I know that artificial intelligence is the hot topic of the moment for in-house legal departments. And it should be. It promises tremendous cost savings and productivity enhancements for in-house lawyers. While everyone is very excited about the new kid in town, there is something brewing out there that is equally exciting but which rests on some pretty mundane financial principles: procurement. Or, more specifically, legal procurement. Now, before you go running into the hallway screaming that it will be a very, very cold day in hell before you let anyone from procurement get involved with your law firms, hear me out. There’s something here that’s worth exploring. This edition of “Ten Things” will provide a primer on the legal procurement process:
1. What is legal procurement? Let’s start with the fundamentals. Most companies of any size have a procurement department, usually – but not always – separate from the legal function. Some of the people working in procurement may have a legal background, but it’s generally not a requirement. This is because procurement (and I am leaving a lot out) is about vetting, selection, and negotiating relating to the purchasing of products and services important to the company. Therefore, it involves more than just contract drafting skills. It also involves getting bids and putting in place an overall strategic purchasing process, from purchase orders to vendor payment. Legal procurement is a sub-set of procurement dedicated to the selection and purchase of legal services from outside vendors. These people are professional vendor contract negotiators and they grind and grind until the right deal is struck. Noted legal procurement expert Silvia Hodges Silverstein states:
“Legal procurement focuses on buying legal services and managing the business side of relationships with law firms and other legal services providers. Buying and negotiations is their forté. They are based in the procurement department and report to the chief procurement officer. The majority of legal procurement professionals have a business/finance background rather than a legal background.”
What legal procurement “is not” is replacing the judgment of in-house lawyers regarding which firm to ultimately hire for any particular matter. Rather, it is a process that replaces picking law firms based on relationships and hourly rates with data-driven decisions related to value.
2. Why you should embrace it. Let’s face it, most in-house lawyers suck at negotiating with law firms about rates and services – myself included. Just think about this for a minute, how awesome would it be to let someone outside the legal department help you find the right law firms and negotiate the hourly rate, fixed-fee, or whatever structure needed to ensure the best firm for the best value? Pretty awesome, I suspect. Especially if you’re interested in breaking away from the long-dominant billable hour regime that drives absolutely the wrong incentives for most law firms. Research shows that legal departments using legal procurement reduce outside legal spend by 15%-20%. Holy cow! All of this plus allowing you to spend more of your time focused on legal work and not dealing with negotiating rates and monitoring billing compliance of your outside law firms. Where do I sign-up!
3. What can procurement do for you? I know you’re skeptical, but intrigued, and, obviously, the next question is “what can legal procurement do for me?” Depending on how involved your procurement team will be, here are some things you can expect from them:
- Pay less in legal fees. From bigger discounts, to RFPs, to monitoring law firm compliance with fee agreements. Legal procurement can help set up alternative fee arrangements (including fixed fees), success fees, contingency fees, fees by stage, caps, discounts, etc. The billable hour is not the only structure available for every project.
- Use less in legal services. Help with legal project management, efficiency improvements, and automation of routine tasks.
- Find alternative sources. Locate alternatives to your current law firm roster, from Big Law to boutiques to 1-person shops. The right firm at the right time at the right price – with no loss of quality.
- Measure and analyze spend. Look for patterns or signs of problems before they become too big to deal with, and measure the “value” of the services your law firms provide. The lowest price is not always the winner, the best value is. Legal procurement can bring transparency to a traditionally opaque process and give you the tools to make an informed-decision vs. a “gut” decision. This, in turn, will allow you to demonstrate value and forward-thinking to the CEO and CFO as to how the legal department handles outside legal spend. It’s not a black hole anymore. There’s rigor behind it!
- Other vendors. Legal procurement is not just about outside counsel relationships, any vendor used by the legal department could be something they can tackle.
- Advocate. Legal procurement can be an advocate for more legal resources internally – a professional group telling the CEO and CFO about the value of in-house lawyers vs. outside spend. They can do the math the CEO and CFO want to see.
4. Why you might say “yuck.” Hey, I get it. Letting procurement mess around with your law firm relationships is probably not something most in-house lawyers get excited about. Historically, the purchase of legal services is left exclusively to the legal department. For some reason, legal bills and legal vendor relationships are treated differently than purchases made by the rest of the company. This is primarily because in-house lawyers have done an excellent job of arguing that “legal is different” and that trying to apply basic financial principles to legal fees is a doomed endeavor. Actually, legal spend is not different and any in-house lawyer worth their salt should be able to accurately gauge legal fees for any particular matter. Most in-house lawyers object to a legal procurement function because:
- Procurement can buy copy paper but not legal services – it’s too hard!
- There is real risk in decisions made about law firms, and only lawyers are qualified to make those decisions.
- They believe they will lose autonomy and control over firm selection.
- The cheapest firms are the ones they will be stuck working with and this means lower quality legal services.
- Long-term relationships will go by the wayside. Law firms won’t “wine and dine” me anymore!
- They will have to teach new law firms about the company’s business.
- They don’t have time to engage with legal procurement over strategic purchasing decisions.
These are all (mostly) valid concerns. But, as discussed below, they are not necessarily true.
5. What the law firms are doing. While legal procurement may be a relatively new tool for in-house lawyers, your outside firms have engaged professional pricing experts for quite a while now. I am not saying that their job is to somehow screw-over clients, it’s not. It’s just worth noting that most law firms have professionals dedicated to determining how to value legal services and how best to price them, including offering different (alternative) fee structures to clients. They study “what’s market,” including public and private pricing surveys. They also, in many cases, act as a buffer for the firm’s lawyers, keeping lawyers out of the fee discussions and allowing them to focus on providing the legal services. This is all fine. But, it means law firms are ready for dealing with legal procurement. And, if you are not equally armed with your own pricing professional(s) how do you expect to appropriately evaluate the offers from firms? Are you bringing a slingshot to a gunfight? And wouldn’t it be nice to have your own “buffer” that kept you out of the fee negotiations so you can focus exclusively on working with outside counsel on the legal issues and not the fee/business issues? Of course, it would! Think about much better your relationship will be with outside counsel when billing and fee issues are not your concern. This alone is a really good reason to keep an open mind about legal procurement.
6. Partnering with procurement. If you are intrigued by the potential of legal procurement (or, perhaps, a higher-power has commanded that you do so), go into the process with the right mindset, i.e., this relationship will be a partnership. This means that you will need to sit down with your procurement partner and spend time teaching them about the specifics of what you are looking for in outside counsel and how you have historically conducted searches for law firms. In other words, embrace the situation. On the flipside, you will need to learn about the procurement process and how your partner generally goes about gathering information and evaluating potential vendors. From there, you must jointly develop a legal procurement plan. Keep in mind that your procurement process is looking for value, it’s not a race to bottom on pricing. It is not about beating up law firms for lower hourly rates. Legal services are not commodities. Moreover, legal procurement is not about giving up control, it’s about gaining control over your law firm selection and management process. Further, the legal procurement process does not stop when the firm is engaged. A sophisticated legal procurement function is involved throughout the entire engagement and helps you manage the business relationship with the firm.
7. Legal decides in the end. The one thing that should be clearly understood about the legal procurement process is that ultimately, the legal department makes the call on which law firm to use for any particular project. The legal procurement team is there to partner with you and help you analyze the different firms and the different value propositions, but in the end, the choice is yours to make as your professional judgment dictates. This is especially true if the stakes are high, the geography unusual, or if the subject matter is unique and there are only a handful of firms that meet the bill. But, keep an open mind and listen to the input of your procurement team when making your decision as any decision must be made with the best interests of your client – the company – in mind.
8. What your legal procurement team looks like. Sadly, embracing legal procurement is not in the cards for everyone. First, your company must have a procurement group. If not, you are out of luck unless you want to outsource the process to a third-party consultant. My instinct is that while that may work, it does not work as well as having someone on the inside who works with you day-to-day as part of the company. Simply being a procurement professional alone is not enough. Not everyone in procurement can handle legal services negotiations. The ideal person will have the right experience, either a history of negotiating legal services contracts or experience with very complex vendor relationships. If your legal spend is relatively small, and there is someone in procurement available to work with the legal department, you might be able to start from scratch and train them. If your legal spend is really large, it may be worth hiring someone into the company with the needed experience. Consequently, the right set of circumstances must exist to make legal procurement operational for any in-house legal department. However, if you’re willing to be patient and ensure that your procurement professional gets proper training (from yourself and via outside organizations like the Buying Legal Council), you can slowly, but surely, build up the necessary expertise within your company.
9. What you need to do to get started. Assuming you’re going to take the next steps and look into a legal procurement process, there is a lot of work on your part at the beginning to make it successful. Here is a short list of what you’re going to need to do or to provide to your procurement team (or help them otherwise obtain):
- Trust – you need to think of them as trusted advisors and act accordingly.
- Benchmarking studies.
- Internal cost and operations information, including details about your law firms and “why” you chose them.
- Information about law firms generally, including peer reviews, win rates, etc.
- Analysis of your company’s legal needs, including breaking down matters/matter-types as “High-Risk,” “Medium-Risk,” and “Low-Risk.” The outside counsel needs surrounding a High-Risk case are much different than those of a Low-Risk case.
- Start small – don’t feel any change must be absolute. You can start with one or two projects, evaluate the success, and make changes.
When new matters arise and there is a need for outside counsel, working on a detailed assessment of what you will need from outside counsel, i.e., a mini-project plan. It is very important that your legal procurement team understand the risks the matter presents, along with your goals, be it M&A, high-stakes litigation, a key commercial contract, or whatever. This can only come from the in-house lawyers and thus is a key part of your working in tandem with procurement to find the best firm for the best value based on the specific needs and goals of the legal project.
10. Resources. If you’re interested in more information about legal procurement, here are some resources for you:
- Buying Legal Council – the premier association of legal procurement professionals. The website is full of valuable information and resources, including a free online guide to buying legal services across the globe. Sign up for the weekly blog posts and check out the BLC conferences held all over the world.
- The Legal Procurement Handbook – written by Silvia Hodges Silverstein, this is the go-to book to learn about legal procurement.
- Legal Services: The Final Frontier for Procurement – a multi-part series prepared by ProcurementAndSupply.com of Australia. Here are the first three articles of the series: Final Frontier, Growing Influence, and Defining the Value.
- What We All Need To Know About Legal Procurement – an in-depth law review article written by Silvia Hodges Silverstein and published in the University of South Carolina Law Review (See in particular footnote 18 for a list of other sources).
- Legal procurement conferences – check back on the Buying Legal Council website for 2019 sessions.
*****
I imagine few in-house lawyers enjoy negotiating with law firms over rates and costs, or dealing with rate compliance issues. Legal procurement is an exciting – and growing – development that offers a way out of that burden. Making it work depends on having the right person in procurement who can handle sophisticated negotiations and management of law firm billings, as well as the right attitude of the in-house legal department in terms of being willing to partner with procurement in this process. Leadership and vision are required. If in-house lawyers realize that legal procurement is not about who controls the selection of outside counsel, but rather a consistent and principled approach to engaging these firms, there is a path to better financial results, with equal or better quality, and a lot less wear and tear on the legal team as they can spend more time focused on high-value legal work vs. haggling with law firms. If the circumstances are right, engaging with procurement over legal spend is a step all in-house lawyers should be willing to investigate.
Sterling Miller
October 22, 2018
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