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Procurement and Legal –
A Perfect Storm

The relationship between in-house legal and procurement has too often been far from productive. GC finds out how getting everyone on the same page can generate new efficiencies and a more effective method of purchasing legal services.

Purchasing Legal Services

Jodi Bartle

Journalist

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There are some things in life that don’t seem quite right when put together: take Jerry Hall and Rupert Murdoch, everything about Donald Trump and the presidential race, kids and matches, high heels and a nice polished floor. Another awkward anomaly is the procurement department sidling up with in-house legal and attempting to make nice.

Getting procurement in just hasn’t been done very well before in the legal sector. The procurement department is certainly no stranger to corporate life in sectors other than legal; it has been an accepted part of big business over time. Legal are just late to the procurement party and it seems they’d rather not attend it at all; while law firms have been just as resistant to procurement interfering in the business of buying and selling legal services.

Richard Burcher, managing director of Validatum, a legal services pricing consultancy, says that this brave new world of procurement and legal is a three-way party, and that three-ways often work better in your head than in practice. ‘The odd one out in the mix has been procurement, which has traditionally come in for harsh criticism by both in-house and external law firms who view procurement as interfering with existing relationships. Procurement has been characterised as being bereft of the ability of knowing the difference between buying legal services and knowing how to buy a pallet of photocopying paper. There is a lot of bad blood out there at the moment, but that is changing with the increasing professionalisation of procurement and the recognition that they aren’t going away, meaning that a collaborative approach should yield better outcomes than a combative one.’

In worst-case scenarios, procurement have been such an unwelcome addition to the mélange that legal departments have steadfastly refused to give them the proper access to do the job in any meaningful way, or have simply kicked them out of meetings, according to Silvia Hodges Silverstein, executive director of Buying Legal Council, a trade organisation for those tasked with sourcing legal services. But she says things are getting much better. ‘Once internal counsel sees working with procurement can be of real benefit to them, it changes things. When the CFO comes in and says “surprise, we have to cut the legal spend by another 10%”, it is an uncomfortable conversation. It is so important for the legal department to know what to do and how procurement can help.’

The business of law is nuanced, highly specialised and predicated on trusted relationships built up over time. While the rest of corporate has been held to budgets and the close scrutiny of governance, legal has been long-trusted to buy external services as it sees fit. But things change; the landscape has shifted since the Global Financial Crisis, with all eyes on getting maximum value for minimum spend across all departments, and there has been a push for legal to look at doing things differently, for less.

Keith Maziarek, head of strategic pricing at law firm DLA Piper confirms this view: ‘Previously, a company wouldn’t hold legal to the same level of analytical rigour in regards to the budgeting process that other departments were subject to. But it has become clear that legal isn’t getting a blank cheque every year and that you need metrics around performance.’ In response, Maziarek says that law firms have had to look at how they can become more sophisticated in how they bid on work and report their progress and financial performance against budgets.

In fact, both sides have had to smarten up in this regard and in-house teams are beginning to look harder at whether they are getting the best deal or not. This is where a good, mature procurement function is an asset to the legal team, acting as trusted adviser. Procurement can analyse and prepare strategic data, ask the right questions of external firms, and work alongside the GC in the data-gathering stage in order to best present the legal team with a clear and transparent picture of the options available to them. If the groundwork is handled by pricing specialists in this way, then it is hard to see what it is about the function there isn’t to like.

It is no longer a matter of procurement barging into legal, all guns blazing, demanding the cheapest legal services with no real understanding of what ‘value’ means. Steph Hogg, former legal procurement specialist working with Aviva’s GC team, says: ‘There is an incorrect perception that procurement is there just to batter down the price, substantiated by people whose only experience of procurement is commoditised; often using tools such as e-auctions and electronic tendering. But sophisticated procurement is not all about price, rather about careful selection and getting the right value for money.’

‘Legal are just late to the procurement party and it seems they’d rather not attend it at all.’

She says that a good buying team will be there to bridge any gap between a GC and a finance team, ensuring that the GC has market intelligence and data that demonstrates what has been spent with whom, on what, and the value add that was delivered. ‘The data helps the GC explain to the CFO what constitutes value for money in their world, demonstrating that spend is well controlled. Legal spend is difficult because it is often so specialist, and it can be challenging to articulate the overall value delivered. Procurement are good at articulating value and at explaining where there may have been overspend, and why.’

Maziarek says that since budgetary constraints post-GFC, the conversation has turned to this concept of value. The difference between ‘value’ and ‘cost’ is at issue here and it is imperative that a procurement function understands that value is multi-faceted. Together, an in-house team can work together with procurement to negotiate with law firms using useful metrics to get the best value, in all senses of the word. Price is certainly one dimension, but Keith says if you have the best team in the area or the nuance that you need, then clients are often a bit less price sensitive.

Another aspect of value is not just competitive hourly rates but alternative fee structures. Maziarek comments: ‘At DLA Piper, we have had to look at ways we can structure fees for the client based on their specific needs which will make financial sense to them. Historically, alternative fee arrangements were particularly challenging, because before there were dedicated personnel and technology tools for pricing and budgeting, the use of data and the level of analytical sophistication leveraged was far less than what is available today on both the client and firm sides of the equation. Now, both sides have made strides in modeling and pricing non-hourly work, so the conversation has evolved.’

He adds that his job is about finding out what makes sense for both parties, and looking at where the firm will not lose money. ‘The concept of profitability in the law firm world is still somewhat new, at least at the matter or portfolio-level. I make sure I know what the client needs, I model different scenarios that enable our client to maximise the value they receive, and which also help the law firm avoid the pitfalls that can lead to losing money on the overall relationship.’

So if procurement really can be useful to internal counsel and law firms, and they aren’t going to go away, then the real question is: what can procurement do to win legal over?

Get the buy-in

Aaron Katzel, head of the legal operations center at AIG says the place to start is getting buy-in from senior leadership at the outset. ‘Find somebody to champion the work, someone who will support the implementation of change in areas unaccustomed to change.’ Katzel credits the vision of executive vice president and GC Tom Russo as being behind the push towards AIG’s procurement and legal revolution. ‘Tom empowered us to take a fresh look at how we managed the consumption of legal services, and we came up a new framework - to be data-driven; to act as one company; to leverage the market dynamics to improve performance and value; and to take advantage of our different areas of expertise.’ Katzel says this top-down challenge led to the legal department partnering with procurement to find ways to get the most advanced and technologically-driven techniques to manage procuring for AIG’s legal counsel, and ‘the drive and support from management gave comfort to the in-house team and gave the procurement and data-driven approach credibility’.

Listen

The most effective thing procurement can do is listen to the GC about what matters. Hogg explained: ‘It is a personality-driven relationship; you have to get to know the GC, understand what is important and what isn’t, and what role they need you to take. You need to get to the bottom of how your GC works to deliver effectively for them. You have to know when to stay quiet and let legal take the lead. You need emotional intelligence; these are highly intelligent people, good negotiators in their own right, and if you don’t get them on side, it is difficult to get their trust and deliver what they need.’

Justin Ergler, director of alternative fee intelligence and analytics at GlaxoSmithKline (GSK) says procurement should beware too strong an approach, because the function of legal is not broken. ‘Procurement is here to listen and to help; there are two very different approaches that procurement can take and it becomes the difference between the function succeeding or failing.’

Start small and softly

Hogg is firm on this point: ‘When you find the people who are more willing to pilot something together, then starting with a small area is likely to be successful. This is a chance for procurement to show they listen, learn and understand concerns.’ She suggests starting with ancillary legal services such as medical records or court reports: ‘something that lawyers think isn’t core to their being,’ and from this, procurement can start building a relationship and gain trust.

Marty Harlow, procurement director for global legal services at GSK, says that the company was utilising law firms for many kinds of ancillary legal services and ‘it was simply a massive opportunity for procurement.’ Over a few years, procurement’s involvement ‘helped us work collaboratively and brought savings and quality improvements. The legal department appreciated that there is value in the collaboration. It was a brilliant place to start and fostered trust.’

Legal decides

Hogg points out that the outcome of the legal work rests on the GC; it is their neck on the line, and for this reason she says that it is imperative legal should have the ultimate say. ‘Procurement is there to ensure good value for money, but it is not necessary to direct where that money is spent.’ She says this is best done by the lawyer because they ultimately know what they want and they know the market. Ergler agrees: ‘A key facet is that the final buying decisions do not rest with procurement, because procurement is not charged with making a subjective judgment. That final decision rests with the legal department.’

This often unwelcome fusion of internal and external counsel with procurement can, with sensitivity and respect, lead to shared goals, happier endings, and a more profitable bottom line for company. Legal service procurement is really still in its infancy, according to Ergler at GSK, and ‘it is important to hear from those of us who have been successful in bringing procurement close, because there is no blueprint.’

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