ISM

Corporate legal department can represent a rich, untapped opportunity to enhance value and obtain savings. Supply management groups have long eyed this category, noting its high degree of spending and lack of transparency.

Transient

September 2008

Significant Sourcing Opportunity: Legal Sourcing

By Jason Winmill, Argopoint LLC

Reprinted with permission of the Institute for Supply Management.

When sourcing and procurement join forces with legal, unexpected surprises — both good and bad — can occur.

Corporate legal spend offers one of the most challenging, but also rewarding, categories for corporate supply management departments. But sophisticated supply management professionals are making inroads into legal departments, finding both success and surprises.

Sourcing and procurement executives recognize that the corporate legal department can represent a rich, untapped opportunity to enhance value and obtain savings. Supply management groups have long eyed this category, noting its high degree of spending and lack of transparency. Despite steep annual increases in the costs of outside counsel, in-house legal groups are traditionally given a pass on corporate sourcing initiatives, and are exempted from collaboration with supply management groups.

This situation has received increased attention in recent years. Law firms have pushed through annual hourly rate increases of 5 percent to 15 percent. For the average Fortune 500 company, this has resulted in an approximate 12 percent annual increase in outside counsel spending over the past several years. Law firm profits are at all time highs. According to Harvard Business School sponsored research on the topic, the operating margins of the top 100 U.S. law firms are nearly three times those of their corporate clients. There are many reasons for this. The market for legal services is complex, extremely fragmented and highly inefficient. Within this context, law firms have used their market power to their maximum advantage. Conversely, the vast majority of corporate clients have not considered — much less actually leveraged — their own market power.

The tide is turning, however. Leading corporate legal groups are partnering with supply management departments, each bringing their unique expertise to the table. Working together, utilization and spending on outside law firms has been rationalized successfully. Benchmarking research suggests in-house law departments that have implemented supply-management-style approaches believe the quality of legal services provided has increased — and most companies report significant savings."

The initial sourcing work with our intellectual property group has already resulted in savings of at least 15 to 20 percent, and our belief that even more is possible is driving an expansion of our scope," reports a sourcing professional currently collaborating with the legal department at a Fortune 100 consumer products company.

But those results should not be revelations to a seasoned supply management professional, given the untapped, "green field" nature of the legal sourcing category. That said, the complex nature of this category has resulted in a few unexpected turns, enough to surprise even highly experienced supply management veterans, with deep expertise in many hard-to-source categories. Some of the biggest surprises have included the following.

Not everywhere or all at once. Some supply management professionals initially view the legal category as homogenous spending, and try to design a strategy to consolidate spending across the entire legal department.

Unfortunately, this approach will hit strong headwinds and is unlikely to make significant progress. The reason is that most legal departments are comprised of highly specialized and fragmented legal subgroups, or practice areas. These groups often have little overlap in legal needs, slight overlap in the outside firms utilized, and little history or incentive to cooperate with each other. Attempting to forge consensus across these groups on a department-wide sourcing effort is guaranteed to be time-consuming, and typically has a low probability of success. A more productive approach might be to source legal services, group by group. High spending groups can be easily identified and targeted for sourcing efforts. Finding a practice group leader who is interested in partnering with supply management and championing initial efforts is absolutely vital to making progress. The early successes of the pilot groups can be parlayed into greater successes elsewhere.

Don't assume it's always about consolidation of law firms. Legal sourcing is sometimes referred to as "convergence." This implies that work fragmented across several firms will be consolidated to a more limited panel of providers. It is often assumed that this aggregation will result in efficiencies and increased discounts.

Legal convergence or consolidation can be an effective supply management strategy. However, convergence should not be applied blindly; in many cases, the opposite approach is the right one. In some contexts, efficiency and savings are to be gained not by sending work to one firm, but by parceling out work to a greater number of firms, each with the expertise that enables them to perform the work most efficiently.

In many cases, a portfolio of specialized boutique firms can provide a much more attractive package than those offered by a full-service (and premium-price) firm that provides many things, but no one thing competitively. 

In-house attorneys will tell you it's about expertise and experience — not hourly cost. And for the most part, they are right. Most in-house attorneys initially balk at sourcing efforts, concerned that outsiders will suggest attorneys with lower hourly rates, and with less experience and less efficient methods. In-house counsel will explain, "What this senior partner can tell me in 10 minutes is worth every penny. Even though he costs $700 an hour, it's good value because it would take a junior associate (at $300 an hour) a day to provide the same answer."

These attorneys are correct — but only half correct. Appropriate expertise is the biggest driver of effectiveness, efficiency and cost savings. Where they are misinformed is in that they believe that supply management efforts will lead to the selection of attorneys with the lowest rates and not the appropriate skill level.

Effective legal sourcing initiatives create ways to articulate and define the specific legal expertise needed, and then objectively assess which outside counsel has that expertise. Initially, these definitions of expertise and legal skill only reside in the minds of the in-house counsel. But a robust sourcing approach will ensure that the specific needs are formally articulated, and data on individual attorneys is collected so that it can be assessed in a meaningful, objective manner. The result is that the most effective team of attorneys can be selected to provide services.

Teaching (and working with) smart people isn't easy. The attorneys employed by your organization will be both the clients and essential collaborators on any legal sourcing initiative. In fact, any successful legal sourcing initiative must be attorney driven, although this does not mean that in-house attorneys alone will have the expertise or bandwidth to be effective on their own. In-house attorneys will be challenged to adopt new ideas and approaches. In-house attorneys may be among the most accomplished professionals in any organization. This can be a sword that cuts two ways, enabling them to be both highly effective and highly disruptive in the context of a legal sourcing initiative.

Harvard Business School professor Chris Argyris, in Teaching Smart People How to Learn, notes paradoxically that, "Professionals have a body of knowledge that constrains their learning. They have a difficult time thinking outside the box. They rarely fail and do not know how to learn from failure." How can supply management professionals help their legal colleagues? My research of those with a track record of successful collaboration with legal initiatives highlights the following best practices.

Use the language of legal, not supply management. Attorneys will be put off by standard supply management terms and concepts. Find ways to learn their language and to "translate" sourcing ideas into their context and vernacular. Sourcing ideas aren't the issue — it's the way sourcing talks.

"Our language causes the attorneys to run away and want nothing to do with us. It's taken me years to get their lingo down ... and learn to avoid 'sourcing-speak,'" explains a sourcing director at a Fortune 50 healthcare company. 

Understand when to be deferential. Legal sourcing can transform legal departments. However, most supply management professionals recognize that legal strategy is the exclusive purview of in-house counsel, and avoid sourcing initiatives that challenge vital, strategic legal issues.

Spend time and don't give up. Supply management professionals who have succeeded in legal don't quit — they persevere. They invest considerable time in getting to know their legal clients' issues and concerns. For example, this might involve attending legal meetings and off-sites that do not appear immediately relevant. However, these activities can be essential to moving up the learning curve and building trust between all parties involved.

Legal sourcing initiatives offer significant benefits, such as increasing the quality of legal service provided, reducing administrative demands on in-house counsel and lowering costs. Navigating the legal category is complex and challenging, but skilled supply management professionals have experienced tremendous success in this area in recent years. Leading companies are building on their solid successes in legal to increase their scope and improve upon existing initiatives. Supply management professionals at other companies, understanding the experiences and surprises faced by these early adopters, can improve the effectiveness and probability of success of their legal sourcing initiatives.

In the future, corporate legal departments can look forward collaboration with sourcing and procurement colleagues. An accommodative alliance between both groups can help both sides further their missions, providing their business clients with the highest value legal services possible.

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