Learning to love procurement

 Roll over long-lunch panel reviews – the procurement department is now central to the process, so you’d better get used to it

It used to be so simple. Perhaps a lunch or even a spot of supper down the club; a quiet chat between chaps in an environment replete with the whiff of panelled oak and sturdy well-worn leather.

Cutting deals between a corporate or banking head of legal and the senior partner at an external law firm of favour was a wholly civilised and discreet affair, polished off with liberal dollops of port, brandy and a firm handshake.

At least that’s the myth. It may never have been quite so cartoonishly stereotypical, but without doubt the appointment of external advisers has a long history of being reliant almost exclusively on the unquantifiable element of personal relationships.

procurement cogs

But that approach may as well be ancient myth now. Law firm partners can confidently forget about invitations to London’s clubland when putting themselves forward for top-tier and multinational corporate instructions. Panel reviews and formal tendering exercises have been de rigueur for at least a decade, and the past five years of global financial hardship have only escalated moves towards more
scientific and objective methods of appointing external counsel.

 Masters of the new universe 

And the gurus, the masters of this new universe, are those in the metaphorical white laboratory coats of the procurement department. Long gone are the days when procurement was exclusively associated with buying photocopier paper and canteen cutlery; today, senior procurement professionals are very much focused on the purchasing of legal services, and some even specialise in it. And lawyers, both in-house and in private practice, had better get used to it.

That is especially true for the banking sector, where annual expenditure on legal services can be astronomic. Some law firm business development (BD) executives maintain that no bank general counsel hoping to stay in post would think of launching a panel review without having procurement well-briefed first and integrally involved.

This has been a tough lesson for the legal profession. Resentment was the first reaction – and still is in some cases – among lawyers when told that non-legal personnel were to play a crucial role in the selection of external advisers. Only last summer there were rumours of an almighty clash at electronics multinational GE over the appointment of its European legal panel. Insiders suggested a decision by GE senior executives to pass the running of the show to the procurement team went down like a trolley-load of lead lever arch folders with the in-house legal team.

As one commentator told The Lawyer at the beginning of July: “The business was not desperately pleased as it was entirely procurement-led. Some people in GE say that from an empirical viewpoint we’ve got the right [panel], but a number say that even after that process they’re not really the optimal people to help us. Next time they will put more of an oar into it and see if they win that battle.”

But putting the wind up general counsel might be the intention of some CEOs and their chief financial officer henchmen. 

“There is a tendency for businesses to use their procurement departments for legal services tendering,” comments Sam De Silva, a man with a foot on both sides of the divide. He is the partner head of technology and outsourcing at London law firm Manches, as well as a board member of the Chartered Institute of Purchasing and Supply, the ‘trade union’ of the procurement crowd. “One issue driving this is that boards want to ensure GCs and heads of legal are not getting complacent and too close to their law firm suppliers.”

There is a view among some watchers of big business and Big Law that senior executives are imposing procurement teams on legal departments because they feel the lawyers haven’t been making a good enough job of running panel reviews.

With the global economic climate still creating an imperative for cost-cutting, reducing the number of suppliers to get better value from those that remain is a boardroom priority. Indeed, one leading British bank is understood to have slashed the number of external advisers across all disciplines and functions from 18,000 to 12,000 in under two years.

And by no means all in-house
legal teams spit tacks at the mention of the word ‘procurement’. In the last fortnight insurance giant AIG wrapped up a panel review for Emea that involved a heavy dose of procurement input, led by a legal services specialist in that department who has been in place for 18 months.

“We work closely with procurement,” says Stacey Coote, director of legal operations for Emea at AIG, who took up his post in June. “They support us with RFI [request for information] and RFP [request for proposal] processes and are involved in reverse auctions. They work on the upfront selection processes.” (See viewpoint, right.)

 Lukewarm welcome

Natalie Jobling, general counsel (corporate) at Network Rail and member of the board of the solicitors’ Commerce & Industry Group, points out that not all the resistance to increased use of procurement has come from law firms – legal departments can also be less than enthusiastic. However, she says her department works closely with the Network Rail procurement team and that general counsel “can make good use of procurement – they need to cultivate them to get the right people and support”.

Comments Jobling: “A lot of procurement teams struggle with knowledge of the legal market. But if you can get a procurement specialist who has done some professional services work, that person can be helpful. Also, procurement teams can be helpful in doing a lot of the spreadsheet work that lawyers don’t like. If you’ve got to show savings of a certain amount, they have some good ways of demonstrating savings. They’re good at the number crunching.”

For example, an in-house legal department conducting a five-yearly panel review is unlikely to be able to negotiate lower headline fees from a firm if it has been holding the rates during that time. But, says Jobling, the legal department might be able to demonstrate to its top-table executives that, if inflation were applied to the original rates, a level of savings might have been achieved.

“Procurement teams are good at that,” she adds. “And also they’re useful for having negotiations about rates – they can do all the nasty tough stuff without the relationship between lawyers being damaged.”

The working relationship between general counsel and procurement specialist is key. 

“When procurement teams are successful it’s when they operate closely with the general counsel,” argues Varun Mehta, vice-president of legal and compliance solutions at outsourcing business Clutch Group. “They and the GC need to have regular discussions so the procurement team understands what the legal department needs. That is not just about how can we make this cheaper, but looking at other value issues.”

According to Mehta, UK legal services-specialist procurement teams have become pretty sophisticated.

“They understand what they’re buying and why GCs want to go to different law firms – why they use certain partners,” says Mehta.

De Silva agrees that best practice involves a combined effort between procurement and the legal team. 

“I’ve seen instances where corporates haven’t even involved their legal departments and handed the whole process over to procurement – and I don’t think that works,” he says. “The GC will moan that they weren’t involved and be critical of the firms chosen.

“Working together from the outset is best, dividing responsibilities early. GCs should take more of a lead in the interviews at pitch – they can ask better directed questions, whereas procurement are better placed to oversee the whole structure and process.”

Law firms on the receiving end of panel reviews and tendering exercises with procurement involvement are noticing a difference. 

“Most of the time now, procurement functions come across as part of the team,” comments Derek Southall, the partner at Wragge & Co, who heads a multi-disciplinary technology team. “They may run the administrative side of the process and provide an advisory role on the pitches, but we don’t often now, as a law firm, get a document that appears to be designed completely for non-legal functions. Every firm has in the past seen documents that were not as ideally suited or that were over-lengthy, but that is quite a long time ago.

“Now you can see from documents that there is some intelligent procurement input, but that the in-house legal team hasn’t lost its voice. So the quality of procurement functions in this area has increased and there has been a genuine desire on the part of those professionals to get under the skin of things. They’re a lot more open to trying to understand.”

Law firm BD executives – those at the sharp end of preparing for panel review pitches – agree procurement departments have become more
attuned to legal services, but there is still room for improvement.

“Five years ago procurement departments were less familiar with the way law firms operate,” says Jerry Barras, director of European marketing and BD at the London office of New York-based global firm Shearman & Sterling. “That has improved over time and, while costs have been reduced, there’s more work to be done to achieve the other objectives of reducing the number of legal service providers and increasing the volume of work for those appointed to the panel. So law firms may not be seeing the promised increase in volume and at the same time their rates are being squeezed.”

 Banks love it

Barras and others reiterate that banks in particular are procurement enthusiasts. 

“Banking procurement teams are increasingly interested in having a relationship with law firms and many see their law firms every quarter,” comments Barras, advising that “banking relationship partners would be wise not to ignore procurement functions as was the case five years ago. Corporates are also increasingly sophisticated in their use of procurement and they often run panel reviews. But they’re less inclined to stay in touch with law firms after the panel exercise is complete.”

Law firms are also noticing that procurement teams – at least those specialising in the legal sector – are becoming less blinkered to issues other than price. 

“While cost-competitiveness is a driver in today’s corporate environment procurement departments are not totally fixated on it,” maintains Southall. “They’re moving more to value than price. They will drive a hard deal on commoditised work because that’s essentially about price, while in other areas they’ll be happier with the suppliers but want to improve the systems.”

However, there continue to be bad experiences. One senior law firm BDer tells a tale involving the procurement team at an international bank. The panel law firm was expected to have quarterly meetings with the procurement boffins. At every meeting the BD team had to start by explaining the core basis of law firm billing structures.

“We were continuously having to educate them,” says the City BD staffer. ”But they didn’t really listen because they didn’t really care. They were only interested in trying to drive down costs and reduce the number of law firms the bank used, and by doing so increase the volume of work they could give to firms on a smaller list.”

On the face of it, that approach benefits firms retaining or winning a panel place with the bank. But, explains the law firm BD professional, “what actually happened was that every year they would push down on price though they would never succeed in stopping the execution bankers from instructing firms they were comfortable with outside the panel. So the amount of work panel law firms were getting wasn’t going up proportionately. It was a lose-lose from a law firm perspective”.

Regardless of grumbles about the underlying motivations of businesses in bringing in procurement teams, there is little doubt that those teams will be a fixture on the law landscape for the foreseeable future. So much so that the Law Society has started running discussion groups to help lawyers come to terms with the phenomenon, with the first held last February and another scheduled for November.

“Engagement with procurement seems to work best when procurement specialists understand that there’s a relationship element between panel firms and GCs that isn’t quantifiable in pounds,” comments Clive Black, the society’s City manager. “These conversations have shown it is possible to collaborate with procurement colleagues and evolve criteria that allow the sophisticated relationship element to be captured. What also became clear is that there’s scope for some firms to develop their understanding of what GCs might consider added value.”

Ultimately, the right procurement team for buying legal services is the one that respects the in-house legal department and the law firms. 

“Any hint of a forced marriage between procurement and internal counsel is not going to work, says Mick Corti, commercial and BD director for NHS London Procurement Partnership (see viewpoint, page 23). “Procurement functions are there to support, facilitate and add value to internal customers – they don’t have a right to exist otherwise. They need to embrace that. And that can be challenging because often they will be faced by GCs who don’t think they can add value. Procurement needs a coherent set of arguments – it doesn’t need to be a price-down, cost-slashing exercise if you don’t want it to be or it’s not appropriate. But we can still help with management and oversight of the panel.”

Mehta summarises: “The right type of procurement staff look for creative ways to both reduce price and find alternative providers. They are interested in introducing new ideas, but they have to be collaborative and understand the issues.”

Nonetheless, there is no doubt that the ultimate impact of greater procurement involvement is a reduction in the number of law firms on panels. 

“The increased use of procurement has led to consolidated panels,” says Mehta. “Banks that used to work with 150 firms now only work with 50.” Procurement has become the unseen hand.

Mick Corti, commercial and BD director, NHS London Procurement Partnership

 “Legal services are not unique,” says Mick Corti of the NHS London Procurement Partnership. “The influence of procurement has spread to areas including marketing. Lawyers may feel they are being targeted but that’s not the case. Procurement is trying to raise its influence across the board.”

Conti acknowledges there is a danger that procurement teams inexperienced in dealing with legal and other professional services will resort to box-ticking, issuing requests for proposals bursting with unnecessary questions. In other words, “increasing the role of procurement for the sake of it is not in anyone’s interest”.

But Conti goes on to point out that the ability of procurement to increase its influence over legal services is based on success. 

“Procurement has matured to a point where it has a strategic role,” he says. “Companies have encouraged this because it adds value. There’s a small but growing group of legal services procurement specialists in sectors such as banking, where legal spend is high. 

“These days, procurement teams at top corporates and banks are attuned to the subtleties involved in purchasing legal services. Once you get away from commodity items everything has subtleties and the trick is for procurement to engage with internal counsel to understand what the value driver is. Is it cutting overall spend, increasing the success rate with external counsel or getting more control over legal spend?

“Legal services is complicated but no more complicated than some of the consultancy services prevalent in the banking world,” adds Conti. “However, procurement departments that have been buying laptops but not legal services should understand it’s a very different landscape.

“If I were buying legal services for the first time I’d have a conversation not only with the legal team to understand their requirements but also with our current law firms to get a sense of what procurement processes they think have worked. I want to be open-minded. The problem is that some procurement professionals see it as an admission of defeat to seek advice. 

“Good procurement teams know the value of contract management, so organisations don’t just appoint a panel and then walk away for four years. You need a contract management mechanism and procurement departments are good at that,” he concludes.

Stacey Coote, director of legal operations for Emea, AIG 

Coote has noticed procurement teams being pushed into legal services tender analysis for the past dozen years, and he doesn’t see it going away. 

“Procurement bring a specific skill-set – they are analytical and have technologies to support the tender processes,” he says. “Most large businesses have invested a lot in technology for managing their relations with external suppliers and they want to get a big bang for their buck. That’s why procurement is getting involved across as many areas of business
as possible.”

The AIG man acknowledges that the enhanced scrutiny has been difficult for some law firms to swallow. But, he says, “most are starting to realise procurement is another stakeholder in the selection process. And good firms realise there are lots of stakeholders along the way to being a preferred law firm for a large organisation.”

Coote continues: “The procurement team here, for example, has been good at highlighting things the firms have been doing outside issues around hourly rates. We had a lot of added-value questions in our request for proposal, covering issues such as secondments and updates.

“Because procurement is often involved in the reverse auction process, that perception of being fixated on costs and fees can arise. But we see the auction as just one tool in the selection process. And procurement are skilled at running those processes. When you’ve got 25 firms pitching, to run 25 negotiations would be time-consuming for everyone, whereas an auction can be run in an hour. Procurement brings to bear technology that improves historic negotiation techniques.”

Online tendering – the pros and cons

“If a law firm gets an unsolicited online request for proposal from a company with which they have no relationship, their response will probably go into the ether. With the online tools, procurement can take the view – the more the merrier. But if the firm doesn’t have a relationship it should decline or determine what value you can add. Another problem is that online tendering is limiting. It’s frustrating when online forms only allow for responses of, say, 500 words. That doesn’t allow for a detailed enough answer.” 

Varun Mehta, vice-president of legal and compliance solutions at outsourcing business, Clutch Group 

 

“Online tendering can be useful when it comes to procuring commoditised, volume-based legal services, but overall, legal services are based on relationships and trust – and you don’t get a feel for those aspects if you do it on an anonymous basis. You don’t get have an opportunity to assess such things unless you meet people. So the fact is that online tendering can actually be quite dangerous for legal services, although it’s all right if you are buying a product.” 

Sam De Silva, partner-head of IT and outsourcing at Manches and a board member of the Chartered Institute of Purchasing and Supply

What lawyers hate about procurement

“From experience, panel reviews run by in-house lawyers are far better than panel reviews run by procurement people. Buying pencils is not the same, but unfortunately the processes are and so are the questions. As a result, all you get is a price debate, which is ludicrous.” 

Anon. TheLawyer.com

“If [the panel review process] is all about price and capability – which it often is – why ask all these firms to provide loads of information on issues such as health & safety, quality assurance, pro bono efforts and diversity? All firms have these in place, so limit pitches to issues around price and capability.”

Jerry Barras, director of European marketing and business development at the London office of US global law firm Shearman & Sterling

 

“We sat in a room with the heads of legal at [a major bank] and they had three senior people from their procurement team at the meeting. They beat us down on price and then sent us to another room so they could think about the numbers. And all those difficult conversations were being led by procurement, not the lawyers. It was quite nice for the lawyers because they got someone else to do their dirty work for them.” 

City law firm BD staffer

What lawyers love about procurement

“There are positives and negatives, but among the positives is that procurement brings a governance structure to the process. It means issues are looked at more objectively. Perhaps a firm with a capability that might not
have known a client because of other relationship issues is looked at in a more scientific way. There are a range of roles procurement and in-house legal functions can carry out.” 

Derek Southall, partner and head of strategic development at Wragge & Co

 

 “Panel reviews can be costly and time-consuming for all concerned, so anything that helps to streamline the process must be seen as a welcome development. Some of the GCs we have spoken to welcome engagement with their colleagues in the procurement department and report good experiences, with positive outcomes.” 

Clive Black, City manager at The Law Society

 

 “Panel reviews can be costly and time-consuming for all concerned, so anything that helps to streamline the process must be seen as a welcome development. Some of the GCs we have spoken to welcome engagement with their colleagues in the procurement department and report good experiences, with positive outcomes.” 

Clive Black, City manager at The Law Society