In our last letter to you, esteemed colleagues in legal departments, we asked whether you include your colleagues in procurement or if you try to keep them out of purchasing legal services. Now we want to discuss cost savings with you, legal spend, and instruments procurement professionals typically use.
Our market intelligence research underscores the point that it pays to involve procurement for buying corporate legal services. With legal procurement’s help, companies save millions of dollars (pounds, or euros). Procurement’s savings through cost reductions and cost avoidances translate into significant savings per share for public companies.
Procurement is clearly earning its seat at the table (at least from the CFO’s point of view), as our survey findings suggest that legal procurement professionals were able to save their employers 17.1% on average. (Last year saw an average of 14.6% in savings due to procurement’s involvement, and in 2017, it was 11.4%.) To put it in perspective, for a company spending $200 million on outside legal services, this translates into $34.2 million saved. The most successful legal procurement professionals saved their employers 24% on average (in our above case, this would mean $48 million saved.)
A competent legal procurement team is worth their weight in gold. They bring to the party a range of skills, knowledge and experiences that drive costs down. They know what questions to ask, what data to collect, and how to get more for less.
Our findings suggest that it is all about tenure: As a rule of thumb, the longer a procurement professional works in the legal category and knows the industry’s ins and outs and particularities, the more successful she will be. Those with 10 or more years in legal procurement saved their employers 23% on average (compared to the general average of 17.1% mentioned before).
Success (here defined as major savings achieved) is also more likely when procurement has a good relationship with their colleagues in the legal department. Procurement professionals describing the relationship with their colleagues in the law department as “partners” or “collegial,” saved their employers about 20% on average, while those with “reluctant” or non-existent relationships saved only 10% on average. Together, legal and procurement can achieve sustainable savings with their law firms and legal services providers.
We cannot stress it enough: Success is built over time in the legal category. Legal is not a category procurement professionals can work in for a few years, only to switch to the next category. It takes time to gain knowledge about the legal industry, it takes time to establish trust and develop relationships with the legal department, and to know what is working for their organization.
How Much Are You Spending on Outside Services?
A lot of legal departments do not know how much they spend on outside legal services, globally in a year. It is often one of procurement’s first tasks to provide clarity in this area. There need to be discussions about which spend will be counted: Only the legal department’s external legal spend? Or also legal spend that is part of the business unit’s budget?
But just how much should you expect to spend on external legal services? What is the standard? Some industries are known for spending lots of money on outside counsel. Large banks, insurance companies, pharmaceutical companies, and other highly regulated industries typically fall into this category. They are intensely supervised by governments on a local, state, and national level and subject to litigation on many dimensions.
Typically, annual legal spend increases with the size of the organization: the larger the organization, the more it spends on legal services. However, the percentage of spend relative to a company’s annual revenues diminishes, ranging between 0.6% for the largest companies ($25B in revenues or more) to 6% for small(er) enterprises ($501M to $1.7B in revenues). Sixty basis points of a $100 billion revenue bank is $600 million—an enormous spend that was largely unchecked ten years ago, before CEOs and CFOs mandated procurement to support the legal department.
The size of a company (in terms of annual revenues) determines the percentage of legal spend: A company with revenues between $4.1 billion to $25 billion (think Fortune 500), spends an average of $173 million on legal, that is, it will spend between 0.6% and 4.2% of its revenues on legal services, while a company with revenues between $501 million to $1.7 billion could expect to spend between 1.8% and 6.2% of its revenues—or $31 million—on outside legal services.
After years of spend reductions, our findings suggest that legal spending is on the rise again. This is likely due to a spike in business activity, which increased amount and complexity of legal activity. Regulation and compliance spend in financial services and health care generate enormous activity.
Interestingly, while alternative legal services providers (also referred to as law companies) have continued to gain market share, the bulk of this new spending is being directed (again) to “traditional” law firms. It appears that when companies are engaged in complex transactions, IPOs, or other big ticket work, the legal department relies on its tried and tested law firms: Clients spent over ten times more with traditional firms than other types of legal services providers, compared to only 5x last year.
However, alternative legal services providers have become very popular among the largest legal spenders—Fortune 100 companies and their international equivalents. The average spend went from $9.34 million last year $11.6 million this year. Alternative legal providers reduce spend per matter by leveraging people, process and technology. They are particularly cost effective for high volume, repetitive tasks, not bet-the-company events.
Favored Procurement Instruments
Procurement uses an expansive range of procurement tactics when buying legal services. With the help of legal procurement, the sourcing of legal, alternative and ancillary legal services continues to move from a largely unmanaged or “passively” managed function to an actively and professionally managed, more mature category of spend. Legal procurement is doing its job and earning its seat at the table.
Let’s have a look at which tools and tactics procurement favors. According to our research, almost every client negotiates discounts: 88% of survey respondents already negotiate discounts with legal services providers on behalf of their employers and an additional 3% plan to use this tactic in the future.
Outside counsel guidelines have become common practice among large corporate clients: 87% issue and enforce outside counsel billing guidelines (up from 74% last year), and an additional 11% percent are planning to issue and enforce them.
RFPs are now the standard way to choose legal services providers: 85% percent of survey respondents issue RFPs—short for requests for proposal—up from 76% last year. Another 10% plan to do so.
Alternative fee arrangements (AFAs) have drastically increased in popularity among legal procurement professionals: 83% currently negotiate AFAs (last year this number was 65%), and an additional 15% plan to do so in the future.
Freezing rates has dramatically increased in popularity among legal procurement professionals: 80% percent expect their firms to freeze rates, with an additional 10% planning on doing so in the future. (Last year, only 60% started to freeze rates.)
Are You Convinced Yet?
Are you almost convinced now that it might be a good idea to bring in procurement? Let us make one more argument why you shouldn’t wait another day to bring in your colleagues in procurement: The “good cop-bad cop“ dynamics.
In-house counsel rarely enjoy tough price negotiations that are necessary to deliver the cost reductions demanded from the CEO and CFO. It is so much better, having someone else—who doesn’t have to work with outside counsel afterwards—do the negotiations for you.
So what do you think? Have you made contact with your colleagues in procurement? Why not have a quick meeting to get to know them and hear what they have to say.
Silvia & Evelyn
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Dr. Silvia Hodges Silverstein is CEO of Buying Legal Council, an international trade organization for professionals tasked with sourcing legal services and managing legal service supplier relationships.
Dr. Evelyn Paetsch is head of indirect procurement, legal and digital services at Deutsche Bahn AG and a Buying Legal Coucil board member.