Masterclass: Effective buying for law firms - getting more for your money

There are only a limited number of options open to law firms looking to improve their profitability. They can sell more, charge more, or spend less on support services. But perhaps some firms simply need to get better at buying.

By Mike Buchanan, managing director, LPS Legal

Buying consultants are an increasingly common feature of UK law firms, often delivering high returns for their clients. In some cases they have been known to reduce costs in individual spend areas by as much as 40 per cent.

However, while recognising that the competitive landscape for legal services will become increasingly challenging over the coming years, and profitability harder to deliver, many firms seem ignorant of a discipline that has long been synonymous with profit maintenance and improvement in the commercial world: professional buying.

Let’s consider an irony. Major law firms are suffering commercially at the hands of their clients’ buying professionals, yet they’ve been slow to adopt professional buying themselves. In case you’re not familiar with the full impact of buying professionals, I will make the following predictions about their likely effects on the legal sector over the coming years:

Lower fee rates (up to 15 per cent);
Increased objectivity in the law firm selection process;
More formal and robust agreements;
Increased measurement of performance, often with respect to key deliverables;
More success-based remuneration.

The increasing involvement of buying professionals in clients’ and potential clients’ law-firm selection process should therefore be a subject of some concern to law firms. Buying professionals are spearheading the drive of many major organisations to improve the value for money they derive from their vendor base.

The reasons organisations may choose to use buying professionals are many, including:

The significant potential for cost reduction across professional services, but particularly with regard to legal services. Buying professionals have a lot of leverage, because given the choice between losing one of your top clients or accepting a 15-per-cent reduction in fee rates, what would you do?
The process of selecting law firms appears rather opaque to more commercially-minded people; too “old boy network” and subjective.
Some client executives may simply resent the level of remuneration enjoyed by lawyers and enjoy the opportunity to ‘take them down a peg or two’.

In any case, buying professionals’ early involvement in the purchasing of legal services has brought significant cost savings to their organisations. As organisations are continually faced with demands for increased value for money from their customers, they have little option but to seek it from their vendors in turn. Thus, there is the introduction of professional buying practices, whether by employing professional buyers, or the judicious use of buying consultants or interims.

Throughout the rest of this article the term ‘buying’ is used to mean the acquisition of support goods and services from third parties, including in areas such as IT hardware and software, archiving services, office stationery and print. Some 40 different spend areas account for approximately 20 per cent of UK law firms’ revenues.

At this point, it is also worth stressing that drives to improve the buying performance of law firms can be undertaken at the same time as drives to improve selling practices – the former need take up very little senior management time when compared with the latter.

The article sets out to answer the following questions:

How can law firms assess the existing quality of their buying?
What constitutes professional buying in professional-service firms?
What gaps do we see in our work as consultants to the legal sector?
What mindsets are indicative of poor buying thinking?
What options are available to law firms to improve their buying performance?

We will also try to identify the law firm mindsets that need to be challenged if buying performance is to improve.

Assessing the existing quality of buying

Often law-firm senior management is simply unaware of the degree of buying competence being exercised. How could individuals obtain such knowledge? One approach would be to employ a buying consultant to carry out a review, but alternatively (and less expensively) in-house lawyers could review the current contractual positions in a few key spend areas. Although some contracts are not always readily available, I would suggest that contracts for the following spend areas are critically reviewed:

Office stationery;
Archiving;
Photocopiers;
Telecoms.

Given we are talking about lawyers, it is ironic that contracts in such areas are often largely based on suppliers’ onerous terms, with features such as:

Poor definition of the service level required and no recourse to contract termination in the event of poor performance;
Automatic contract extension if notice is not given within a strict time period;
The supplier’s right to increase price levels;
No right to re-negotiate price levels in the event of widespread price falls (particularly important for goods such as copiers);
Fixed discounts on price lists, when the price lists themselves are liable to change without notice (often the case in stationery contracts).

Often there is also an unjustifiably large number of suppliers, when a reduction in the supplier base alone could bring quite significant cost savings.

Buying in law firms

In law firms, the responsibility for the spend areas listed below does not usually rest with buying specialists, but with departmental managers in areas such as facilities, IT, HR, finance or marketing. However, while these people may be competent in their own disciplines, it is quite unlikely they will also be competent at buying. We often find that those managers who most strongly believe they are competent at buying … aren’t.

There are substantial differences between professional buying and the buying practices encountered in many major law firms. I have worked for clients in many sectors, and can honestly say the quality of buying in the legal sector is among the poorest I have encountered.

In particular, legal staff who have budgetary responsibilities are rarely challenged by the senior management team – less than in any other sector, including the public sector!

Mindsets indicative of poor buying thinking

There are a number of mindsets common in law firms, which need to be challenged for a culture of professional buying to endure. Here are the ‘top ten’ phrases you may be likely to hear:

“Our managers are meeting their budgets, so they’re buying proficiently”

Budgets are a notoriously bad way to measure buying performance. They reflect historical costs, not current market pricing. At one major UK law firm we looked at a number of areas, including archiving. They had two offices in a city in the north, but one had been paying twice the storage rates as the other for years. The two offices had never compared either their archiving costs, or any other support costs. How had this discrepancy survived for so long? Management accepted that adequate budgets existed.

“We have a buying manager, so we’re proficient in buying”

How effective is your buying manager? It’s hard to say because you have no way of tracking how well (s)he performs compared with similar people in other organisations. All performance is relative. We’ve worked across many sectors over the years and in every assignment we’ve come across managers who have managed large budgets for many years, highly regarded by their senior management. When we demonstrate they have actually cost the company millions of pounds over the years, there is always great astonishment.

“You get what you pay for”

Roughly translated, this means that quality is proportional to price, implying that if you negotiate lower prices, service quality will suffer. However, assuming an adequate contract is in place, this will not happen. We frequently find firms using very expensive copier paper on the grounds that “lower quality paper keeps jamming the copier”. However, when we ask to see the specification of the paper being used, we have never once found a person readily able to locate it. There are a number of specifications that should automatically be familiar to the person buying your paper, including gauge, density, smoothness, opacity, whiteness, etc.

“Our vendors need to make a decent profit to survive”

From a buyer’s perspective, the only legitimate interest in a vendor’s profitability concerns their financial viability, given the damage that might result from the vendor ceasing to trade. Anyone who pays more for goods and services than (s)he needs to with a view to supporting a vendor’s profitability, really shouldn’t have budgetary responsibility.

“I’ve been buying this service for 20 years and our terms are very competitive”

While there are exceptions, managers who say things like this can usually be relied on to have the same one year of experience, 20 times over. Some of the largest cost savings we have achieved have been for companies where the same individual has been responsible for buying for many years.

“We’re not buying widgets, you know!”

These comments tend to be made by managers who believe professional buying approaches may be suitable for buying some goods and services, but not for their specialist areas. They are invariably wrong.

“We already get very high discounts from our vendors”

The issue that matters is the price paid, not the discount that leads to it. A focus on discounts, while ignoring base price-list increases, is a strong indicator of poor buying thinking.

“We’re seeking ten per cent cost reductions in all areas”

Many managers have a ‘mental ceiling’ cost reduction of ten per cent, with some even claiming that to seek more would be embarrassing. We recently carried out a market-testing exercise on stationery supplied to a major UK law firm. The firm was convinced there was no cost-reduction potential in the area, because one of their facilities managers had already carried out a market-testing exercise the previous year and found the incumbent vendor highly competitive. However, we believed the individual in question to be incompetent at buying. We conducted a proficient tender process and reduced the annual stationery bill from £1.3m to £0.8m. The new contract will save the firm as much as £1.5m over the three-year term.

“Good buying is just about good negotiating”

While tough negotiating may be required on occasion, our experience shows that the ‘table thumping’ negotiator seldom delivers a strong performance over the medium to longer term.

“We get professional advice in this area and pay nothing for it”

Free advisers are common in a few spend areas, notably utilities. The advisers sometimes share delivered cost savings, but more often receive commissions (undisclosed) from vendors, a clear conflict of interest. We would invariably recommend our clients pay for specialist advice in such spend areas.

While recognising that a few sellers’ markets do exist (electricity and gas at the current time are good examples), most are perennial buyers’ markets. Overall, we have found cost-reduction potential of between ten and 40 per cent in the majority of law firm spend areas.

Options for buying improvement

Assuming that law firms wish to save a lot of money through professional buying, what are the options open to them? There are three basic choices, each with associated advantages and disadvantages.

Employment of permanent buying staff;
Development of functional managers (facilities, HR, IT, etc.) to better equip them for the buying elements of their roles;
Use of specialist buying consultants and/or interim managers.

Summary

We’ve considered why the legal sector is poor at buying, why it needs to improve, and how it might do so. As more and more firms introduce professional buying – by whatever means – the pressure will mount for others to do likewise. Maintaining and improving profitability is about pushing revenues up, but also about keeping costs down.

In most sectors it is now inconceivable not to have professional buying disciplines in place. I would predict that most major UK law firms will also have the disciplines in place before too long. Why not steal a march on your competitors while you still can? 

Mike Buchanan is managing director of LPS Legal. He can be contacted at www.lpslegal.co.uk