By Susan Avery
Procurement professionals leading their companies' sourcing strategy for legal services are helping to convince law firms to set up centralized procurement functions. Their questions to law firms about how they manage supplier risk is what's encouraging the firms to hire CPOs and work to increase procurement's influence internally.
“The legal sector is a bit of a laggard, but we see a trend especially among larger firms towards more centralized procurement,” Lee Garbowitz, a Managing Director for the Global Strategic Sourcing & Business Operations Practice at HBR Consulting, tells My Purchasing Center.
“One reason is that law firms need to be more cost conscious,” he says. “They need to make changes that move procurement from being a cost center to more of a profit center.
“Second, law firms have been challenged by their clients to understand the risks present within their supply base and mitigate that risk as much as possible,” Garbowitz says. “Law firms deal with sensitive information and they need an individual group responsible for managing third-party risk.”
A new survey of procurement leaders at law firms by HBR Consulting finds 80% have been asked by a client to provide documentation of their formal third-party risk management policy. Survey results also show that just 30% of law firms have a formal policy. Fifty-five percent say they are working to develop one.
Challenges of implementing a third-party risk management policy vary from firm to firm. They include, according to survey respondents, people (35%), process (30%) and strategy (25%). The survey also finds that the need for third-party risk management will continue to increase.
“You can see from the survey that law firms are at the very beginning of being able to address risk, Garbowitz says. “It is a trend we want to make sure everyone understands. Law firms really need to think about risk in the broader sense, in terms of who is gaining access to information, how is it being managed and what they are doing to protect it.”
For its Law Firm Procurement Survey, HBR questioned 17 Global 100 law firms with an average of $80 million in spend under management and $1.2 billion in firm revenue. In a separate survey conducted simultaneously, the consultants also queried law firm executives (managing directors) on their views of procurement. They completed both surveys prior to HBR's annual Law Firm Procurement Roundtable in October, an event that provides an opportunity for procurement leaders at law firms to discuss trends, exchange practices and network.
Typically law firms source goods and services similar to those purchased by other professional services firms, yet in a decentralized manner. Their largest buys include contingent labor, HR benefits and other services, technology, travel and real estate, among others.
The survey also asked procurement leaders at law firms about performance metrics. Results show the most important Key Performance Indicators (KPIs), according to procurement, are related to savings achieved, contracts under management and spend under management, being tracked by 70%, 60% and 50% of firms, respectively.
HBR posed the same question to executives. While just half of the procurement pros consider spend under management an important measure, 80% of executive survey respondents view it that way. Seventy percent of execs agree with procurement in that savings achieved is a critical metric, while 50% say so about contracts under management.
The procurement survey finds that just 50% of procurement leaders actively monitor and report back to management on fewer than three KPIs.
“In the legal sector, many heads of procurement don’t even measure savings at this stage,” says Garbowitz, who in his role at HBR serves as a leader at the Law Firm Procurement Roundtable. “A lot of them use very basic measures in terms of the percentage of spend addressed by the procurement process and the percentage addressed by a contract. Very few measure the ROI (Return on Investment) of the organization.”
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Among other findings, 50% of respondents to HBR’s executive survey say procurement budgets for 2017 will remain flat with 2016. As in other industries, law firms are automating processes and deploying software systems to help with the budget crunch. According to the survey, firms currently use these procurement technologies: contract management (60%), invoice automation/processing (45%), request to pay/purchasing (40%) and spend analysis (25%). It also reports that firms—even those with limited budgets—will continue to implement such technologies in the new year.
At the same time, the survey finds procurement leaders are working towards becoming a trusted advisor within their law firms, a practice adopted by their colleagues in other industries. As 55% of procurement leaders responding to the HBR survey see it, being a trusted advisor means having the ability to identify key trends in critical supply markets that can be leveraged for the firm’s benefit. The same goes for 60% of executives in their survey. The executives also say the two key qualities of a trusted advisor are an alignment with stakeholder interests and objectives and flexibility to address evolving stakeholder needs.
“Law firms know how to give good counsel and heads of procurement is looking to become more of an internal counsel, to optimize the third-party supply base and maximize value in terms of client delivery,” says Garbowitz, suggesting leaders look to colleagues in other industries ahead of where they are to help them advance. Educating executives and building relationships is a start, he adds.
The HBR survey shows procurement leaders at law firms are beginning to move in that direction. That is, more than half of respondents say they play a role in executive management decisions, strategic discussions and business planning.
Listen to the My Purchasing Center podcast, Law Firms Look to Procurement Best Practices in Corporate World
See the My Purchasing Center article, Procurement Priorities for 2016
Susan Avery is Editor-in-Chief at My Purchasing Center. She writes articles, blogs and white papers and manages and creates other content for the online procurement and supply management publication. She produces and moderates roundtable discussions, podcasts, webcasts and video interviews. Susan has 30 years experience covering procurement and supply management for Purchasing magazine and Purchasing.com.
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