By Stephanie Corey.
Navigating the complex world of legal negotiation can be daunting, but there are strategic ways to approach the process that reduce costs, alleviate budget pressure, satisfy stakeholders, and produce long-term, measurable results.
There is no single way to negotiate within the legal procurement and services arena. For strategic, complex relationships beyond the RFP-centric world of simple transaction-based contracts, there are many factors to consider in addition to pricing.
It is vital to understand and establish priorities, as a legal team, and as professional buyers of goods and services. Without that as a first order of business, it is difficult to proceed. Then, do your homework:
Define the collective good
Define what success will look like, both now and future. For instance, are you trying to reduce the number of firms and/or vendors? Reduce costs? Create better partnerships with firms?
Answering these questions will help guide the process and lead to success.
Find common ground that helps all team members be successful in their areas. The General Counsel plays a critical role at this point in defining and communicating end-goals. Legal ops and Sourcing then must work together to make it so. But team members (i.e., the other in-house counsel) need to be on board for the success of the program.
Many believe the goal of a successful negotiation is to identify and mitigate as much risk as possible up front, while enabling a partnership between companies to develop. This sounds good, but is easier said than done, especially for those new to the negotiation process. If one side has engaged in old-school tactics, such as wielding a hammer, focusing on risk avoidance or risk-shifting to the detriment of the other party, then the relationship is in jeopardy. Forget a long-term partnership in that case.
One thing is certain among all the uncertainties, negotiation strategies will have to adjust to new realities.
This article addresses how negotiation plays a role in the legal industry in the following areas:
Pricing
Payment Terms
Other Terms and Conditions
MSAs and SLAs (master service agreements and service level agreements)
Two basic negotiation guidelines to embrace are: communication and collaboration. Those imperatives, which feed on each other, are important pieces of a flexible governance structure that the parties craft together.
Pricing
There are at least two schools of thought on pricing: Procurement is obsessed with finding the lowest costs, while Legal is mainly concerned with quality, regardless of price. Getting the right balance of costs, quality, and efficiency is a trick that can foil even the most well-intentioned.
According to a Deloitte 2018 survey [1], 78% of respondents said cost reduction is the main business strategy for procurement leaders, followed by new products/market development (58%) and managing risks (54%). The report noted, “A clear shift in procurement focus towards innovation and value requires an acceleration in the pace of change especially in leadership, talent and innovation. Procurement has continued to successfully deliver short-term savings and manage risk to support growth during a period of uncertainty.”
Legal procurement can - and should - help drive the process by identifying market conditions and pressures on price and budget.
The Time/Value/Money Paradigm
The old adage goes that “you get what you pay for,” and in the realm of buying legal services, it could not be truer.
Quality service provided quickly is by definition not cheap, whereas cheap service involves sacrifices in value or time. The message? Do the due diligence and collect and assess the data transparently for all of the stakeholders in order to set priorities and negotiate the pricing accordingly.
Legal Services
The legal services category is highly complex; saving money while improving quality and service levels is a challenge that has to be taken on. In addition, it doesn’t require hostility or a purely transactional approach - maintaining a good relationship with law firms and service providers is still an important, necessary factor.
Many legal departments are exploring alternative compensation models, rather than the traditional billable hour. For example, in order to maximize value and reduce the total cost to serve the business. It is critical that sourcing teams understand what each model offers when negotiating pricing.
The Pros & Cons of Alternative Pricing Models
There are three basic alternative pricing models, and there are pros and cons to each option.
Volume-based percentage discounts
Blended Rates
Alternative Fee Arrangements (AFAs) and Value Based Pricing (VBP)
Pricing discussions can be highly complex and
challenging. They must be based on solid historical data and projections, given current and anticipated conditions, and a high degree of trust goodwill and collaboration will make the discussion go smoother.
Legal Software and Systems
In order to negotiate the maximum value at the “right price” for minimum risk, it is critically important when sourcing legal software and systems to understand the Total Cost of Ownership (TCO). TCO is the foundation for any best value decisions that need to be made. A TCO analysis includes determining the direct and indirect costs of an acquisition and operational costs. The purpose of determining the TCO is to help make clear decisions when it comes to pricing. It shifts the focus of the money/value paradigm by prioritizing value and managing cost.
TCO calculations can include many factors but generally they should include one-time and ongoing costs. [2]
We are emerging from take it or leave it pricing strategies of the past to a more cooperative and realistic approach based on market condition and quality relationships.
Payment Terms
In this article, we focus on working with suppliers that agree to terms anywhere between net 30 to 90 days of an approved invoice. The question then is: Why do payment terms matter, and how can firms effectively negotiate them up front to avoid a cash flow problem later?
Long-time procurement leaders are frequently asked to re-engage with all of their suppliers to request an immediate change in payment terms, for instance, from net 60 days to net 90 days. Obviously, these are never easy conversations to have with a supplier, and to be frank, the sourcing personnel making the request are truly at the whim of the supplier and their desire to continue in the spirit of partnership.
Understanding why payment terms are a critical aspect of an agreement in the first place, can help avoid those conversations after negotiating a contract for goods and services.
Accordingly, the two items sourcing teams need to consider when negotiating payment terms for legal goods and services are 1) how much should be paid to the supplier and 2) when should those amounts be paid?
Incremental Payment Schemes
Under incremental payment plans, the options, particularly for projects, can include 30/70 or 50/50. Negotiating a split payment system benefits the supplier by offering cash up front to begin investment in the customer’s requirements; it benefits the customer by allowing it to maintain a higher level of working capital and manage risk during the life of the project.
The mechanics of a split payment model should be discussed in conjunction with pricing because an offer of a larger payment up front can often generate some leverage to reduce the price.
The final thing to consider when negotiating payment terms is to ensure that the mechanics of invoicing approval and any early payment discount, whether offered as an account credit or potentially as a quarterly check, are explicitly outlined and understood between all the parties.
The importance of correctly collecting and analyzing historical data on pricing and payment terms cannot be overstated. This also applies to other negotiated terms and conditions. A comprehensive approach also will help in analyzing risk going forward if all stakeholders are engaged in dealing with and forecasting economic, political, and societal conditions.
Other Terms and Conditions
Know your targets and your least acceptable alternatives for each term. But also note that what may be “least acceptable” to one might be highly acceptable to others, so a degree of flexibility and unbiased thinking is needed in any strategic negotiation. That’s how simple relationships become strategic partnerships built for the long-term.
Here are some points to consider:
Ensure there are relationships between the legal and sourcing teams so that sourcing understands what the preferred terms are for your company
It’s likely that preferred terms are predefined by in-house counsel, but it is critical that sourcing teams understand the meaning and function of these terms in order to successfully negotiate and employ them in a commercial context
The Ripple Effect
First, understand the precedents, if any, that the terms set, and how the terms and conditions impact agreements with other suppliers or previous/follow-on agreements with the existing supplier. Next, decide whether a broad or narrow clause will best serve the interests of your company. This may be beneficial to ensure that all disputes “arising out of or relating to” the contract are submitted for arbitration. Such a broad clause offers the buyer the opportunity to avoid formal litigation in court, which can be lengthy and expensive for all parties.
On the other hand, an opposing side may desire to exclude certain disputes, those that are collateral or peripheral to the agreement itself, from arbitration.
Next, choose the seat (or situs) of arbitration wisely and with diligence. Often, general counsels will not budge on this term and for good reason, because the seat of arbitration, particularly in the international context, is of singular importance. The seat will determine the procedural law for the arbitration and the role of local courts within relation to the proceedings. When negotiating the seat of arbitration, consider the ease of access for both parties, the availability of arbitrators, and judicial experience levels.
Finally, make sure the sourcing team is up to speed on the various arbitration bodies available, their rules, and how arbitral proceedings occur, generally. Sourcing teams should be cognizant of the different venues for arbitration and the rules that used to administer an arbitral proceeding. Sourcing teams will likely be involved if a dispute involving the contract and/or the negotiations process should arise so the more they know, the better.
Master Services Agreements (MSAs)
Master Services Agreements (MSAs) (also often called Master Retention Agreements (MRAs)) generally are tools that larger companies or firms can use when they contract with a large number of preferred suppliers and/or service providers.
It is considered a best practice for corporate legal departments to have an MSA in place with each of their firms, because it is an important part of the overall outside counsel management program. Having all of the firms operate off of one agreement simplifies administration for the in-house legal team.
Often, they highlight important department initiatives, such as diversity and inclusion, and how they expect their firms to participate. And they feature “billing guidelines” [3] as an addendum that details what the corporation will and will not pay for.
It’s a good idea to work on an MSA with one or two of your top firms to understand what is reasonable with them, and then use that as a template for other firms. This can make the process easier by identifying, and fixing, possible controversial or contentious parts of the contract early-on before it goes out to all the firms. Make sure Legal, Procurement, Finance, and Accounting are aligned.
Keep the MSA form simple and as short as possible, no more than two to three pages (without the addendums).
If there is not the support or bandwidth to implement a company-wide MSA process, we recommend focusing on the top 10 firms, or whatever number makes sense for your department size. If you don’t have the bandwidth to do that, focus on ensuring that the billing guidelines are sent to each of the firms—and make sure they understand these are non-negotiable items. By the way, invoicing you means they’ve accepted the billing guidelines.
As an alternative, try to get a Matter Specific Engagement Letter in place for each matter opened with the firm. This could be a very short form describing:
The name/description of the matter
A conflict of interest clause
Whatever obligations the firm is agreeing to by managing this matter
The Billing Guidelines if the firm has not yet received them
Measuring Success
Once these steps are taken, especially as regards pricing, billing and MSAs, it’s important to put protocols into place for measuring success. This includes regular reporting such as Internal Reports (to show cost savings in terms of overall hourly rate discounts, volume discounts, proper billing practices); and Law Firm Scorecards (to measure accessibility, ease of doing business, substantive experience, results and budget performance and allow evaluation of the quality of the firms you’re using).
Not only should scorecards be shared with the internal team, they should also be shared with the law firms! A best practice is to meet at least annually with your firms to discuss how to improve the partnership. Use this time to provide them with feedback and ask for their comments in return. The firms should be coming to you with data and ideas on how to improve the relationship and the work being done.
Conclusion
The buying and management of legal services means understanding existing processes and developing more efficient and transparent ways of operating. Two basic negotiation guidelines to embrace are: communication and collaboration. Those imperatives, which feed on each other, are important pieces of a flexible governance structure that the parties craft together.
There may be information that must be kept confidential, but those guardrails should be stated early-on in the negotiation. Assess each round of the negotiation and document the discussion and progress made. Adjust tactics as needed. But remember that the final stages should not be marked by conflict and power plays.
If all of the above works, that will mean collaboration is occurring, and the ability to maintain flexibility amid uncertainties is real. With the additional ability to make adjustments as necessary, the end result will be a win-win procurement process.
Notes
1. “The Global Chief Procurement Officer Survey 2018,” Deloitte, 2018. https://www2.deloitte.com/uk/en/pages/operations/articles/cpo-survey.html
2. “What is Total Cost of Ownership?” Purchase Control: https://www.purchasecontrol.com/blog/total-cost-of-ownership
3. Lauren Lee, “The Basics of Billing Guidelines,” SimpleLegal, May 17, 2018
About the Author
A veteran in the Legal Operations field, Stephanie Corey began her career at Hewlett Packard Company as Chief of Staff and Head of Legal Operations. Stephanie has held similar positions at VMWare and Flex International.
She is the co-founder of the Corporate Legal Operations Consortium (CLOC), a leading Legal Operations association, and co-founder and General Partner of UpLevel Ops, LLC, a legal strategy and operations consulting firm. Stephanie holds a BA in Economics and an MBA from Lehigh University, and is a serial entrepreneur in her spare time.
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