Category Archives: Legal

Legal Sourcing Requires A Legal Mind

Or at least an understanding of the legal mind! Sourcing Innovation occasionally covers Legal Sourcing, which is one of the sacred cows in many organizations. However, as the doctor has more expertise in Sourcing Technology than in Legal Sourcing, not very often. Thus, when the doctor sees a great article on Legal Sourcing, he points it out.

Last week, over on Spend Matters, he saw such a great article. Cyndi Joiner’s guest post on how you should “Be Smart When Sourcing Legal” is just such an article. You have to do your homework before approaching Legal, because they always do theirs, you have to understand the landscape, and you have to have a strategy. Cases are built on strategy, and firms that might need to argue those cases are selected on strategy, and if Supply Management does not have a strategy, Supply Management will be shown the front of the door before they even get into Legal’s office.

But if Supply Management has a strategy, they will not only be able to work their way into Legal’s offices, but earn their trust. And when they work with legal to execute strategic sourcing, they will not only get the sacred cow under control, but they will see spend leveraged across the enterprise, standardized rates, documented processes for engaging preferred firms for service, improved billing, and complete transparency and visibility into legal spend. And a sustainable savings average of 7-10%, or more, will be achieved.

To find out how your organization can achieve these savings, check out Cyndi Joiner’s guest post on “Be Smart When Sourcing Legal” over on Spend Matters.

Should Your Contracts Be Based on Alternate Dispute Resolution?

The dispute resolution solution of choice in most large contracts is litigation — you reserve the right to tell the other party that I’ll Sue Ya if anything goes wrong. Given the large judgements that have been awarded in some of the more famous legal battles, it seems like it should be the dispute resolution of choice when millions of dollars are on the line. But should it really? The reality is that court is time consuming, costly, and, as all court cases are public domain, damaging to your reputation and irreparably harmful to your business relationship. All it does it take a bad situation and make it much, much worse.

There are other options, and, as described in this recent CPO agenda article on “taking the alternate route”, they include:

  • mediation,
  • arbitration, and
  • adjudication.

And your procurement organization should be acutely aware of them, because each and every contract signed needs a dispute resolution procedure — as it cannot be predicted when something will go (horribly) wrong and when the organization will have to deal with it quickly, and effectively. And as the article notes, if you do have a dispute and you don’t have adequate dispute resolution provision, it can make the resolution of the dispute significantly disadvantageous for one party or another, depending on the circumstances. And you don’t want to risk the resolution being disadvantageous to your organization, considering it is Supply Management’s job to be leaders in contract creation and negotiation.

So why consider ADR? As the author notes: the overriding advantage of using ADR is that it enables both parties to preserve the commercial relationship while maintaining control of resolving the dispute. So which ADR option do you choose? It depends on what you need.

  • Mediation
    is a method that may allow parties to reach an amicable agreement and maintain on-going relations. The focus of the process is on the interests of the parties, rather than on their legal rights alone, which allows other factors such as commercial pressures to be taken into account. If the goal is to reach a mutual settlement, this is often the best bet.
  • Arbitration
    is particularly valuable with international contracts where parties are based in different countries, since court judgments accepted in one country are difficult to enforce internationally. Arbitration awards are easily enforced all over the world under the New York Convention. If the goal is to reach an enforceable settlement, this is often the best bet.
  • Adjucation
    is hugely popular because it provides a quick answer and the resolver is likely to be a subject matter expert from the industry. And the answer, while not always the one sought, is usually one the parties can live with. This allows the parties to deal with the problem and move on. If the goal is to get a quick resolution, this is often the best bet.

And while the best option may not always be clear cut, chances are it won’t always be litigation. Keep this in mind when determining your dispute resolution methodology of choice.

Non-Traditional Opportunities Abound in Legal Process Outsourcing

A recent article over on SIG on “sourcing legal process outsourcing services” did a great job of pointing out that sourcing legal services is not the same as sourcing other types of services if the goal is cost reduction or value generation. Traditionally, an outsourcing project looks for savings by way of:

  • Headcount Reduction
    by outsourcing FTE roles to resources who can do the same job at a lower cost
  • External Spend Reduction
    by moving spend to those firms that can perform a set of functions at an overall lower cost

Headcount reduction works fine for accounting, where there are rows and rows of AP/AR people reviewing invoices, collecting payments, and making payments, or marketing, where advertising, print media, video, and radio are best outsourced on a project by project basis than staffed in house. This doesn’t work that great for legal where, given the size of an average legal department, the scope of an LPO engagement may be 10 FTEs. Given that average in-house legal spend is 40% of total legal spend, that, on average, only 25% of these roles can be outsourced, and that the maximum savings is 50%, the maximum savings achievable is 5% of total legal spend. Average is probably about 3%. No outsourcing effort is worth it if only 3% can be saved.

And external spend reduction works great for marketing which has outsourced an entire project, including brand building, message generation, and print production to a single firm when brand building should have been outsourced to brand specialists, messaging to advertising specialists, and print production direct to a printing shop that can offer steep discounts for high volume. Bur for legal, where you are simply shifting cookie-cutter legal tasks (such as fixed-form document review, property titles, etc.) from a legal firm to an LPO, savings are minimal given that outsourced spend is typically 60%, less than 50% of the tasks will typically be transferrable, and savings will probably only be 20% as they are still skilled tasks, for a maximum savings of 6%, with an average savings of 3% to 4%. Again, not worth it.

Outsourcing legal is all about value identification and generation. First, as the article points out, the supply management team needs to figure out what legal services can be “unbundled”, which of these could be outsourced, and whether the savings opportunity is there. Then, when they have identified those opportunities that could generate enough savings to be worthwhile, supply management needs to determine how to maximize the non-financial value-generation opportunities that are quite real and more valuable than any cost savings that may be achieved. Specifically,

  • Resource Re-Allocation
    Existing legal staff needs to be focussed on high-value work as there are very limited resources. Legal staff should be focussed on risk-management, not document review. On forth-coming compliance requirements, not process improvement. And on supply management contract simplification, not one-time contract generation.
  • Acquisition of New, Previously Unavailable, Services
    There are only so many legal resources in-house, and their knowledge is limited. They will not be able to provide guidance on every potential market that the business might want to enter, or be aware of all of the impending regulations in the US, EU, and China that might affect the business, or provide detailed due diligence on every contract presented to the business by a potential customer.

In many legal departments, counsel spends 90% of their time reviewing every routine change requested by a counter-party in a legal negotiation instead of focussing on what the real risks are and how to negate them. They spend a lot of their time reviewing existing processes with respect to current compliance regulations to insure reasonable efforts are taken to ensure compliance instead of focussing on what is coming down the pipe and what significant organizational shifts will be required. And on generating a custom contract for each major supplier instead of optimizing a contract generation and management system that will allow negotiators to generate a customized starting contract with all relevant clauses and terms at the press of a button. That’s why in-house resources need to be focussed on high-value tasks.

And with global market penetration becoming more and more important as first-world economic growth declines by the year, the ability to access more expertise than can be found in house is becoming more and more critical.

Thus, a sourcing team that adopts a value-based approach to legal services can provide the organization with value that goes well beyond what any cost savings could possibly achieve.

Do You Know Your Legal Risk In An Acquisition?

Chief Executive just ran a great article on how to evaluate legal risk in acquisitions that I believe is a must read for any Supply Management department asked to consult on a Merger or Acquisition. Especially since, like the article states, it is nearly impossible to find a company not involved in some sort of litigation. The traditional analysis of the management team, cash flow, and market share is not enough — a risk assessment on pending litigation must also be made.

So how do you assess legal risk? The first thing you do is get an expert advisor, and a litigation manager in particular. Once you have this individual, who is an attorney with a significant business background as well as a litigation background, you work with her to evaluate the:

  • materiality of the litigation, the
  • potential for future suits, and the
  • connection between the litigation and the business plan.

The materiality is important not just from a relevancy perspective (that attempts to define the validity of the claim and the chance of success by the claimant) but from a cost perspective. If the cost of defending the litigation, regardless of expected outcome, will cost the company more than it can afford, the company will be bankrupted. The potential for future suits is also important because if the business model, or technology platform, opens the company up to other potential litigations based on equally (in) valid claims, the company could be bankrupted as it grows (and becomes a target by patent pirates). Finally, it is critically important to understand if the litigation exposes a problem with the core business model. If this is the case, and there is no easy, or at least manageable way, to correct the model, there is not only a great potential for further suits but a great potential for failure and bankruptcy.

However, if a litigation manager properly evaluates the potential for materiality and future litigation, and the connection between the litigation and the business plan, and finds no significant risks, then investors, who can make informed decisions, with a full understanding of the legal risk associated with a potential company, can confidently invest in the acquisition.

Be sure to check out the article on how to evaluate legal risk in acquisitions. It has a lot of great advice and a great case study on how a residential and commercial brokerage firm sized up the risk of an acquisition.

What’s the Right Number of Approvals?

In a recent piece by ChainLink Research on “how a legal department can add value”, the author noted how gaining efficiencies is not only about technology, but about process. Referencing Cisco’s big push to get to “one-approver per function”, the article noted that it’s important to ask what is the real ROI of having additional approvers and what is the related impact on revenue and customer satisfaction. It’s important to ask how much time the extra approvals take and what the time-value of money is for holding up orders for that many extra days. And what is the cost to the organization if approver number 17, who is the least affected by the purchase, decides to reject the order 7 days into the process when the product is needed on day 10?

While it’s probably impossible to build some hard and fast rules that will always apply, it is important to set some ground rules as to when another approval is needed, and when an approval can be skipped or automated. For example, does every order over $10,000 need to be signed by three approvers? What if the order is for four new servers at a cost of $20,000 and the purchase has already been approved in principle in the budget (for an amount up to $25,000)? Should not the CTO’s approval alone be sufficient once the product has been selected (provided proper procurement policies have been followed)?

At most there should be one approver per function, and the approval of functions that are minimally impacted should probably not be required at all if at least one of the approvers is a senior manager or the purchase is not high dollar and at least one of the approvers has deep product and/or service knowledge. And any approvals that can be automated should be. For example, a $500 spend on office supplies for approved products from an approved supplier should probably not require three manual approvals.

Any thoughts as to what the right number of approvers is?

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