurement acts as buyer, influencer and gatekeeper, especially in mid-sized and larger companies.
- Almost 20% of legal procurement professionals have a legal background.
- Procurement gathers market data and conducts benchmarking studies.
- Procurement is more adept at fee negotiations and defining billing guidelines.
In their article, “Procurement Needs a New Metric,” Charles Green and Bill Young highlight six areas of conflict as procurement moves from managing the buying process to being more strategic when retaining external counsel. They consider price versus 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. They 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 GC should be calling for a more robust legal services procurement capability within the year.
The Pricing Enigma
Danny Ertel is a partner with Vantage Partners. His 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 needed.
Law firms are careful to limit the amount of financial risk they take on when they move away from hourly based pricing. A good start is to have 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 U.S. law firms have been hiring pricing and legal project professionals. Steven Manton is the Strategic Pricing Leader with Debevoise & Plimpton LLP in New York. His article, “Procurement and Pricing: The Benefits of Partnering,” describes how this new breed of pricing specialists simplifies the negotiations and supports ongoing business relationships with significant corporate and institutional clients. He 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 certainly think of 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, partly because they believe 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.
In his article, Jason Winmill, Managing Partner of Argopoint, 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 members of the law department for disciplined sourcing, and a fragmented marketlace 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 reflects the rapidly changing relationship between law firms and their best clients. Canadian GCs should read it and quickly adopt a more cost-effective, strategic ap- proach when managing this aspect of their business.