New England Biz Law Update
How many legal departments employ best-in-class procurement practices when retaining the assistance of counsel? Probably not many, since very few inside lawyers consider themselves to be in the procurement business.
This article will challenge traditional notions of the role of the legal counsel in corporations. It is intended to assist inside counsel make better purchasing decisions when retaining outside counsel.
As a logical byproduct, this article is intended to help outside counsel respond better to current or prospective clients who are using best-in-class procurement processes. We are trusted advisers to senior management. Our value proposition is to proactively translate legal risk into business reality. We develop and implement plans to coordinate risk prevention and crisis management.
Does this sound like the profile of a buyer? Not exactly, but inside counsel are the buyers of over 2 percent of the gross domestic product in the United States, just on tort claims alone.[1]
How many buyers of legal services have systematized their procurement process allowing them to replicate best practices on every transaction? I am not aware of any inside counsel that approach buying legal services as a procurement competency. However, some companies have implemented creative strategies to reduce legal costs.[2]
FMC Technologies, Inc.’s general counsel, Jeffrey Carr, has developed a proprietary model called Alliance Counsel Engagement System (ACES, patent pending). Carr has created a shared-risk approach with outside counsel.
Firms can earn a premium on their rates if they hit certain benchmarks, and reciprocally, they can lose up to 20 percent of their fee if they fail to meet the thresholds.
DuPont implemented a new model of managing legal costs, saving the company over $50 million since 1993, by imposing cost-control measures, early case assessment and consolidating the number of firms it uses from 300 to under 40.
Raytheon installed a case management system and linked it to their accounting system, helping them to control budgets and allocate resources.
GE’s legal department has used a number of innovative strategies for managing legal costs, and recently began sending commercial contract work to inside lawyers in India where the cost is lower.
Inside lawyers are both “professionals” and “buyers.” Procurement professionals in world-class organizations are beginning to implement strategic sourcing processes for purchasing goods and services (see below, “Seven-Step Procurement Process”).[3]
This article will focus on the first two steps of the Seven-Step Procurement Process — strategic planning and due diligence. Future articles will cover the remaining five steps.
Step 1 — Strategic Planning
Traditional buying methodologies are situational in nature. Instead of relying on a system of negotiation best practices, inside lawyers rely on their experience, judgment and relationship with outside counsel to drive objective decisions about the procurement of legal services. But best-in-class strategic sourcing initiatives start with a principled negotiation process where the goal is to make both sides more profitable.
Merely negotiating a discounted rate structure with a law firm is not enough. This tactical approach gives inside counsel a false sense of security that it has lowered cost. Outside counsel does not like this model either because it knows the client will eventually come back for more of a fee discount. However, the law firm sets the rate on which the discount is applied. This “regular rate” becomes the sticker price.
Most legal departments are responsible for a budget that includes only the cost of inside counsel, outside law firm fees and disbursements, and department operational costs. The legal department may be included in the decision to set reserves, but it rarely has budgetary accountability for the outcome. Depending on the type of matter, the outcome (e.g., settlement or judgment in litigation, total acquisition cost in a merger) can have an economic impact well in excess of legal fees and disbursements.
Inside counsel needs to have a strategic focus on the total cost of a legal matter, including its outcome. Outside counsel should focus on meeting its client’s interests, which may be to minimize the total cost of each transaction, to maximize profitability, and/or to reduce adverse publicity.
Conversely, inside counsel should focus on satisfying the law firm’s interests, which may be to maximize profitability for its partners, to build a client base in a new specialty or geographic location, and/or to develop associates skills. If the client and its outside law firm are focused only on its own respective positions, they will miss critical opportunities to create new value by working toward each other’s interests.
Step 2 — Due Diligence
As the most important three things in real estate are location, location, and location, the critical success factors in negotiations and procurement are preparation, preparation, and preparation.
In order to implement your strategic plan, buyers of legal services need to conduct more than adequate due diligence on the prospective suppliers: outside firms. In a future article we will discuss Step 3 — RFP, including a very detailed due diligence questionnaire about the law firm and the services they provide. Here we will discuss how to understand what motivates the outside firm and how to measure the performance of lawyers in a litigation context.
What Motivates Your Outside Firm?
Law firms spend a fortune in entertainment expenses to woo new clients and to maintain relationships with current clients. The financial and marketing interests of the firms authorize this spending year after year.
Inside counsel maintains that it can make objective buying decisions despite the perquisites. Gift and entertainment giving in the pharmaceutical industry is now regulated even though doctors maintained that the giving did not influence their decision-making. Maybe inside counsel should continue to accept the invitations, but turn these events into a due diligence exercise.
Find out how the firm motivates its partners and associates. If the firm’s mantra is bill more hours, how can the interests of inside and outside counsel be aligned? If outside lawyers are compensated based on client surveys or objective client-success criteria, this is the firm with which inside counsel wants to partner.
The Need To Measure Litigation Performance
Although a collaborative negotiation is an art, the process of comparing the performance of suppliers on an objective basis is a science. In the field of procurement, supplier scorecards are developed allowing buyers to ascribe weights to such factors as quality, consistency of supply, delivery of service levels, customer satisfaction, inventory controls and, of course, price.
Can buyers of legal services apply the same procurement models to improve their company’s earnings by reducing the total cost of litigation, that is, legal fees, settlements, and judgments? The answer is absolutely yes.
There are over a dozen matter-management software solutions on the market that offer litigation recording systems giving legal departments an ability to record the data on its cases. Assuming that the data is input, these systems are a good step in the direction of analyzing the performance of lawyers.
However, these systems simply record matter data in specified fields without analyzing the impact of each factor on the outcomes. If the data is complete and reliable, what does the legal department do with the data to make better decisions? Does it share the data with key law firms? These systems do not:
Examples of Measuring Litigation Outcomes Using Statistical Metrics
Leading Consumer Goods Manufacturer
The general counsel of one of the world’s leading manufacturers of consumer products found that the company’s litigation caseload kept rising every year with legal expenses of outside counsel rising proportionately. Like many general counsels, he was under intense pressure from senior management to keep costs down.
This general counsel believed he could manage litigation more efficiently if he had better tools to evaluate the company’s outside law firms. He knew what firms charged per hour, the total amounts the company was paying each one, and the total settlement costs. However, he was not clear as to which firms were providing the most value on a total cost basis. He thought it would be helpful see if there was a way to analyze the correlation between the many variables of each case and their impact on outcomes.
The company selected a consulting firm to see if it was possible to:
In addition, the company was able to use statistical metrics for analyzing the effectiveness of alternative dispute resolution. Previously, it had a difficult time being certain whether cases handled through ADR were costing it more, less, or the same as other cases handled through traditional methods of litigation. With the benefit of statistical metrics, they were able to determine that using ADR was saving the company money and to pinpoint cases as to which ADR would provide the greatest economic value.
UnumProvident Corporation
Chris Collins, senior vice president and deputy general counsel of UnumProvident Corporation, wanted to take its management of litigation data to the next level. As an industry leader in insurance, his inside team was already very skilled at examining trends but he thought there was room to improve on its quantitative analysis of litigation data.
Collins used statistical modeling to take a sophisticated look at the numbers. But the analysis did something more important, it motivated lawyer/managers to look at their work with a greater focus on the business implications of the cases assigned to their teams. The study is also producing some unexpected dividends.
“We have been able to use our learning with internal clients in more targeted preventative lawyering,” Collins said.
Within a few weeks after UnumProvident’s 150 outside law firms attended a retreat where its consultant gave a no-names report on which firms were “above mean” and “below mean,” nearly a dozen of them offered to lower their fees. Although the unilateral reduction of fees of these firms was significant, Collins’ legal department can now reward the most efficient firms and help the less efficient ones quickly improve their effectiveness. UnumProvident’s legal department uses an electronic “playbook” to input the case variables and view the ranges of likely outcomes by firm.
Knowledge Is Power
Statistical metrics will never replace the judgment of inside counsel. However, it will give the buyer tools to make more informed decisions. General counsels are measured by outcomes and budgets.
Outside firms that wish to be true partners must be willing to be measured by these factors as well. A collaborative process will require inside counsel to allow the firms to explain outliers in the case data and to provide the firms performing below standard the opportunity to improve their performance. There may be situations where the outcomes were contingent on factors not within the control of the firm.
Inside lawyers must bring their procurement competency to a level equal to that of their legal ability. Relationships will always be important. The question is, “with whom do you wish to relate?”
Inside counsel should invest in relationships with firms that share their values and are committed to aligned interests. Until this happens, law firms will continue to slug it out with their competitors based on the “who you know” criterion and will continue to push the mighty billable hour.
Who knows, that competitor may be their client who just added an incremental inside counsel. Question for the law firm: “How do you think your client was able to have the expense of an additional lawyer approved?”
David Kramer is the former senior vice president and general counsel of The Stop & Shop Supermarket Company and senior vice president of legal affairs for its parent, Ahold USA. He is now president and CEO of Litigation Metrics™, the industry’s only solution that uses multivariate statistics to measure litigation performance on a total cost basis (e.g., legal fees, settlements/judgments, etc.). Litigation Metrics’ electronic “playbook”allows its clients — such UnumProvident Corp. and one of the world’s leading consumer goods companies — to predict budgets for legal fees and reserves, to identify the most efficient and effective inside and outside counsel, and to determine the optimal time to settle each case. He can be contacted at 508-785-3334 or at [email protected]. You can visit its website a www.litmetrics.com.
Mr. Kramer also is the founder of Kramer Procurement Solutions, Inc. (KPS), a consulting firm that helps its clients improve earnings through a strategic approach to sourcing products and services. KPS can be contacted at 508-785-1605 or at [email protected]. Also, you can visit them on the web at www.kramerprocurement.com.
[1] The 1995 edition of Tillinghast Towers Perrin’s “Tort Cost Trends: An International Perspective” found that U.S. tort system costs, including insured and self-insured costs, were $152 billion in 1994, up from $132 billion in 1991, and equal to 2.2 percent of GDP. See www.hcla.org/html/tillhast.htm.
[2] Catherine Aman, “Cracking the Whip,” Law.com, February 27, 2002. See http://www.law.com/servlet/ContentServer?pagename=OpenMarket/Xcelerate/View&c=LawArticle&cid=1046288234900&live=true&cst=1&pc=0&pa=0
[3] Kramer Procurement Solutions, Inc. has implemented this strategic sourcing methodology and conducts negotiation and ethics workshops for clients such as the LEGO Company, The Stop & Shop Supermarket Company, BI-LO Supermarkets, Fakta Supermarkets (Denmark), the Mason Contractors Association of Massachusetts, and the Massachusetts Bay Transit Authority (MBTA). See www.kramerprocurement.com.
Seven-Step Procurement Process:
1. Strategic planning; stakeholder buy-in; negotiation and ethics training.
2. Due diligence; unambiguous specifications.
3. Request for proposal (RFP) with minimum contract guidelines.
4. Weighted supplier scorecard to evaluate RFP responses; multiple rounds of negotiation.
5. Contract summary database.
6. Audit supplier’s reports and ensure compliance with contract terms.
7. Post-mortem evaluations of supplier; record intranet to share internally; automatic tickle system for next negotiation commencement.
