Sourcing Legal Spend: Q&A on Strategies, Tactics, and Trends
As one of the more strategic and often high-dollar services categories companies procure, third-party legal spend is getting more attention these days – from CFOs, from heads of procurement, and of course, from general counsels. But legal spend can be highly complicated – far more so than other categories of professional services (e.g., management consulting, audit, internal audit, etc.) To cut through the noise, Spend Matters had a virtual sit down with Procurian legal procurement expert Stephen Rauf to explore a variety of trends and strategies in the legal sourcing market. Stephen is author of the recent Procurian paper, How to Bring Down the Gavel on Legal Fees: Three Key Pillars to Managing Legal Fees, Driving Better Outcomes at Lower Costs.
Spend Matters: Why is legal spend getting more attention these days?
Stephen Rauf: It’s getting more attention these days because legal sourcing works—it’s delivering value for companies that employ it by improving quality and legal outcomes while controlling or reducing costs. But I think it’s helpful to look at the current situation and how we got here.
The legal function is predicated on results, and not cost, so it is only logical that the primary focus has been on performance alone, especially with respect to litigation. Senior officers like the CEO and CFO have generally left General Counsel to run their organizations without cost pressures, since they act as the defender of the company, often handling sensitive subjects. Who is going to focus on driving down legal expenses when defending the company on a major matter, minimizing an employment issue, or negotiating a complex acquisition? Let’s also not dismiss the fact that until more recently, procurement and sourcing professionals had little insight into how legal departments functioned. And they certainly did not have direct experience in supporting the negotiation and retention of external counsel.
Enter the global economic crisis and the fact that law firm profits exceeded those of public corporations, and their annual fee increases outpaced inflation by several multiples. Companies struggled to remain profitable in turbulent times and left no stone unturned – including legal departments and legal expenditures. AMLAW reported again this year as part of their annual survey that several key metrics such as law firm revenues and profit per partner reached new highs. The marketplace noticed this. CEOs and CFOs challenged General Counsel to reign in their spending. The spotlight was cast on the costs of law firms.
Legal sourcing works. Companies are walking away with results. They are enjoying non-hourly billing mechanisms that help shift management factors such as staffing plans, quality of outcomes, and efficiency to the law firm, allowing in-house counsel to get back to what they do best: practicing law. We outline some of our key recommendations in a recent paper, How To Bring Down the Gavel on Legal Fees.
Spend Matters: How are firm and marketplace dynamics changing?
Stephen Rauf: Law firms are on a merger and acquisition path. “Big Law” continues to get bigger and bigger. Firms are increasingly being run as big businesses now, with an army of non-lawyer support staff and administration. This trend, of course, adds overhead that is factored into underlying hourly rates. The counterforce to this is the fact that there is a glut of unemployed, or underemployed, lawyers. And with key metrics like litigation demand being down, and mergers/acquisitions taking a downward toll (until the more recent rebound), the supply/demand balance in the legal market place still remains in favor of the buyer.
Spend Matters: Where can procurement and finance organizations start to dissect legal spend and activity to make it appear less complex — and to create strategies that lead to better outcomes and lower costs?
Stephen Rauf: First off, it is a dangerous proposition to start performing analysis on legal spend without the sponsorship from legal stakeholder(s). Without this critical buy-in established up front, expect to have the door shut in your face with little likelihood that it will be re-opened. After securing legal stakeholder buy-in, it is advisable to start asking some preliminary questions. What’s the overall annual legal spend? Is it relatively consistent year to year? How many firms are being utilized? Is there overlap amongst them? How concentrated is the spend (the old 80/20 rule)? How tight are relationships, and over how many years do they span?
After getting the basics under your belt, host an open conversation with internal counsel and present your findings. They might provide additional insight. After your discussion, ask them how they think you can help. You might be amazed by their responses.
Stephen Rauf is the Legal Services Tower Lead at Procurian (www.procurian.com). He provides advice to clients and constructs commercial arrangements that are equitable to both the client and the law firm. As our discussion with Stephen continues on Spend Matters, we will turn our attention to the dangers of blended rates, best practice company examples, and more.
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