How Procurement Teams Are Working with In-House Lawyers

Ari Kaplan

Law Technology News

09-27-2012

In the beginning of 2012, Microsoft reduced its stable of approximately 25 law firms handling its global portfolio of real estate transactions in 68 countries to one. The change streamlined the company's legal operations while enhancing its work product and reducing its costs. It also showcased the philosophical alignment of Microsoft's procurement professionals with its law department leaders.

"The impression that in-house lawyers are chiefly concerned with quality while procurement is concerned about cost and rates is incorrect," says Ethan Patashnik, the senior procurement manager for business and operations solutions in the office of general counsel at Microsoft. Patashnik's role is more influential than ever before as the dynamics of purchasing legal and professional services changes in a down market.

The growing influence of procurement professionals in organizations is a trend that is occurring across industries and regions. For instance, as part of a companywide optimization initiative in 2009, KeyBank National Association began to incorporate more transparency into the legal department's cost-and-spend effectiveness in an effort to achieve more efficient relationships with a consolidated group of law firms.

"We now apply rigor and a disciplined process to evaluating legal expenses just like we do with other goods and services," says Krissa Kean Spence, an attorney, who is a vice president and procurement strategist at KeyBank. "Procurement looks at things in dollars and efficiency, but we don't compare a piece of litigation [software] to a box of pencils." Spence adds that organizations can treat legal services similar to other professional services like consulting, where individuals value their time at variable hourly rates and the focus is always on excellence.

"You used to envision a guy with a calculator next to a stack of purchase orders," says Martin Harlow, director of professional services procurement for GlaxoSmithKline. "Those days are gone." The transition from calculator to procurator began for Harlow when his team started to manage the source selection process for complex legal matters like product liability litigation, corporate transactions, and patent litigation matters. "One of the final frontiers for procurement officers is legal services because the conventional wisdom is that you need to be a lawyer to understand what the law department is sourcing," says Harlow.

By building trust within the organization, leveraging more sophisticated analytics, and fostering competition, savvy business managers like Harlow, Spence, and Patashnik are transforming purchasing in the legal field.

TRUST TRUMPS

Redesigning these protocols starts with interdependence and you will succeed in building trust if you provide in-house lawyers with value every time you collaborate while working to make their lives easier, suggests Patashnik. Fast-tracking the payment of an outstanding bill or playing the bad cop in rate negotiations can also be effective. "You need to build bridges and get a seat at the table," says Patashnik. "Until you get their attention, it doesn't matter how good your ideas are," he adds.

Combine good judgment with independent research, recommends Harlow. "It is a combination of very small victories," which for him started with sourcing ancillary litigation services that the company's outside counsel once handled, albeit with less efficiency. Doing so saved the company money and improved service, resulting in standardized quality benchmarks. "It was relatively low risk to the legal department because they were ancillary services," he recalls. "If a poor selection process led to choosing the wrong service provider, we could ultimately select another."

As a result, Harlow recommends that law departments interested in developing an internal sourcing campaign begin with document review, court reporting, trial services, and medical records collection. He also suggests that legal departments create cross-functional teams with representatives from legal, IT, and finance to highlight what they value in outside support, the specific qualities they prefer, and strategies to measure performance.

ESSENTIAL ANALYTICS

Comparison-shopping also helps. When a firm working with Microsoft wants to increase rates, for example, Patashnik and his team use an internal rate analysis tool and collaborate with in-house counsel to fully understand the impact and reasonableness of the rate request. He then compares the proposed rates to those of similar firms and highlights the differences in the negotiations. "When you have data, you have power," he says.

Using this detailed information, procurement officers now serve as virtual mediators in setting rates at levels that are acceptable for the corporation and still profitable for the firm. "Business intelligence on hourly rates is critical in negotiations," he notes, suggesting that companies consider the area of specialty, experience, geography, fees of the competition, and special connections to the company, among other factors. With the pressure on costs, more organizations are requesting tiered discounts, annual adjustments, and special pricing on large or lengthy matters.

Often, simply engaging law firms or vendors in a dialogue about fees could yield surprising results. "Just having a discussion and questioning the pricing will get you a better deal," advises Spence. Like Patashnik, her team uses market data to compare billing rates using TyMetrix. "We are actually here to manage a process and provide as much decision-grade data as possible to help our lawyers make the most informed decisions they can," Harlow notes.

ENCOURAGE COMPETITION

Part of managing the procurement process is to encourage competition. Prior to initiating a formal request for proposal (RFP) process, Microsoft held standardized rates for patent applications constant for four years. As a result of issuing a formal RFP, however, the company's patent group was able to maintain quality and reduce costs by roughly 20 percent in the first year. It decreased its expenses another 35 percent by pushing firms to engage contract attorneys and update processes. "We pushed them to a more efficient model," says Patashnik. "The competitive process opened our eyes to the fact that you can get work done of equal quality and speed while reducing cost."

Patashnik notes that the easiest practice areas to introduce an RFP process are where you have many repetitive activities, such as patents, trademarks, immigration, contracts, and licensing. The questions and responses from the RFP will still require a thoughtful approach both by the applicant and the corporation. "When you ask someone to build a house, you need to adequately describe the number of rooms and finishing touches or you may get a proposal for the Taj Mahal," says Patashnik.

Start by ranking law firms (without names) based on their staffing, hourly rates, and whether they are willing to consider alternative fee arrangements. Focus on the anticipated output rather than projected input to determine value because understanding the probabilities for success helps to optimize costs. Then, specify the type of work, anticipated duration, and value to the organization. "Defining the work provides better bids," says Patashnik.

THE RISE OF REVERSE AUCTIONS

The culture of bidding on work is the new normal that is raising the profile of procurement professionals. In fact, with its online RFP process, KeyBank is planning to test the use of closed bidding systems for legal services by the end of 2012, and potentially reverse auctions, where any bidder can see competing rates for similar goods and services with the option of lowering the price prior to the bidding deadline. That said, "you can only move at the speed of your law group," Spence cautions. "You must have a strong partnership with your general counsel and foster collaboration with the entire legal team so avoid doing anything too radical that might compromise the quality of the legal services."

GlaxoSmithKline runs more than 5,000 auctions a year and the legal department's alignment with procurement has saved it over $20 million, reports Harlow. "We have designed the process in a way that law firms like since procurement is focused on process and not the selection decision." Undue reliance on sometimes-impertinent relationships or "beauty pageant"-type information has historically hampered competition, he notes, highlighting that firms appreciate the transparent level playing field.

To ensure that everyone is competing for the same body of work, the company provides an initial set of assumptions and the law firms then share their projections using the same data. "You can neutralize the complexity and uncertainty in legal matters by having an upfront understanding of how we think the matter will play out, with the realization that if a material change occurs, we will be flexible," Harlow adds.

GlaxoSmithKline's initiatives earned it a 2012 ACC Value Champion award for its OCSI (outside counsel selection initiative) including its e-tendering tool. "The ultimate question is whether the company is receiving fair value and one of the ways we assure ourselves of that is through a heightened sense of competition," says Harlow. For that reason, among others, we have used OCSI on 70 events including patent and product liability litigation, as well as business development for the company's various mergers, acquisitions, and divestitures. In fact, any engagement that could exceed a certain low threshold must go through this process.

MATTER MANAGEMENT MATTERS

Spence reports that since beginning its procurement initiatives and implementing a matter management system three years ago, the legal department at KeyBank has yielded significant and immediate savings to the company's bottom line. By simply avoiding double billing, preventing billing to closed matters, eliminating the use of unapproved rates, and setting automatic triggers for billing discrepancies, organizations can realize positive results, she notes. "We never substitute ourselves for legal decision-making authority, but a team where one person is worried about quality and the other about cost can make a really informed decision."

Patashnik describes these choices for enhancing efficiency and lower cost as elements of a toolkit, but notes that there is a hierarchy in their usage. "The easiest thing to do is to employ an electronic billing system that doesn't let inappropriate billings through," he advises. "The other methods employ more complex strategies for optimizing the value you get."

BUNDLING IS BETTER

While Patashnik admits one matter may have variability, he highlights that ten similar matters have less and that in a three-year time horizon there is even less. By bundling matters, law firms receive predictability in their client's spending over longer periods of time, which reduces their costs and allows them to create efficiencies to provide better pricing.

"You get the biggest bang for your buck by designing big bundles which require corporations and law firms to think more broadly," says Patashnik. "You spread the risk and refine the bids." For example, instead of negotiating each patent, he recommends that companies select a few law firms that can bid on a series of patents. "By doing so, you can reduce the number of firms you are using, get better volume discounts, and take advantage of longer-term efficiencies."

NEW NORMAL

Ultimately, procurement professionals have become much more active and influential within their corporate legal departments because the general counsel is under tremendous pressure to reduce costs in the economic downturn. "A lot of law firms believe that once the economy turns, the procurement folks will fade back into the dark corners of their offices and lawyers will return to the old ways of obtaining new business," says Harlow. "But there are too many wins, too much momentum, and too much untapped opportunity. I can't see procurement's role in sourcing legal services fading away."

Ari Kaplan, the principal of Ari Kaplan Advisors, is a lawyer and author of Reinventing Professional Services (Wiley, 2011).

This article originally appeared in Law Technology News.