A Clear Vision: Corporate Law Department Leadership Strategies

Transcription

1 May 22-25, 2016 Los Angeles Convention Center Los Angeles, California A Clear Vision: Corporate Law Department Leadership Strategies Moderator: Paul Roy Panelists: Toby Brown, Peter M. Hebert, Michael K. Wofford, & Christopher J. Yost LI10B 5/23/16 11:00 a.m. - 12:30 p.m. The handouts and presentations attached are copyright and trademark protected and provided for individual use only.

2 LI10B A Clear Vision: Corporate Law Department Leadership Strategies Monday, May 23, :00 a.m. 12:30 p.m. LI10B A Clear Vision: Corporate Law Department Leadership Strategies Toby Brown, Chief Practice Officer for Akin Gump, brownt@akingump.com Peter Hebert, Senior Vice President and Lead Litigation Counsel for City National Bank, peter.hebert@cnb.com Michael K. Wofford, Executive Vice President and General Counsel of Entertainment Partners, mwofford@ep.com Christopher J. Yost, Managing Director of Litigation for FedEx, cjyost@fedex.com Moderator: Paul Roy, Senior Director of Finance and Administration with Time Warner Cable, paul.roy@twcable.com

3 Creating a Healthy Relationship: Legal and Procurement Toby Brown Chief Practice Officer Akin Gump Strauss Hauer & Feld There is a natural tension between the Legal Department and Procurement. Their basic goals, on the surface, run in opposite directions. Legal is charged with reducing risk as much as possible, while Procurement is charged with lowering the cost of reducing risk, which obviously may increase risk. Role of Procurement To better understand this relationship, and more importantly to improve it, we will start with exploring the role of Procurement. Many procurement efforts are started when companies reach a critical mass in size. At this point they realize a centralized approach to managing their supplier relationships will save them money and ensure consistent inputs into their products and services. These inputs can be pretty much anything the company may purchase; from copy paper to steel for bridges. Initially Procurement has an easier go driving savings. Although it definitely requires significant effort to find and then combine all of the supplier relationships, cost savings are readily obtained via purchasing power and utilizing a more methodical approach to negotiating contracts. But after this initial benefit, Procurement s role shifts towards a constant, diligence over cost control. They are charged with making sure year-over-year, supplier contracts squeeze every dollar out of the administrative costs and cost of production for the company. Some companies in the retail space are well known for their prowess at this, as their margins are very thin and aggressive cost control is required to maintain a healthy bottom line. Of course such an aggressive approach can yield unintended consequences. We have seen this also in the retail sector when reports of child labor used overseas, or poor working conditions hit the news. In turn, this consequence demonstrates a need for balance in how far cost savings can be pushed. At any rate, the bottom-line for Procurement is the bottom-line. And the way a procurement department shows value is demonstrating their impact on the bottom-line via cost savings every year; some to the point that their salaries and bonuses are driven by meeting such goals. The Role and Situation of Legal In contrast, the role of the legal department, until only recently, was sheltered from such cost savings efforts. Their job was holding down legal risks and taking aggressive action when risks were actually manifested into real problems (a.k.a. law suits). The annual budgets for these departments were not heavily scrutinized. Since the number of lawsuits and deals the company would have each year were not predictable, the legal department generally made requests for

4 resources as they needed them. Company leadership would approve, since failure to respond to a lawsuit could have significant negative financial impacts and deals had to be done. With the Great Recession, that all began to change. Cost savings found its way to the legal department. One point to note was that the market relationship between legal departments and the outside firms began changing prior to this watershed event. Around 2005, requests for discounts became more commonplace. After that, each year brought more and greater discount requests. So when the recession hit, legal departments were already leaning in the cost control direction. In-house counsel were already feeling like the cost of outside counsel was too high. So they were onboard with addressing cost control. In some respects, in-house counsel had developed a level of distrust with outside counsel, to the point they felt their firms were being unfair with them. But here s the thing legal departments built the existing service and billing approach system in cooperation with outside counsel. They needed and relied on the dynamic that lead to high rates and billable hours. In fact, they were (and are) reliant on this system for their own internal talent. In-house groups hire trained lawyers from outside firms. Only occasionally do they hire straight out of law school. So what we have is some dysfunction within the legal sphere, between former collaborators who are now faced with a new, and not sure how to handle, problem. Enter Procurement Around 2008, in-house legal departments started feeling more direct pressure to control costs. CEOs were effectively telling General Counsels that even with changing volumes of work, they would still need to control costs. In some circumstances, the CEOs introduced Procurement to the legal department as a means for driving these cost savings. From experience, many times Procurement was thrust upon the legal department. I recall one GC commenting about how Procurement was great at driving down prices, but they weren t around to deal with the consequences of that effort (a.k.a. unintended consequences). Early examples of Procurement s involvement were likely not effective, based on observations from the outside. RFPs from these efforts would ask odd questions, demonstrating a lack of understanding of how legal services functioned. For instance, one RFP provided a spreadsheet with types of services for each jurisdiction, broken down further into types of time keepers (e.g. partner, associate, etc.). The law firms expected response was to input rates and number of hours per timekeeper type, per jurisdiction. Presumably, they were hoping responses would show competitive numbers on hours and rates. This all of course, assumed next year was going to be exactly like the current year. Not a good assumption. These early procurement driven RFPs clearly demonstrated the classic procurement method: unitize the product, then drive down cost per unit. For Legal, this approach keeps the focus primarily on billing rates. This mindset appears to persist up to current times. Clients have an almost exclusive focus on billing rates as the metric for measuring cost savings on legal services.

5 On one level, this makes sense. Lower rates should lead to lower costs. However, it overlooks many other important variables, including the number of hours worked. Before we address those other variables, we need to address two important points that arise from the focus on rates. First Point - The focus is most often not on the actual rates, but instead on the percentage discount against law firms standard rates. You can have competing firms with different rate structures bidding on work, but the apple-to-apples assessment of their bids is centered on the level of discount each firm proposes. Perhaps clients assume each firm s rates reflect varying degrees of expertise (and value) and therefore recognize and agree with the different levels. A firm with 10% higher rates, reflects 10% greater value. Whatever the perception of the clients, this doesn t add up. The firm with higher rates might give a greater discount, but the actual rates paid would still be higher. The connection between lower rates equaling lower costs is broken. It is very hard to definitively demonstrate cost savings with this type of a rate discount shopping approach. So why do clients continue to do this? Second Point - Because it is what they know and can be easily accomplished. Asking for discounts is something clients had already done and firms agreed to them. So it was very easy to just ask for greater discounts. Procurement can easily be on board with this message too. If last year the client had a 10% discount and this year they get 15%, savings should be realized. This is the message they can take to their leadership. You asked Legal to control costs. And we compiled by obtaining greater discounts from our outside counsel. To borrow a phrase - Mission Accomplished. So it s obvious why clients would stay focused on rates and discounts. First - it is something they know how to implement. And second - they can use it to argue they are meeting the directives for cost savings The purpose of the preceding discussion was meant to give a brief history of the relationship between Legal and Procurement, to highlight the tensions between the two, and to demonstrate that efforts to bring these two groups together may not be meeting the intended purpose of cost savings. In turn, this begs the question: How can they work together effectively? An important point to note is that some clients are ahead of others in this movement and have found ways to wed the two. However, experience shows that those are exceptions and that the majority of the market is still struggling with this. On top of that, the trend for bringing Procurement to bear on legal cost savings is still early stage now. The market does not yet have good stats on how many clients are actually taking this step, indicating this is very early stage. But taking this as a likely trend, looking for a way to do this well leads us on. Scope - the Missing Ingredient

6 The reason much of these cost efforts are struggling is due to a lack of focus at the fee level. By fee level we mean how much does a legal matter cost? Rates and hours add up to the fee and the fee is the actual cost to the client. So cost savings are better focused at this level. A big challenge for shifting focus this way is that the market has not traditionally priced legal services at that fee level. The known market pricing mechanism has been billing rates since the late 1960s. So lacking that history and market, both buyers (clients) and sellers (law firms) have little to no experience establishing fees. This brings us to a point where I believe Legal and Procurement can really make some magic. In order to establish fee-level pricing, what is needed are budgets at the matter level. In order to effectively develop these budgets, clients will need to establish scope for legal engagements. Establishing scope is something Procurement can help Legal do. For most product and service offerings, Procurement likely requires scope of some type of specification of what is being purchased. Otherwise, they are not able to demonstrate cost savings. An apples-to-apples comparison is needed for that to happen. Since Legal has not been developing scope for their engagements, Procurement had to do what it could to establish those baseline numbers. How do we fit the two together? In a perfect world, Legal should take the driver s seat in cost savings, with Procurement acting as a navigator. By taking the lead role, Legal will be in a position to drive results that include both cost savings and risk mitigation along with quality legal results. In-house legal departments that have been effective at controlling their legal spend have been those that take cost control headon. The challenge is that most legal departments do not have the skills or personnel in place to take that approach. Whereas law firms have been adding pricing directors, legal departments need to start employing similar roles. An old friend has a saying, Nothing happens until there is staff. That concept definitely applies here. It might be an existing person within the department or a new role. However it is structured, cost control needs to be a primary part of their job description. With this role in place, the legal department will be better positioned to take advantage of the resources of Procurement. The role can drive data driven approaches that include budgets for matters above a predefined threshold. The budgets should include scope, such that changing situations can be addressed. And with scope part of the scenario, Procurement will be in a better position to drive the cost control goals of the department. At this point Procurement becomes a tremendous asset, helping the legal department understand their spend and track it in a much smarter fashion. It becomes a partner in the effort to effectively control costs. Clients leading this effort have proven this approach out. A well-known example is that of Glaxo Smith Klein (GSK). GSK went as far as creating a cross functional team, comprised of both Legal and Procurement department members. And the effort is driving the intended results.

7 It Can Work A natural tension exists between Legal and Procurement. And the brief history of their efforts has further demonstrated this challenge. However, there are ways the two groups can effectively work together; resulting in cost control and quality legal service to the client. Legal departments will need to be proactive and take the lead in this relationship. They will want to add or designate resources in the group dedicated to the cost control effort and through that role engage with Procurement. This new role will be the key to creating a truly productive relationship and driving the best results.

8 Your opinion matters! Please take a moment now to evaluate this session.