Category Archives: Legal

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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Legal Sourcing 101

A recent article in ISM on crashing the legal department had some great advice on what you need to do when helping your General Counsel source legal services.

  • You must take the lead in proposing alternate fee arrangements.
  • You must take the lead in finding out what “XYZ” task really costs.
  • You must figure out how waste can be driven out of the system.
  • You must insure that the firms you select can get your rates with the product and service providers they could also make use of.
  • You must help to quicken the death of the billable hour.

For more advice on how you can help decrease legal costs, see:

… here on Sourcing Innovation and

… over on e-Sourcing Forum.

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Can Good e-Discovery Tools Really Reduce Your Legal Fees?

Or will they just instill over-confidence and end up costing you millions when you lose the case and have to pay a huge award for damages?

It’s a good question, and the first one I asked after reading this article in Integrated Solutions Magazine on how e-Discovery is not just for lawyers anymore. The article, which points out that Gartner’s recent report on E-Discovery: Project Planning and Budgeting 2008-2011 found that one gigabyte of data can result in $18,750 in legal review costs, makes a good point when it notes that outside e-Discovery can be very expensive. It also makes a good point when it notes that you’ll likely have to pay considerable legal fees regardless of the outcome of the case. But what it doesn’t ask is what happens if doing it yourself fails to turn up that one piece of evidence that could win the case for you? Even if you had to spend an extra 100K, that’s still a lot better than losing 1M, 5M, or even 10M!

While I loathe paying extravagant legal fees as much as the next guy for something I could do myself for much less than a big-name law firm will charge me, there’s a difference between writing your own contracts and trying to defend yourself in a trial where millions are on the line. And that’s usually where e-Discovery comes into play.

What I believe you should take away from this article is that modern e-Discovery tools are much more powerful, and much cheaper, than they were years ago and that it doesn’t cost your law-firm $200 an hour for legal review when these tools allow para-legals, who make less than $30 an hour, to do the initial culling which produces documents that are then reviewed by junior associates, who make less than $50 an hour. (And I’m being generous with both numbers, especially considering the number of hours new associates are expected to pitch in. There’s a reason some people think law firms keep the cot industry in business.)

Then, your procurement department should be using this knowledge to aggressively negotiating the amount you pay for each service performed by the law-firm. Force them to break down services on an itemized bill and insure that you don’t pay more than, say, a blended rate of $65 to $75 per hour for legal review (with the exact amount dependent upon your local market), just like you don’t pay 20c a page for copies or $500 an hour for basic services (like filings) that an associate can do for (significantly) less than $150. It might still cost a bit more than doing it yourself, but considering the cost of the risk that you will be mitigating, I think it’s worth it.

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