With non-legal procurement teams becoming more and more part of the bluechip panel process, are firms delivering the best value for money?
`The client is the enemy,’ says one veteran corporate partner at a Magic Circle firm, privately expressing a common frustration over how the traditional relationship between external counsel and in-house legal teams has been battered by the latter’s post-downturn quest for value.
There is no doubt that tough trading conditions have meant the relationship between clients and law firms has become more tense – fractious even – as general counsel (GC) have pushed advisers through a string of increasingly prescriptive and lengthy adviser reviews. Under this analysis, the drive to secure a better deal is rapidly eroding what was once a constructive relationship, replacing it with a process-driven marriage with little room for goodwill or trust.
And if there is one practice that has taken hold since the downturn that, above all, causes horror among partners at leading firms, it is the deployment of non-legal procurement teams at bluechips in panel reviews.
Still, on this issue at least, the views of GCs and advisers are often not so far apart, as many in-house legal teams are uneasy about the growing pressure to bring in centralised procurement into buying legal services.
In fact in-house counsel – who also have an ‘us and them’ view of procurement – often have little choice but to involve them, with one GC of a large UK corporate commenting: ‘Pushing them away will end up in a situation where you’re forced into it and they will take control of the process.’
While there are well-known examples of panel reviews where procurement is regarded as having driven the process – Royal Dutch Shell’s panel selection in 2010 was described at the time as much like buying hammers – more commonly, purchasing legal services is not procurement led but assisted, often at the behest of the GC.
Most GCs agree with private practice’s view that the procurement function needs to be clearly directed, carefully defined and limited in scope.
Last year, global technology services company Atos, with annual revenues of €8.5bn and employees in 48 countries, used procurement to help it drastically cut its panel to three international law firms – Baker & McKenzie, DLA Piper and CMS Cameron McKenna – to provide global support.
Atos GC Alexandre Menais is of the opinion that in-house interaction with external counsel is a relationship that should ultimately be determined by lawyers, but comments: ‘Procurement certainly has an important role to play in helping to select external counsel as part of the creation of a legal panel.’
‘In recent years, for many large organisations such as Atos, in which the legal budget can be significant, the selection of external legal counsel has moved on from a simple “beauty parade” of pre-selected firms already known to the GC and where often the final decision was at best, subjective, and at worst, somewhat arbitrary.’
The procurement team helped Atos to put together a selection process, as well as providing advice on the request for proposal (RFP).
Menais recalls: ‘It was clear from the outset that we needed to have a well-structured and objective process for evaluating and ultimately selecting the relevant firms and, in this regard, the procurement department made a valuable contribution. Procurement provided their advice on [RFPs] – lawyers are more used to reviewing RFPs than creating them! Procurement also helped devise a scoring system by which we could judge each response, as far as possible, on consistent, objective criteria.’
Others, such as Centrica Energy’s GC David Isenegger, who joined from Shell in late 2010, agree that it makes sense to use procurement specialists to ensure that the data provided by law firms is comparable. Isenegger comments: ‘They are good at making sure we go to market with a clearly defined idea of what we want and making sure we are comparing apples with apples.’
Isenegger also finds that procurement teams are good at analysing corporate legal spend and filtering that information into the pitch process. ‘When they analysed our historic legal spend we saw a long “tail” of firms who were only getting a tiny piece of our work – it highlighted some inefficiencies. So we challenged ourselves about the reason we were using a large number of firms, who we don’t necessarily then have a very deep relationship with,’ he says.
‘It’s about better value but not just in pounds and pence – we want a deep relationship and for companies to understand our values. We also wanted to be able to ask more of them, such as secondments, know-how and training.’
The subtleties
With procurement acceptably tasked with managing data and the analysis of legal spend, it’s the more subjective tasks like selecting a law firm that many in-house counsel and private practice lawyers agree – rightly or wrongly – that procurement professionals are less effective at.
Procurement of legal services is not the same as tractors, or hammers or widgets and – so the argument goes – specialists are unable to understand the subtleties and the importance of the relationship involved in legal services.
There are many dissenters to the view that law cannot be commoditised or that procurement can be more effectively standardised and managed. The high-profile market commentator and author of Tomorrow’s Lawyers, Richard Susskind, says: ‘There is a view held by some lawyers, which I don’t support, that there’s something so different about legal services that the involvement of procurement specialists is precluded.’
Given that many GCs have been in private practice themselves, it is unsurprising that they share misgivings about standardised procurement.
Royal Dutch Shell’s legal director Peter Rees QC – formerly at Norton Rose and latterly Debevoise & Plimpton before he took over from Beat Hess in 2011 – says: ‘There is an element of subjectivity and quality analysis that procurement is not able to bring to the process. I’ve been in practice for 32 years and if you can tell me that procurement knows as much as me about the qualitative aspects of the legal market that’s fair enough, but you can’t.’
In his panel this year, Rees has focused heavily on furthering Shell’s relationship with panel firms and, having agreed rates at the outset, will award work to firms based on the overall price they can do the work for. He has deliberately not chosen a three-year cut-off with panel firms, asking them to view it instead as a long-term relationship where the firms closest to Shell will be rewarded with more work. He adds: ‘You have to have a relationship of trust – you work hard and well for all clients, but for the clients you like and trust the work product is often even better.’
It is this relationship that procurement specialists have little insight into, and Isenegger adds: ‘I would rather work with people I have a relationship with and who I have confidence in.’
Linklaters global head of banking Gideon Moore takes this point even further: ‘If the procurement team’s sole raison d’être is to ensure that the law firm is providing the service at the cheapest possible price I’m obviously going to say that they’re not taking into account the quality of advice, the speed of response and the level of service. I don’t think they are getting the best service.’
Even Susskind agrees that it is difficult for specialists to grasp the relationship angle, commenting: ‘While I don’t think the legal sector is unique, I don’t think procurement specialists are always fully alive to the unique relationship between law firms and clients.’
For all these reasons, GCs have been willing and able to push back against procurement when it comes to law firm selection, but it is a different picture when it comes to conversations about cost.
The Million-Dollar Issue
If, metaphorically speaking, GCs are reigning back procurement specialists during early discussions, when it comes to discussions over costs, they are often happy to let them take the lead.
According to both Menais and Isenegger, there is good reason to leave conversations about costs to the experts. It is important for the relationship with the law firm for the GC to be at arm’s length. Menais says: ‘Critical to the success of the relationship is the personal rapport and the trust that is built between the GC and those senior partners. Cost is always important, even if it is not the “be all and end all” and therefore, in order not to undermine that relationship generally, most partners, and indeed most GCs, probably prefer to keep what can be difficult and intense discussions around cost separate’.
GCs are quick to acknowledge that procurement still needs guidance – Menais highlights the ‘relative importance of cost to the overall relationship; the prevailing market conditions for lawyers; and, particularly important these days, possible alternative billing structures.’
GCs are also clearly aware that pushing the price down too far will lead to a poor level of service. Isenegger says: ‘It’s easy to drive down costs but, below a certain level, quality and service can suffer.’
However, there is little consensus in this area regarding the right approach, largely because such issues around value remain so subjective. Procurement teams, by their very nature, are good at driving a hard bargain. One GC of a large UK corporate recently remarked with glee that procurement had knocked around a quarter off the panel firms’ rates and obtained a number of free services before being restrained.
Another area of subjectivity is understanding the hidden value of a law firm that knows your business; has particular expertise in an area; and is able to get things done cheaper because of its efficiency even if it doesn’t offer the lowest rate. Wragge & Co head of intellectual property Gordon Harris says: ‘Clients are right to challenge and to keep costs under control, but they should not lose sight of the value of a long-term relationship and advisers who know their business inside out.’
Squire Sanders head of outsourcing and procurement Garfield Smith says: ‘Having a methodology and a system for buying and having people who are fluent in that methodology is a good thing in any business process and I don’t see why buying legal services should be any different. But are procurement professionals in the best place to determine what is the best value? They can’t tell you whether it buys you good value, only whether some things come cheaper. It is more difficult when it becomes more sophisticated.’
While much will depend on how big a piece of the pie law firms are being given in exchange, it is not always apparent that procurement’s focus on the bottom line is achieving more for less. As the aforementioned Magic Circle partner puts it: ‘All the value add they negotiate for now used to be given for free anyway because we had that kind of relationship. At one time I would have walked under a bus for my clients. Now it’s different. The rates are so low I have to charge for absolutely everything and I’m not inclined to do anything extra for them.’
There is fault on both sides but, in many cases, clients counter that law firms have brought such a dynamic on themselves. A culture of above-inflation hikes in charge-out rates has taken hold at major law firms in the UK and US, together with what most agree is a tendency to heavily resource matters – all of it under-pinned by 1,600-plus annual chargeable hour targets.
Susskind argues that both clients and law firms will have to get used to this changing dynamic. ‘A new way of procuring services is needed. Many clients and law firms are alive to this. In-house counsel should look upon procurement specialists as their own personal advisers rather than people who are in some sense in opposition to them.’
If the ‘us and them’ approach is not working, what is needed is mature, all-party talks before the relationship breaks down any further. LB
caroline.hill@legalease.co.uk
francesca.fanshawe@legalease.co.uk