There has been a real change in the way that big clients are looking to buy legal services, and if you are a law firm, the good news is that old fashioned procurement is on the wane. There are a real variety of factors causing this change and it has opened up the opportunity for firms and their clients to move back into the “relationship” space and away from complex and formal RFPs. Getting this right requires changes on both sides, but the opportunities are great. Procurement has been facing diminishing returns. Techniques that worked for them in 2009 onwards, when law firms faced an uncertain future, don’t work when so many firms are having their busiest ever year.
Lesson 1 – How Procurement Works
You spent £4,000 on your family holiday last year. Procurement visit you and say, “You paid too much. I can get you exactly the same holiday next year at 20% less (so saving £800).” You are a bit doubtful, but hey, saving money is good isn’t it? So, 12 months later, Procurement buy your holiday. They pay £3,200. They charge £200. Still that’s £600 saved. They give the £600 saving to your employer (not to you!).
At this point you get the same holiday (OK your flight had a connection and your room didn’t have a sea view, but it was pretty much the same) so you can’t complain. But what takes some understanding is that you – the user of the holiday (or whatever the service was) – don’t actually see any of the money saved. In a normal corporate environment, the money saved benefits the CEO’s bonus this year (what a great CEO our profits have increased, give the CEO a bonus). Or the savings may help the CFO who has been targeted with reducing overheads by 10%. Plus there is the cost of the procurement team or consultant, they need to be paid. The slight of hand here is that the supplier of the service receives less money, but the actual saving (unless you are a sole trader) gets lost somewhere in the corporate system. So, the actual benefit to the user – in the typical case the GC, the legal team and the business units that they support – is very hard to find.
In my consulting work I have the opportunity to speak to all of the parties in the game. I can meet and talk to GCs and their teams in major buyers of legal services, I work with many of the very largest law firms in the world, and I meet and have drinks with the procurement professionals. It is through these conversations that I can see the change. Pure procurement has run out of steam. By the time procurement have “helped me save money” a few times my family holiday is in a caravan at Prestatyn, it’s raining, and my kids are wondering where it all went wrong. Fortunately for my family, I am in Consulting, so I can draw diagrams and charts to show them what happened. What happened is that cheaper stuff, is not as good as more expensive stuff. It’s a law of economics and it’s time to call Emperor’s New Clothes on the procurement of legal services. It was great while it lasted, but it’s come to a natural end. That does not mean it will stop straight away, there is a whole industry involved in legal procurement, but the smart money has moved on. I want to look at some of the ways this change is happening, because it shows a more collaborative, partnering future. Actually, more of a return to an older model. Before we get to that, it is worth looking at why procurement ran out of steam, and the answer came from an interview with the assistant GC at one of the world’s biggest technology companies. It turned out that interviewing the assistant was crucial because the GC is still giving interviews about cutting legal spend and how successful it has been. Here’s what I was told:
“At the top end, the law firms completely ignored procurement. They were fighting landmark cases for us, defending our IP, or helping us deal with anti-trust matters. They weren’t interested in meeting procurement and that was quite right really. They charge eye watering amounts and no one in the company is going to challenge them over this. At the bottom end we don’t care – it’s repetitive work, it’s cheap anyway and to be honest it’s already been procured to death. There are no more savings to be had. The real damage has taken place in the middle. Good firms, handling pretty important work, have had several rounds of procurement and, to be honest, the hourly rates we now have are unsustainable. No one in these firms wants to work on our matters. The partners were just caught in the middle between our Procurement team and their Managing Partner. Faced with the loss of millions of dollars of fees and a big-name client they just raced to the bottom to the delight of the Procurement team who said, “I told you they were overcharging”. Now I’m left trying to deliver a great legal service to this business with a smaller and smaller budget. Meanwhile procurement and the GC are telling the world what a great job they have done. We are now moving to fixed fees and the firms are starting to opt out because they are busy with better paying clients.”
My analysis is that, short term, procuring services works. You cut spend. But to pretend you get the same service is wearing a bit thin. And it runs out of steam – it faces diminishing returns. If you disagree with me, then just let me take over the buying of your annual family holiday – I guarantee I will save you money. Let’s run this holiday buying scheme for a few years and see how it works out for you (it’s fine for me, I can take my fees out of the savings). To see how well procurement of services works in other areas of life, we can see how saving money on probation services led to a 50% increase in serious crimes committed by those on parole from this report in 2019 ( https://bit.ly/2RFpRAg ) and saving money on minor surgery led to a trail of deaths from this work in 2018 ( https://bit.ly/2Sncchy ). Now, cutting legal spend is unlikely to cause deaths, but to pretend it really works for the users of the legal service, is becoming more and more difficult. I have seen a shift of terminology from Procurement to Legal Operations and a lot of talk about innovation – but if you question the aims, it’s still about old fashioned cutting legal spend.
Lesson 2 – Why Procurement was right
When procurement arrived at the scene, many law firm and client relationships were dysfunctional. They may not have seemed it at the time (I was a law firm partner then) but it had become pretty one sided. The risk of overrun was overwhelmingly borne by the client and the simple fact was that the longer a matter took, and the more complex it became, the more profit the law firm would make. There were clear disincentives to efficiency. It was like the nightmare where your pipes burst, you call an out of hours plumber. He charges by the hour, and you know he is going to take a while to fix your leak. It is hardly surprising that law firm partners (and all of the others working inside law firms) saw impressive growth in earnings. There was a balance of supply and demand up until 2008, simply because law firms would recruit the number of new lawyers that they needed, and let go of ones who weren’t busy. It was a very simple balance of supply and demand. That supports prices. There had been previous recessions, but if anything, firms were busier in a recession than in a boom.
Bigger buyers of legal services (I’m looking at you, Banks, Insurers and Pharma!) had already started to use regular RFPs to drive competition, often with a bi-annual competition run either by, or with the assistance of, Procurement professionals. At this stage I joined the Chartered Institute of Purchasing and Supply. This gave me access to those in the procurement industry who had just started to buy legal services. Generally, they knew nothing about the legal sector at all, but that didn’t matter. It turned out it was remarkably easy to drive down prices. The simplest strategies produced high returns. Stage 1 was often to halve the size of the panel. Firms were told to come up with their best price because they were either going to win double the amount of work, or were going to be dropped from the panel. Partners, who were faced with the possible loss of their largest client, dived for the floor on price. In many cases a client loss would mean having to fire staff that the partner had themselves recruited and trained. Once the new smaller panel was in place (ignoring the fact that the remaining firms didn’t actually have the extra capacity to handle double the work, the law firm partners and the GC would have to sort that out) then procurement could gradually add “challenger firms” to the panel (i.e. cheaper ones) until it was time to halve the size of the panel again.
Meanwhile, inside the lucky law firms, they were faced with more work on lower rates so there was a drive to “lower the octane”. Less partner involvement, more paralegals, switch to fixed fees and computerise, and so on. The Client Partner would face pressure inside the firm to maintain profit. In many firms, the partners who most often faced procurement were achieving a lower price, and overall law firm profit may have been supported by other clients who were paying more. Changeable hours budgets might increase – in effect lawyers may have to work longer hours to meet their billing targets and earn their pay and bonuses. So they did.
On the plus side, partners and their whole teams had to start looking at efficiency. Why bother with efficiency, if all your clients are paying hourly rates with only sketchy estimates of the total? Here we had whole teams learning new skills and understanding this had value to their other clients, and to the whole firm. But it meant a change of attitude. No longer was it a matter of crafting the perfect solution, irrespective of cost. It was about delivering ‘good enough’ solutions, within budget – and it did not suit all.
After the general financial crisis in 2009, most law firms saw a sizeable drop in demand for legal services. Some areas of work in finance and real estate simply stopped. Income was clearly going to fall, and all clients were now determined to cut legal spend. A huge growth in recruitment of in-house legal teams started, and continues to the present day. Law firms initially shrank in size and were more cautious about new recruits. By managing size against demand, the last ten years have enabled law firms to once again see a balance in supply and demand and they have seen steadily increasing income and profitability as a result. I cannot recall talking to a single Managing Partner in the last 12 months who didn’t admit to having a “very good year”. And there isn’t a week that passes without hearing of firms withdrawing from, or refusing to tender, for lower value work. At a time when everyone is busy and struggling to cope with demand, good lawyers are being moved off the lower priced work to clients who are paying higher rates. I have long worked with global firms on their pricing strategy. This needs a dual track approach. In the short term it is about better scoping, pricing and project management of their work. For the medium term it’s about finding cultural fit – focusing on the clients who value your advice and are looking for long term partnerships, and moving away from clients who only talk about price. For procurement, the party is over. The game now is about Professional Buying, and it is GCs and their own legal team who are best equipped to do that.
Best practice today
At the forefront of client and law firm relationships I am seeing an atmosphere of collaboration rather than confrontation. A much more open relationship where the law firm is taking much more time to understand the pressure faced by the in-house team and is looking for opportunities to improve value, in ways that work for both client and law firm. One GC expressed it this way, “I have my panel, they are all there for a reason. They all bring something and give me resilience. I am happy if it’s the same panel in 20 years’ time. Why would I want to lose a trusted advisor? They understand that I need to show that I am working with them to deliver best value to my company. We collect and measure a lot of data points together. If a firm is falling behind it’s my job to help to lift them up. And it’s not about price, it’s about value. A panel firm may repetitively get low scores on price, but stay on panel because they deliver value in other ways. But they all have to deliver predictability, they know how important that is to me.”
What I found most interesting was the change in attitude this brings. Lawyers are employed for their problem-solving skills, it’s what they are good at. Why not harness those to look at better ways of working together, reducing waste and delivering more.
And what about the RFP? The smarter GCs can see that law firms burn up hundreds of hours responding to an RFP. When I sat down with one GC, a back of the envelope calculation was that, given the size of the panel, responding to a new RFP would burn up around $1 million of law firm time. Yes $1 million. Could we honestly not think of a better use of so much valuable time, than filling in RFP responses that we both knew the GC was not going to read in any detail? Why not make the RFP a couple of pages, but arrange a number of discrete law firm and client workshops to develop new processes, upskill the in house team, learn from the law firm IT Professionals what developments were headed down the line and how they might be used by the client. There are, quite simply, much better uses for law firm and client time than focusing on an RFP.
So, is this the end of the big RFP? I really hope so. I feel like it has had its day. For law firms to achieve this they have to start focusing on value and away from ever increasing chargeable hours. They need to move from pricing to scoping, spending much more time at the outset, understanding what the clients want and exploring options with them. If there are uncertainties be honest and explain what different routes would involve, and therefore cost. They need to be open to sensible alternative fees. If you work with your clients like this, there is no room for procurement, or the cost of procurement, in the process – which of course is yet another saving!
Kevin Doolan is the author of The Financial Times Guide to Mastering Services Pricing (published by Pearson) and is a partner in the Professional Services Group at Møller Institute based at Churchill College, University of Cambridge. He is the author of the Harvard Law School Case Study on Pricing Services (HLS 13-17) with Professor George Triantis at Stanford Law School and is Guest Faculty teaching Pricing and Business Development on the Accelerated Leadership Program at Harvard Law School. He divides his time between teaching and consulting, and between Europe and North America.Kevin.Doolan@MollerInstitute.com