Editor’s Note: The author of this post is a consultant to law firms.

By Mark Klender, Principal, Deloitte Consulting

Entering 2016 we will dive deeper into the 10 axioms from my first post . The first, that “corporations are buying legal services differently, and will continue on the path of rationalizing providers through strategic sourcing” represents a fundamental shift in how legal services are sourced and purchased, with huge impacts on — and within – law firms.

For Big Law, the predominance of demand for services is from corporations. Demand for legal services, like the demand from corporations for all categories of goods and services, took a nosedive with the Great Recession. The Great Recession also drove corporations to take a deep review of their cost structures (aka “strategic cost management,” “enterprise cost reduction” and “zero based budgeting"), with the objective both immediate cost take out and sustainable, long-term cost structure transformation.

Integral to changing the cost structures has been strategic sourcing, the concept of consolidating spend into a fewer number of vendors and leveraging the greater spend with those fewer vendors into preferred pricing. A double whammy for law firms, less spend and intensive review of how to spend what must be spent.

Spend on law firms was often taken off the table in these cost reduction initiatives – because legal spend and the headcount in legal departments was generally low compared to other spend areas and because the head of general counsel held sway with senior management (this the topic of a future post). This has been changing, with corporate legal departments now in scope. And rolling through corporations — and changing the landscape of how legal services will be sourced and bought.

What impact for law firms? It follows the string of the strategic sourcing process:

• Spend on legal services is reviewed: the number of law firms utilized, the type of law services being used, and the spend by each firm. • A deeper dive is conducted of the spend by type of service and the economics across firms. Services are bucketed by their nature, complexity, and other attributes. • Best practices are developed: for purchasing, for delivery, for pricing and economics, and for vendor management. • Decisions are made about the service delivery model: what should the mix be of internally delivered vs. externally provided legal services? For those externally provided services, what non-traditional alternatives can be used and at what rate advantage? • Sourcing strategy is determined: bundling multiple services in a fewer number of firms vs. mix of “best of breed” providers. • Services are put to market: the growing use of stone-cold RFI/RFP process, to likely include a mix of current and new law firms. • Down-select, followed with price negotiations to a smaller set of preferred providers.

With the procurement organization involved, traditional relationship-based, more informal arrangements become structured and often play back-seat to the hard efficiencies of sourcing. Pricing structures get more formal and structured, with accountability – fixed fee, time & material with caps, deliverable and milestone-based billing, outcome and value-based billing (this is not pure contingency). Rates are no longer negotiated on a per matter basis – annual rate cards with volume discounts and/or rebate models govern all engagements, with special resources only on an exception basis.

Transparency is demanded from the onset and through vender management. With reviews of services, results, and economics built into the new arrangement, the law firm has to examine the entirety of the services that it provides to each corporation, who and how it delivers them, and how it can deliver them most cost effectively. The past one-off, individualized arrangements and lack of coordination by firm attorneys, is destructive to the partnering required in the new arrangements.

With every corporation that brings legal spend in scope of sourcing and procurement, there will be winners and losers – the law firms selected, how services are delivered in the firm, and individual attorneys depending on how they play by the new rules. Given the supply-demand imbalance present in the market, corporations taking more legal work back in-house, and the growth in alternative providers, this is the new reality.

The segmentation in the nature and delivery of services and the growing completion for legal services in the next post.

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