Cost-conscious companies are using procurement departments to seek value-for-money legal advice. Could this threaten long-standing relationships with firms? Lucy Trevelyan reports

Aquiet, but nonetheless radical, revolution is unfolding in the way companies are procuring outside legal advice. With company management increasingly demanding better value from external legal advisers, merely flattering general counsel is no longer enough to guarantee private practice lawyers permanent panel places.


Company boards are turning to procurement departments to help purchase legal services. Indeed, a recent survey of 30 senior managers at leading companies in the UK, US and mainland Europe showed that 80% of respondents were planning to review their legal providers within the next year – and of these, some 70% expect procurement departments to lead the process rather than lawyers (see [2005] Gazette, 7 July, 1).

This approach is forcing law firms to forgo the effort traditionally expended on sustaining cosy relationships with in-house lawyers, and concentrate instead on developing the internal systems and policies needed to help them succeed in the new approach to tenders that procurement departments demand.


Raju Patel, chief executive of consultancy Fulcrium which conducted the survey, says procurement departments are credited with enhancing shareholder value by generating big savings – and their popularity is growing. ‘Procurement departments are tasked with taking the “difficult decisions” which boards or in-house counsel might find embarrassing, such as disengaging law firms whose partners have built strong inter-personal relationships through “wining-and-dining” chairmen, chief executives and in-house counsel,’ he says.


Mr Patel says that branding and perceived reputations are no longer enough to tide over leading firms: ‘Panel reviews are now taking place more frequently with the consequence that law firms have to jump through the hoops every year – a bad law firm may get through one year and then be terminated the following year. Gone are the days when getting on to a prestigious panel meant the account was secure for three to five years.


‘With the rise in competition and mergers and acquisitions (M&A) work, boards are getting more cost-conscious and looking for real value from law firms that are quoting between £1 million to £20 million or even more for M&A due diligence work. Even under urgent circumstances, board members are carefully scrutinising law firm appointments for M&A, competition and litigation work.


‘Some law firms have embraced these changes and proactively managed their responses, resulting in market-share gains. Nowhere is this more evident than with the rise of regional law firms – often offshoots from the major firms.’


Board members at large companies are now routinely asking procurement departments to initiate panel reviews, he says, with law firms reacting in different ways.


‘Some of the well-established, prestigious law firms have sometimes unashamedly reacted with arrogance, anger, denial and a spirit of non-co-operation towards procurement departments. But these departments are here to stay. They are the result not of the whims of corporate boards, but of the commercial and competitive pressures faced by clients within their own industries.’


Deepak Malhotra, London chairman of the Law Society’s Commerce & Industry Group (C&I) and general counsel at brewer InBev, says procurement departments can add something to the strategic sourcing of external counsel: ‘Legal advice needs to be procured, so there’s no reason why this shouldn’t be done along the lines of the policies and procedures set by the business. I am very much in favour of getting the procurement department involved in purchasing general advice.’


But he adds that such departments should not be responsible for procuring specialist legal advice, as they do not have the legal knowledge required: ‘The procurement process works best when it operates alongside the legal department to establish parameters and key performance indicators. General counsel may find that a procurement department will bring a more balanced perspective when it comes to selection of law firms, and have good ideas of how to get better value out of the relationship.’


Experience and structure are other advantages a procurement department can bring to the process, he adds, and general counsel should not feel threatened.


‘You won’t find a situation where the general counsel and the procurement department are looking for something different. Best practice would dictate that they should sit down and establish the selection criteria beforehand.’


The group general manager of the legal and compliance department of a large retail bank – who asked not to be named – says general counsel are solely responsible for procuring legal services in his company. He says: ‘I suspect that when a law firm pitches to a procurement department, the pitch would have to focus on costs, whereas if pitching to general counsel, it would concentrate on the value added that the law firm will bring. I don’t think procurement departments can fully understand how to choose the right lawyers, as the process is bound to become more cost-driven, which affects the quality.


‘The provision of legal services is not simply about cost but also the quality of the service and compatibility with the client. If legal services are purchased in the same way as paper-clips, the non-financial aspects can be overlooked,’ he adds.


Mr Malhotra maintains that the use of a procurement department should not change the approach of an external law firm to clients or pitches, ‘since they should be looking to provide the best quality and value at the right price anyway’.


However, Stanley Williams, chairman of the C&I Group and director of legal affairs at business services provider BSI, says the usual warm relationship between general counsel and private practice lawyers has changed and will continue to do so.


‘Some lawyers aren’t the best monitors of costs. In times gone by, they have just kept on with the same relationship year in, year out and haven’t chased costs down. This is where purchasing departments are making inroads into legal services. General counsel are going to have to change as well. Some are more economically minded than others, but some of the cosy relationships have not in the past been challenged. Now boards are saying that costs have to come down.’


Solicitor Anthony Armitage, director of legal tendering company First Law, says that while procurement departments may appear useful, they will not necessarily be a long-term fixture. He says: ‘There is probably an increased perception that the purchase of legal services is not conducted as rigorously or as uniformly as for other services. Procurement departments are specialists in outsourcing so, at least superficially, it makes sense to involve them.


‘But I think this is more likely to be a passing trend, because it has arisen from a lack of information, and is based on an assumption that legal services procurement is no different from other types of procurement.


‘From my experience, there is very little adaptation of the questions asked of suppliers to take account of the specific characteristics of the legal services market. Without relevant information – such as a firm’s policy on working to fixed and capped fees, for example – a comparison of hourly rates between competing firms is virtually worthless.’


He says using procurement departments instead of general counsel can lead to a loss of control by the legal department and a poorer understanding of the complexity of the solicitor-client relationship, as well as creating unnecessary bureaucracy and inadequate contractual documentation to govern service standards for ongoing work. ‘Lawyers should be evaluated in three principal areas – experience and expertise, value for money and service standards. The criteria used in the assessment process should be designed to address as objectively as possible these three elements, using a pre-determined numerical scoring system. To my knowledge, lay procurement departments tend to ask questions which either invite yes or no answers or rather subjective narrative in response, neither of which lend themselves well to sophisticated appraisal.’


Maeve Jackson, head of business development at Birmingham firm Wragge & Co, says that in the last year, the use of procurement departments by commercial companies has become much more the norm, with around 30% to 35% of requests to tender now coming from such sources.


She says although procurement departments demand controlled costs and improved quality, far from being price-fixated, many are more interested in whether their would-be legal adviser would be the right ‘cultural fit’. Questions about the law firm’s stance on the environment are becoming an important aspect, for example.


‘Luckily for us we already have policies in place on these sorts of issues. It’s part of our strategic imperatives to make a statement about what we are and what we believe in, so we can take things like this very much in our stride. While we may have had to change the style of how we work, we haven’t had to change who we are.’


But Ms Jackson warns: ‘Other firms – those that are perhaps a little more old-fashioned – would find this pretty tricky. Potential clients ask about things like measurement matrixes. We have systems to measure our performance in place, but for firms that don’t, this would be a huge undertaking and they may have to count themselves out.’


She says the tendering process often adopted by procurement departments generally requires law firms to fill out a questionnaire, followed by an invitation to tender, with those who successfully make it through the first stages being asked to give a presentation.


‘One of the criticisms aimed at the document stage is that it suppresses innovation and the ability to give creative answers. We have turned this on its head though – it’s a creative challenge for us to get across our point in those sets of boxes. We enjoy the process most where general counsel is also involved. The questions tend to be tough but relevant. Some are not written so well and lack the understanding of a legal firm’s perspective and don’t have the same level of sophistication.’


She says clients are increasingly refusing to reappoint their existing law firms ‘on the nod’, which stops practices getting complacent and allows other firms to get a foot in the door even where the relationship between the incumbent law firms and in-house lawyer is long-standing and close.


Given that the tendering process is time-consuming and expensive for both client and law firm, she says her firm naturally has to consider whether the work threshold on offer is worth its while before participating. Fortunately, she says, some companies will still engage a firm for, say, a three-year tenure. ‘If they have big projects we have to get used to each other, and that’s hard to do if time is short.’


Mr Patel says that where procurement departments are involved, law firms likely to be losers are those professing to offer a one-stop shop, because procurement departments will scrutinise every service offering by the law firm, and only recommend appointment in service areas where they are particularly strong.


He says some top-100 law firms are overly reliant on a handful of major clients. ‘Fulcrium estimates that up to 40% of fees earned by some top law firms can be attributed to either a single client or a handful of clients. This means that with more panel reviews taking place, the stakes are much higher for such law firms.’


Those who will reap the benefits, he says, are firms with innovative business models that respond to the client need for cost reduction: ‘The winners will also be firms that understand the meaning of the much banded term “value”, and then translate that in a way that significantly – not incrementally – enhances relationships with clients.’


He warns that attempts by law firms to drive a wedge between procurement departments and the board or in-house counsel will almost certainly backfire, while attempts at irregular discussions between external lawyers and in-house counsel or board members during the panel tendering and selection process will prejudice the client company – and ultimately the external law firm.


‘If you are an incumbent law firm, the decision to re-appoint you will be made easier if you can show how you intend to reduce the cost of legal services and dramatically improve the transparency of your billing. Otherwise, while clients may re-appoint you to the panel for “political” reasons, they may not necessarily channel much work your way during the year.


‘But if you are a law firm with little history at the client in question, the odds are already stacked against you. You will need to show a compelling case to earn an appointment to the panel – and procurement departments can be your greatest allies in helping you get your foot in the door.’


Lucy Trevelyan is a freelance journalist