Sourcing Legal Spend: Q&A on the Dangers of Blended Rates, Pfizer’s Best Practices, and More

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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.

For the first installment of this interview, see: Sourcing Legal Spend: Q&A on Strategies, Tactics and Trends.

Spend Matters: What are some of the dangers of blended rates?

Stephen Rauf: The main drawback to a blended rate is that it does not account for quality or efficiency. Think about it this way: if I paid you $20 an hour to cut my lawn, and it takes you two hours on average to complete the job, you’d earn $40. Now, what if I offered you that same $40 on a flat fee basis to complete the same task? Your motivation just changed. It is now in your best interest to complete the job as quickly as possible to increase your overall margins and minimize the time spent on the task. Blended rates can have a similar impact. The law firm is motivated to push the work to the lowest (least expensive) resources possible, and complete the task as quickly as possible. After all, the billing clock isn’t running anymore.

Do not misunderstand; blended rates have their place and can be immensely rewarding if managed correctly, but you need to consider an incentive structure that aligns the goals of your organization and the law firm so that unintended consequences like the situation described above can be minimized or avoided.

Spend Matters: What organizations are known to be some of the best at managing legal spend? What does the collaboration look like in these companies between the office of the general counsel and procurement? 

Stephen Rauf: Pfizer is often cited as the pioneer and therefore poster child for a very tightly managed program. Consequently, they have a very strong collaboration with their internal procurement organization. The pharmaceutical industry in general is credited with good management of legal spend. As you might have guessed, these companies also have extremely large outside counsel spend.

One thing to note here is that the companies that are the best at this have recognized that legal spend management is an ongoing process, and not a one-time project. They are actively capturing metrics via e-billing and matter management tools, running reports on the data, and creating strategy. And both procurement and legal are reviewing the information regularly and collaboratively.

Spend Matters: How should we reconcile the rationalization of legal spending to manage costs with working with specialist providers for specific needs?

Stephen Rauf: This is the intersection of the art and science of legal services sourcing. Local counsel firms and boutique law firms that are highly specialized in a particular subject matter will always have their place. And in many cases, their usage could yield considerable savings compared to large full-service firms. The balance between using as few firms as possible and using an abundance of highly specialized firms is entirely situational and dependent upon a myriad of factors: how many in-house attorneys does the company have, and how many firms is it realistic to expect them to manage? What industry is the company in? How large are the matters (in terms of volume and cost)? What is the culture of the company? All of these factors and more need to be considered prior to answering this important question.

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 we conclude our discussion with Stephen on Spend Matters, we will explore alternative fee arrangements, creative sourcing, technology and additional areas.

First Voice

  1. John:

    If you paid me $20/hour to mow your lawn, I’d be very satisfied taking 2, 3 or 4 hours to complete the task with my upright push mower. If you offered me $40 to do it, and I end up cutting corners, I’d probably be fired and replaced with someone who uses a riding mower and could complete the job in 1/3 the time. That person would also have time to complete other jobs that might have otherwise been awarded to me and my upright. It’s called efficiency and competitive free markets, where quality is assumed and need not be sacrificed if innovation is introduced.

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