Procurement of Legal Services – partnering with internal legal leaders

(We don't often reproduce entire posts from Spend Matters US, but given we've been talking a lot about procurement of professional services here, and because we thought this was a great article, we've done so here. This is a guest post from Mark Gordon, Partner at Vantage Partners.)

There is a confluence of events that should increase the role of procurement in capturing value from your legal spend. This is a good time to think about how procurement can partner most effectively with your General Counsel's (Head of Legal's) office.

The Perfect Storm
General counsel seek to reduce spend: The worldwide economic crisis has put pressure on all budgets and pushed many legal departments to greater scrutiny of their spending habits. Your lawyers probably want greater accountability for their outside counsel, more reliable forecasting of fees, greater visibility into budgets, incentives for efficiency, and work flow optimization. Moreover, they are less willing to pay high hourly rates for junior associates still learning their craft, and much less inclined to give outside counsel a blank check to "run the meter" and bill for all hours regardless of the nature, efficiency, or quality of the work.

Law firms more receptive to novel fee arrangements: For many decades, the billable hour was the presumptive norm, except for contingency fees in plaintiff's litigation. Virtually all legal fees were on a "time and materials" basis, where law firms set hourly rates for each level of attorney, and simply billed for every hour of work done. Most high-end law firms stuck to their standard rates and rarely offered a discount of any kind.

With the economic downturn, many law firms had excess delivery capacity. While many firms reduced headcount, most were loath to cut too deeply given the cost of recruiting, retaining, and training attorneys. Given over-capacity and under-utilization, firms became more open to discounts and novel fee arrangements to retain clients and attract new ones in order to keep the volume of work and utilization up.

Procurement more involved in sourcing services: Historically, procurement teams were told to stay away from indirect spend in general and, in particular, to keep their hands off something as specialized as buying legal services. That was traditionally the domain of the General Counsel's office, and the GC typically insisted on avoiding procurement techniques that might damage the professional, trusted advisor relationship. More recently, however, procurement has become more involved in most indirect spend categories and is accepted as a valuable addition in managing services spend of all types.

Partnering with Your General Counsel's Office
Given the perfect storm that gives you a new entrée, here are some tips for how to help your in-house lawyers contain and manage legal fees:

  1. Segment the Legal Spend
    Many in-house lawyers have a good intuitive sense for where they have "bet the company" litigation, where money is no object, and where saving on legal fees is foolhardy if it reduces even marginally the likelihood of a favorable trial outcome, versus where they have purely mechanical, repetitive, lower-value commoditized legal tasks (e.g., routine immigration services, trademark applications, or initial simple contract review), where any qualified lower-cost provider may produce the best value. However, given the broad array of legal services, a more refined tiering and typing exercise may be valuable, and your procurement team can assist your GC with bucketing legal spend into useful segments.
  1. Consider When to Use a Bidding Process
    Based on your segmentation, it should be clear that not all legal services are alike, and that for the more strategic segments, a bidding process will not make sense. However, for more commoditized services, some combination of RFPs and a bidding process is likely to yield the most favorable result. Most GC's have not used RFPs and competitive bidding in seeking legal services. Procurement can help your in-house lawyers describe requirements effectively, design the optimal process, specify and weight selection criteria, evaluate bids and responses, apply selection criteria, and attain alignment around down-selection of finalists. Beyond simply running an effective bidding process, your team may help your in-house counsel more effectively unbundle some service areas so that they may consider whether components ought to be outsourced or put out to bid. (See Sourcing and Legal: A Primer for Collaboration, by Danny Ertel)
  1. Beware of Just Seeking a Discount in Rates
    Whether you are in the bidding mode, or engaged in negotiations with a law firm, beware of over-focus on rate per hour. Just getting a "discount" in rate per hour does not necessarily yield cost savings. Your ultimate bill depends on staffing, leverage, efficiency, scope and project management, and, ultimately, hours billed. A discount in rates will rarely create overall savings of a similar scale unless there is much more built into new arrangements with your outside counsel. (See You've Got Legal Services Leverage...Now Use it Wisely, by Danny Ertel)
  1. Look for Creative Options when Negotiating
    As you help your GC's office formulate strategy for negotiating fees, help them clarify what they are really looking for. Differing interests will lead to different options you might put on the table to meet those interests well. Are they looking mostly for a reduction in overall fees, for better predictability, for more early warning of blown budgets, for more transparency, or for more involvement in matter management? Based on the priorities they have, you might explore various creative options like tiered volume pricing or rebates, unbundling services and outsourcing discrete tasks, using fixed fees for some kinds of work, creating hold-backs of a certain percentage of the base fees with final billing based on outcome or efficiency, utilizing fee collars that create shared incentives for efficiencies, continent uplifts or penalties based on varying levels of satisfaction with the level of service, or various kinds of value-based billing.

This is a time where your team can demonstrate significant value in helping your General Counsel's office. You have both good arguments for why you ought to take a more significant role and good tools to use to make a difference. Make the most of this perfect storm by helping your in-house legal team navigate to capturing more value from their legal services spend.

- Mark Gordon, Partner at Vantage Partners


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