Procurement and The New Legal Buy/Sell Dynamic
Procurement's expanding role in the legal industry is changing the way legal services are bought and sold.
Procurement is changing the legal industry. It is driving another nail into the legal guild’scoffin by altering the long-standing practice of lawyers selling corporate legal services to lawyers. This is not simply a change in the corporate legal buy/sell dynamic; it is compelling evidence that law is not solely about lawyers anymore. The myth of lawyer exceptionalism has been debunked. Lawyers no longer determine what’s a “legal” matter–that only they can handle, nor do they dictate fees (“for services rendered”), control supply and buy sides of their labor-intensive business model, or insulate themselves from “outside” competition by self-regulation.
The emergence of legal procurement signifies that the legal profession is now the business of law in the eyes of those that matter most—buyers. Procurement speaks to a growing sophistication among legal buyers as well as new engagement criteria. This portends further changes in law—by whom, when, how, from what model, and at what price legal services are bought and sold.
What is Legal Procurement?
Procurement is the task of buying legal services at the optimal mix of price, quality, and value. It is a multi-dimensional process that starts with an assessment of the service/product needed; its complexity; enterprise value; degree of risk relative to enterprise tolerance and potential exposure; provider (vendor) options factoring in expertise, experience on like matters, results, and ease to work with; and, finally, price. Note to lawyers: procurement is much more than negotiating discounts, a common practice with corporate counsel and law firms. Procurement is about applying business discipline to purchasing legal services. This is a whole new ball game for law firms that have sold to buyers based upon “relationships,” pedigree, and reputation. Those things matter, of course, but procurement focuses on quantitative metrics, not puffery.
Procurement professionals recognize that legal expertise is only part of a delivery equation that also involves technological and business expertise. Procurement has shifted the value determination from seller to buyer. Law firms formerly dictated the value of a task, matter, or portfolio. Procurement makes that call now. This is anathema to many lawyers who regard value determination as essential to their ability to practice. That’s another legal myth in the process of being debunked.
Dr. Silvia Hodges Silverstein, Executive Director of the international legal procurement trade organization Buying Legal Council, told me that procurement is, “Buying smart. It’s buying well. It’s knowing who is good at what. It’s about trading off reliance on traditional suppliers for new strategic partnerships. The goal is to get the services at lower cost at equal (or better!) quality. It’s using data and technology to measure user satisfaction, outcomes, relative value. It’s about strategic partnerships with the right partners.” Silverstein’s functional definition alludes to several key legal industry shifts:
(1) disaggregation of work;
(2) migration from law firms to other providers;
(3) metrics; and
The rise of legal procurement is both result and consequence of these market shifts. It is evidence of buyer recognition that not all “legal” tasks require lawyers or law firms; not all tasks or matters require “legal” expertise but do require process and/or technological training; and the existence of a legal supply chain.
Why Has Procurement Come to the Fore?
Procurement departments have been corporate staples for decades. Their jurisdiction only recently extended to legal buying, and this was met with corporate and law firm resistance. The legal guild had long operated by its own set of economic rules that over time diverged from their clients’. How and why did this paradox persist until the past few years? There are several reasons:
(1) lawyers sold to lawyers;
(2) legal spend was, until the past decade, a relative rounding error on corporate balance sheets; (3) the global financial crisis, technological advances, and the complexities of business produced elevated buyer expectations that extended to law;
(4) technology and process became integral components in legal delivery, and most law firms were slow to adapt– in part because efficiency was inimical to their economic model;
(5) new supply sources—well capitalized, tech and process savvy legal providers with corporate structures and business-centric delivery capability—emerged to address the market void;
(6) in-house legal departments performed more and increasingly complex work rather than outsource it to law firms; and
(7) legal expertise, long the sole element of legal delivery, became part of a three-legged stool comprised of legal, technological, and business expertise.
Legal buyers, confronted with a “more with less” mandate from the C-Suite, were forced to break down expertise along practice, business, and technological expertise and engage in value stratification within/among them. This included a reconsideration of sourcing most work to law firms. Law departments had no choice but to become more sophisticated legal buyers as well as more efficient, innovative, and collaborative providers.
The Numbers Reveal a Systemic Change in Consumer Buying Practices
The 2018 Buying Legal Services Survey, a study designed to examine the purchasing behavior of legal procurement professionals, provides ample evidence of systemic changes in legal buying. The Survey has three central themes: (1) procurement’s impact and value; (2) the interplay between procurement and law departments; and (3) the market for legal services is shifting to metrics, commitments to constant improvement, and ongoing education/training.
The Buying Legal Survey found that when procurement is involved in legal buying, companies saved an average of 14.6 percent of legal spend, up from an 11.4 average in 2017. That figure jumps to a 20.8 percent average when a positive relationship (read: collaboration, not turf war) between procurement and the legal department exists. The study also revealed a strong correlation between tenure of the procurement professional and results obtained. Those with ten-plus years of experience achieved 19 percent savings on average compared to a 13 percent average for those with two to four years of experience. While this is hardly surprising, it is a reminder that “procurement” is not a monolithic, impersonal category; it is comprised of human beings with various levels of experience and skills. These skills include technological, business and inter-personal—especially the ability to forge meaningful, impactful collaborative relationships with the legal department. This, too, is emblematic of the significance of “people skills” (“EQ”) in the legal marketplace.
The Survey also illuminated buying trends dictated by the size and legal spend of the company. On average, Survey respondents spent $113M annually with “traditional” law firms; $5.5M with “alternative” law providers, and $15M with ancillary legal providers (court reporters, medical records companies, litigation finance). The larger organizations increased spend on law firms and ancillary providers; however, they spent proportionately less on “alternative” providers than smaller organizations. The smallest organizations among the 133 companies sampled spent an average 27 percent of their total legal budget on alternative providers compared to the Fortune 100 company 5 percent alternative provider spend.
The data confirms that: (1) mid-cap companies are a prime customer target for alternative providers; (2) many Fortune 500 companies—especially the 100 largest—have built internal legal operation teams and can “in-source” much of that work; (3) there is great opportunity for the Fortune 500 to migrate more work to alternative providers, even where it is presently performed largely in-house—United Lex, Elevate, and Axiom provide examples of this; and (4) 76 percent of respondents presently engage alternative providers, indicating market willingness to deploy new delivery options.
What Legal Buyers Are Focused On
Lawyers are notorious for imputing their own value to matter management instead of focusing on client objectives. Procurement is putting a halt to that. The five top goals among the legal procurement professionals surveyed are: (1) capture/analysis of spend data; (2) further reduction of legal spend; (3) better management of legal work; (4) implementation of strategies and processes for portfolio management; and (5) improving relationships with the law department. Procurement professionals are forging systemic change to create a better legal buyer. They are utilizing data analytics, process, collaboration, constant improvement, and strategy to advance that objective and are doing so in a disciplined, holistic fashion.
Price matters, but it is not the sine qua non– or even principal consideration– as the risk of legal work increases. “Commodity” work (document review, basic research, etc.) is highly price sensitive. But as the value, complexity, and risk of matters increases, predictability, efficiency, expertise, and experience in similar matters is what counts most. This turns the traditional law firm “scorched earth/best possible legal work/every matter raises unique issues” approach on its head. So too does it underscore that buyers—not providers—are determining what’s needed from legal service providers to solve business challenges.
Many lawyers—and that includes corporate counsel– regard procurement professionals as bean-counter interlopers that have no place in legal buy decisions. That ship has sailed. Procurement is here to stay. Just as lawyers must learn to collaborate with technologists, business professionals, accountants, data analytics experts, and other professionals, paraprofessionals, and machines, so too must the profession accept procurement professionals. Each plays a role in advancing client objectives and achieving positive, quantifiable results. That, as lawyers are fond of saying, “is the bottom line.”
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This article is also published at Law.com