A buyers’ market

In-house teams may have grown in size and stature over recent years, but their external adviser panels are definitely shrinking. As a result, law firms find themselves increasingly at the sharp end during adviser reviews (see box ‘Cutting back’, below), with clients pushing for better rates, greater efficiencies and added extras.

The use of alternative fee arrangements (AFAs), reverse auctions and value accounts is well documented but recent years have also seen procurement teams playing a larger part in the buying of legal services, as well as the creation of more specialised procurement roles to support the legal function.

‘Senior lawyers have to realise that buying things and negotiating supply arrangements is a particular skill,’ says Paul Wortley, RSA’s head of legal for commercial lines and litigation. ‘It is not the same as a legal skillset. That is one of the reasons why generally, procurement has taken a larger role over the last few years than it might have done historically. That is a good thing.’

Reverse auctions and demanding AFAs are often touted by clients as flashes of ‘innovation’ during lengthy and drawn out panel processes. Yet, although innovation is often used as a byword for efficiency, Julia Chain, director of RPC Perform and the former general counsel of T-Mobile UK, says clients are at risk of overcomplicating rather than clarifying the process of buying legal services.

‘We are not seeing nearly enough innovation in how legal services are delivered and priced on the one hand, and on the other we are seeing hugely complex solutions with rebates and auctions when the simpler versions work the best, where you have done all your work on the panel, you decide who your firms are, you’ve done the due diligence and generally there is a simple auction process based on price, availability and capability.’

However, Stéphanie Hamon, head of commercial management at Barclays, who was in charge of the bank’s recent global panel review, argues innovation can be simple. ‘Innovation is not always just about technology. Very often people tend to associate innovation with buying a new piece of software and therefore there is a big investment attached to it. But innovation, particularly in the legal industry, can be quite simple. Panels are a great tool, but can often be relationship-damaging. We wanted to make sure everyone would come out at the end of the process feeling really motivated and wanting to work together.’

Baby and the bathwater

Generally financial services, in particular banks, are ahead of the pack when it comes to trying new methods of buying legal services.

Paul Worth, global head of litigation at Eversheds, says: ‘Banks’ legal spend gives them considerable purchasing power. It is no good complaining about added value such as providing secondees if you want premium work from the banks. It is part of the deal. You take it or leave it.’

Panels are a great tool, but can often be relationship-damaging. We wanted people to want to work together.
Stéphanie Hamon – Barclays

According to Kate Cheetham, group GC of Lloyds Banking Group (LBG), which finalised its UK roster in November, the in-house team together with procurement set out a plan that centred on law firms’ use of technology to cut costs and drive efficiencies.

‘We used e-auctions and were very focused that we wanted additional rate cards and/or fixed prices for standard law firm offerings as well as rate cards and prices based on law firms utilising technology, including artificial intelligence and/or low-cost service centres.’

Greg Bott, director of Addleshaw Goddard’s consulting arm, AG Consulting, says this is an emerging trend. GCs are becoming increasingly interested in law firms’ automation capabilities. ‘Clients are starting to take artificial intelligence and automation very seriously. Whereas in previous requests for proposals (RFPs) it may have been referred to, now it’s: “What are you doing in that space?”; “Can we leverage those investments?”; and “How will that mean our work is done cheaper, quicker and faster with greater cost certainty?”’

Barclays is often cited as one of the more progressive in-house teams when it comes to buying legal services, although one private practice partner says the bank ‘tries a lot of new things but these can be a little over-engineered sometimes’. In 2014 the bank pioneered its value account system, dubbed ‘relationship accounts’, which works by giving firms an annual value of free legal services they must provide in return for volume of work – primarily through legal advice and secondments.

The system, which originally applied to Barclays’ list of preferred advisers, was extended this year to all firms that receive a volume of work worth over £1m from the bank. In addition, during the RFP process the bank asked all firms that wanted to be on the panel to always suggest AFAs for litigation work and moved from a single rate card to three hourly rate cards: ‘strategic’, ‘medium-complex’ and ‘flow’.

‘We wanted law firms to start thinking harder about what the value was for the client for the piece of work they wanted to do,’ notes Hamon, who says the relationship account system was something law firms wanted Barclays to keep.

‘We also wanted to share law firms’ commercial offering anonymously, so they could see their relative position compared to others. We created peer groups. They could see we were comparing them with their peers to give them that transparency.’

In addition, Barclays raised the threshold for the value of matters that need to be tendered to its panel firms from £25,000 to £100,000. ‘There always was a policy to tender, but as part of a feedback exercise, we discovered that our threshold was too low and so we raised that above a certain amount in the spirit of improving relationships,’ adds Hamon.

In the energy sector, BP has informed its current external advisers that they will be required to pitch for each instruction worth over $1m in legal fees ahead of its long-awaited 2017 review. Meanwhile, Shell, which cut its global panel from 11 firms to six this year, has introduced a rule that every matter must be pitched for by three or more firms and must be on an AFA. The panel process was run by Gordon McCue, associate GC for global litigation, strategy and co-ordination, who also used an online reverse auction for hourly rates.

‘We invited all the firms that were in the running for a particular jurisdiction plus any of the firms we were considering for a global panel. The auction rooms were set up for an hour each and the level of experience of each lawyer was all divided out, so you had 12 or 13 different rates to bid on. The firms would enter their initial bid for their maximum rate for a lawyer at a specific experience level, and once they submitted that they could see where they sat relative to the other firms.’

Although McCue says the auction was successful in that it reduced the overall billing rates by around 18% compared to 2013, he admits the process needed some refinement. ‘There was a lot of wasted time in those auctions, where the firms just waited to see what others did. Then there would be a flurry of action in the last couple of minutes. In one case we had an auction extend for 30 minutes beyond the end because there would continuously be new bids in the final minute.’

However, for Chain, who says rebates and reverse auctions come with the temptation to ‘throw the baby out with the bathwater’ because they look at a pure cost play rather than value, the whole issue of automation and outsourcing is where in-house teams can show how forward-thinking they are.

We were very focused that we wanted additional fixed prices for standard law firm offerings as well as prices based on advisers utilising technology.
Kate Cheetham,
Lloyds Banking Group

‘Commodity outsourcing is in its infancy, but people are looking at it far more to see where they can get value at the lower end and that is definitely a good sign. People are looking at India and the Philippines, but also nearshoring. Robin Saphra, who used to be [group GC] at Colt, set up a successful Indian firm that took a massive amount of cost out of the business and it worked very well. Everyone is looking at it. It has to be the way forward.’

Power struggle

As in-house teams become more sophisticated, so too do their legal procurement teams. Although the role is still new, and has taken time to bed down because of the natural tension between the two groups, GCs are realising that procurement can be an asset to use before boards, which are increasingly challenging legal spend.

At the start of the year, RSA, which is currently reviewing its claims panel, created a supply chain and procurement function purely for the claims division. Mark Baker, head of UK claims supply chain at RSA, says insurance companies are no different to other large companies in that their procurement functions have become more advanced over the last ten to fifteen years. ‘We’ve had to get more sophisticated in how we do things and the types of arrangements we put in place, be that risk and reward arrangements, differential pricing or understanding the cost of delivering that service. We also have a duty to ensure that suppliers are making a reasonable return on the prices they are putting forward.’

Historically procurement and legal teams often clashed but, as Chain says, attitudes are changing, with many procurement functions now bringing in specialists for legal purchasing.

‘Procurement realises it needs people that are skilled in purchasing legal services and GCs are realising that the procurement function is something they have to work with, not against. Historically there was a mismatch on both sides. The procurement guys were used to buying widgets and didn’t understand about purchasing services and the GCs, to put it crudely, had never been challenged about how they went about buying stuff, so there wasn’t a lot of science about how they negotiated contracts. I remember doing a panel several years ago that had both procurement professionals and GCs working together and they almost came to blows.’

Banks, again, are generally seen as doing procurement better. The Royal Bank of Scotland (RBS) has an entire team responsible for legal sourcing which, according to one private practice partner, ‘takes it all very seriously and it works very well’.

According to Cheetham, LBG’s panel process is jointly led by the internal legal department and the sourcing team, with the relationship a ‘true partnership which has been that way for a number of years’.

‘The sourcing team adds value with its commercial insight, as well as its process mapping of the re-panelling process and sourcing tools, which significantly helps execution.’

Other sectors, including pharmaceuticals and energy, have developed strong procurement departments because their size necessitates it. However, when it comes to retail, a private practice partner says one particular in-house team was under huge pressure from procurement to have a one-size-fits-all standard rate for their law firms, which was all based on negotiating down the hourly rate.

‘The deal was: push the rates down by 10%. But just looking at the rates these days doesn’t get you where you want to be on the value efficiency curve. It could have done more innovative things but procurement’s view was: “We are charged with getting 10% off everything. So that’s what we are going to do.”’

According to Worth, there are good procurement teams as well as bad but those that take time to build a relationship with firms and understand the different service delivery models can be extremely helpful.

Some teams procure photocopiers on Monday, paper clips on Tuesday and lawyers on Wednesday, applying the same methodology throughout.

Paul Worth – Eversheds

‘I recently worked with a procurement team at one of the banks and it was excellent. We had high-quality conversations about flexible resource models, AFAs and the disaggregation of service delivery. Others are just not equipped to have that sort of dialogue. They procure photocopiers on Monday, paper clips on Tuesday and lawyers on Wednesday, applying the same methodology throughout.’

There are no hard and fast rules when it comes to the involvement of procurement in the panel process. Some teams are only involved in the RFP stage, while others can be heavily involved in the follow-up activity and relationship building with firms after a panel is complete.

At Barclays, the entire panel review, design and implementation was carried out under the remit of the legal commercial management team of around 20 people, headed up by Hamon. The team was created last year by group GC Bob Hoyt as part of a plan to run the legal team within Barclays like a business.

What we are doing now is a fit-for-purpose approach in applying procurement principles to legal services.

Gordon McCue – Shell

The commercial management team is responsible for all external legal spend, including contract lawyers and e-discovery. It also has a relationship management element to it, where the performance of the panel firms will be continuously monitored to make the next panel process quicker and easier.

‘Procurement was involved from a process perspective,’ says Hamon. ‘Making sure we were able to follow our policy in terms of issuing the tender, that we had non-disclosure elements in place, ensuring the contracts were adhering to our terms and conditions, and that all our suppliers went through our ABC checks and so on.’

At Shell, McCue used procurement for the first time during the last panel review as part of the aim to significantly reduce the company’s roster of 250-plus firms around the world. The legal team used a procurement tool called Emptoris, which it customised and used to narrow the list of law firms around the world using different rounds of questions. They also used the tool for the reverse auction part of the process.

‘When we went into this process, we did decide that we would do it more efficiently, and the way to do that is by using the procurement function,’ says McCue. ‘This time we decided to take advantage of some of the tools they have within the procurement group, so it took a bit of time upfront to decide what those tools were and understand how they could help us and modify them. They were great for purchasing pipes and things like that but weren’t set up in a way that made sense for legal services.’

Procurement was used purely for the panel process. McCue says the legal team now has its own mini-procurement group within legal, which comprises non-lawyers who help the legal team work out the right pricing arrangement for a particular matter, typically on high-value transactions or litigation.

‘In the past the procurement processes were too heavy for the volume of matters that legal would bring in. What we are doing now is a fit-for-purpose approach in applying procurement principles to legal services.’

There is no doubt that in some sectors, GCs are beginning to realise the potential of procurement to control external spend if it can be customised effectively in a symbiotic relationship with the legal team. But arguably, the true potential of procurement has yet to be realised by those GCs eager to prove their worth to the board.

Concludes Chain: ‘Procurement and legal can be very effective in working together to get the low-value work off the desk of the in-house legal team so it can concentrate on what it was trained to do: the high-value work. Pretty much without exception, from teams of five to 500, senior lawyers are spending 10-20% of their time on what I would call administration. The most successful procurement guys are the ones that realise this isn’t just about pounds, shillings and pence and it isn’t about effectiveness. It’s about a mixture of the two. It’s about delivering value.’

kathryn.mccann@legalease.co.uk