How the smartest law firms are getting ahead of the game
Why do so many law firms lag behind the financial performance of their corporate clients?
Procurement in big business is a proven value lever, creating differentiation and adding, substantially, to bottom line financial performance.
Historically, the legal profession has viewed procurement very differently.
The business of law is nuanced, highly specialised and predicated on trusted relationships built up over time.
Consequently, lawyers have been long-trusted to buy external services as they see fit, with service delivery firmly above price as a critical success factor.
Which drives a widely held misconception about the role of procurement in this process.
Global Procurement Director, Top 100 Global Law Firm
There is an incorrect perception that procurement is there just to clobber suppliers and batter down the price. But good procurement is not all about price, rather about careful selection, enhanced supplier relationships and getting the best value for money .
Never-the-less, many firms remain resistant to what they see as procurement “interfering” in the business of buying and selling legal services.
3Consequently, procurement has - until recently - been under-resourced and largely overlooked in most law firms.
Many smaller, country specific, firms do not have dedicated internal procurement teams. Instead, responsibility for the buying of external goods and services sits at departmental level - usually with an end result that virtually all procurement is transaction-based with virtually zero strategic activity and poor value for money.
And its not just small firms that have this limited set up. A number of Top 30 international firms don't have dedicated internal teams either, with external expenditure that typically runs well into the hundreds of millions not being professionally managed at all.
For firms that do have dedicated internal teams, those resources are often limited (in terms of numbers of people on the ground) and lacking in capability (when compared to high maturity procurement teams outside of the sector).
Furthermore, in certain instances the internal team is faced with an uphill battle, with a complete lack of stakeholder support and blockage to the proper access required to do the job in any meaningful way.
But times are changing
The landscape has shifted since the Global Financial Crisis, Brexit and a period of sustained political and economic uncertainly.
At the same time, the legal industry has gone through a minor revolution during the last few years. Several firms have become truly international (Dentons merging with Dacheng of China, Hogan partnering with Lovells) whilst the three-way merger between CMS UK, Nabarro and Olswang created the 6th largest firm in the world (by headcount) virtually overnight.
If you add to this mix an environment of fierce competition, client pricing pressure, disruptive innovation and a rising cost base (with external expenditure up by as much as 30% in 3 years according one Magic Circle firm) viewpoints about the role of procurement are starting to change.
More firms are finally beginning to recognise that professional procurement departments can help lawyers focus on what they do best.
Whilst at the same time, there are big transformational and financial implications for getting this dynamic right.
The substantial benefits of procurement excellence can go a long way to supporting the growing appetite for organisational change and transformation that has taken hold in the legal sector over the last 5 years.
And a small - but growing - number of firms have been placing procurement at the heart of their transformation agendas:
Transformation Director, Top 30 Global Firm
Procurement is the really interesting piece of the transformation jigsaw
as it funds the other projects...
With external spend often running into the hundreds of millions, the 'prize' for delivering enhanced procurement can come in the form of substantial seven and even eight figure financial savings...
...providing a head start on short-term financial performance as well as freeing up funds for re-investment and longer-term transformation.
How one firm brought this to life
Following a series of mergers between US, European and Asian firms in quick succession, a multi-billion, truly international law firm was created.
Spend on external goods and services was estimated at well over $500 million per annum. Spend data sat at a county-by-county level across multiple systems, formats and languages - with visibility of spend regarded as "poor at best".
Procurement had up until recently been autonomous, non-centralised and non-professionally managed. Following the recent mergers, some global initiatives (across certain IT contracts) had been started, coordinated by operational people. Travel was also being examined - again at an operational level but with little input from an experienced procurement resource.
However, it was clear that the new, much larger, organisation created opportunities for supplier consolidation at the very least.
A newly created, regionally focused procurement team had begun making some interesting inroads. Basing activities around the most 'workable' spend data available, partnering with an external procurement specialist and with sponsorship from the regional CFO, the team identified a number of test categories to pilot “under the radar”.
These included telecoms, basic office stationary, some areas of print and franking.
The external partnerprovided support to sharpen the quality of the available spend data, creating valuable category and sub-category analysis and forming the basis for a longer term solution to both spend visibility and intelligent procurement decision making.
Together with stakeholder conversations on 'low hanging fruit' a series of procurement initiatives were designed.
Significant tail spend existed, as well as multiple agreements with the same vendors across various countries, representing big consolidation opportunities and a powerful basis for supplier negotiation.
In addition, historical contract and pricing errors would bring profit recovery numbers to the table, whilst an examination of existing platinum level service agreements (that had never been required or used) delivered additional savings and enhanced service agreements.
In telecoms an agreement that was 7 years old - with one legacy firm paying well over the odds – saw a 64% cost reduction coupled with an enhanced service agreement almost overnight.
Whilst based on the smaller peripheries of spend, the overall scale would still be large enough to include an 8 figure addressable spend level and a significant increase in value for money.
As the project advanced, interest began to take shape more broadly, with the other regional CFO's taking an active interest. The firm now plans to take this to the next level, rolling out other categories and creating an overall, global, approach to procurement. With over half a billion of external spend (and rising) the financial enhancement opportunity will be substantial.
Points to consider
- Attitudes to the role of procurement in law firms are changing
- Whilst many firms still don’t regard procurement as a strategic priority, others are getting ahead of the game and enjoying the lion’s share of the financial and transformational benefits that can be achieved
- Senior level sponsorship (at CFO / COO / Senior Partner of Managing Partner level) is crucial in realising these benefits
- Creating a 'proof of concept' to demonstrate value can be a highly effective way of beginning the journey and getting senior level buy in