Power of the Purse: Get To Know Your Client’s Chief Procurement Officer

by Dr. Silvia Hodges on April 9, 2012

“Three years of cost-cutting has created a new dynamic in the relationship between law firms and their clients. Rather than maintain a cozy relationship with law firms on an ongoing basis, more and more companies are taking a rigorous approach to selecting firms and ensuring that the relationship continues to deliver expected outcomes,” according to 2011 Financial Times research report A New Dawn: Lessons for Law Firm Management in the Post-crisis World. This shift is particularly visible at the initial instruction phase, when more and more companies bring in procurement professionals to help evaluate providers and negotiate a good deal.

In-house lawyers who once had free rein to hire and pay outside counsel now often report to executives, who are not lawyers, and who want expenses to be predictable. They bring in “new sheriffs,” warns PwC’s Howard Kravitz in an article in the March/April issue of Strategies Magazine (the issue’s focus is legal services procurement). Procurement’s goals include a variety of sourcing strategies to help obtain discounts, reduce or increase the number of suppliers, and force a competitive bidding event. While the GC and business executives may be the ultimate decision makers, procurement can significantly influence or direct the buying process and outcome.

So … do you know your clients’ procurement professionals? If you want to continue developing business for your firm you better have them on your speed-dial, have their mobile number, and be connected to them on LinkedIn, Google+ or Facebook.

Unless you sit across from them in a pitch, corporate purchasing, procurement or sourcing managers are the faceless people accused of everything from interfering with the lawyer-client relationship; of having no knowledge and ability to judge the quality of legal services; of unreasonably squeezing firm’s margins; to playing firms against each other and cherry-picking in order to get the lowest price. Recently, after losing a pitch, one outraged lawyer complained that “they [the procurement managers] probably got their brains for a discount.”

It is unlikely that procurement or supply management, as it is now often referred to in corporations, will go away when the economy finally picks up again. After buying raw materials, goods and services for their employers, corporate purchasing departments started sourcing engineering and architectural services in the late 1980s, marketing, public relations and advertising services in the mid-late 1990s, and accounting and tax services in the mid-2000s.  Now it is the legal industry’s turn.

Procurement’s tactical potential as a cost killer is no secret. That is their corporate mandate. Spending less on suppliers can directly improve the bottom line. The McKinsey Quarterly wrote in a 2007 article titled Inventing the 21st-century Purchasing Organization, that a “decade of globalization-fueled competition has opened the eyes of executives everywhere to the strategic benefits that can be achieved through the intelligent use of purchasing and supply management.” The role of procurement has always been based on the idea of cost control, getting external suppliers to reduce their prices and preventing departments from unnecessary spending through managing what is purchased. This starts with initiating firm reviews and continues to acting as the contract negotiator.

Ideally, procurement brings skills, processes, discipline and focus to complement the service-specific knowledge and experience of the internal users, the in-house legal department. It assists in-house lawyers with defining the scope of the project, selecting the right supplier, negotiating, and structuring compensation, evaluating supplier performance, and leveraging business with preferred suppliers. Says McKinsey: “the intelligent use of purchasing helped [a company] rein in rising legal costs by separating legal services into commoditized segments (including paralegal and research needs) and creating sourcing strategies for each individual segment. Meanwhile, the company introduced systematic performance metrics–such as indemnity averages–and created an independent general-counsel office staffed with lawyers trained in purchasing basics.” Indeed, companies with a sophisticated approach to procurement pay attention to talent by upgrading their procurement skills and exploring ways to connect employees across the organization in a common purpose. They set high aspirations and establish goals that balance their vision of the future with a clear focus on how to achieve it, according to McKinsey. Top procurement professionals place a special emphasis on aligning their sourcing efforts with strategic corporate goals.

The new role of procurement and sourcing managers is not confined to the reduction of costs. They aim to work with functional leaders – including general counsel – to improve performance and focus on business value as well as cost. As McKinsey puts it: “Top performers view purchasing not only as the commercial conscience of the organization but also as its competitive eyes and ears.” There is little doubt that the involvement of procurement is an important factor behind a power shift in the legal industry to the client. Procurement today has its seat at the table when it comes to sourcing professional services. Our colleagues in advertising, architecture, accounting, and engineering among others, have had to learn to deal with this. It seems that it is our turn now.

Dr. Silvia Hodges is the co-chair of the NYLMA communications committee and the issues editor of the March/April 2012 issue of the Legal Marketing Association’s (LMA) magazine “Strategies,” which focuses on legal services procurement. In December 2011, she lectured at Harvard Law School on “Power of the Purse: How Corporate Procurement is Influencing Law Firm Selection”. Join her on June 15, 2012 at the conference “Power of the Purse” (organized by ARK Group). Silvia is the Director of Research Services at TyMetrix Legal Analytics and an Adjunct Professor at Fordham Law School. Reach Silvia at hodges@silviahodges.com

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