Today’s interview is with Chad Adler, a purchasing expert at a manufacturing company in the pacific northwest. Chad manages diverse commodities such as information technology (software and hardware), travel, and marketing. He also touches on legal services.

What do you like about your company?

If you understand the importance of process, then my company particularly values your talents and wants to develop these kinds of employees in a variety of roles to maximize their positive impact. My company also trusts its employees to make timely decisions and provides them with a strong degree of authority.

What is your negotiating approach?

We often start with a request for information (”RFI“).  Generally, in any RFI, there are critical questions that must have complete, compelling answers or we won’t go forward. Once I’m looking at a leading vendor after the RFI, I check with that vendor to see if they want to do an elaborate written contract on their paper (or our own).  If not, we can move more quickly because I can put the contract on our internal purchase order to protect our company with standard terms. Frankly, the typical purchasing manager in the corporate world is so busy, that if there is not a large amount of money on the line for a given deal, it is preferable to do the deal under a purchase order.

We’ve also had success using online reverse auctions, which are a creative idea to have an existing supplier bid against other suppliers to reduce the fees they charge for a given commodity. This is usually a valuable opportunity for the existing supplier because, in an auction, we are usually offering more business across my company Fluke then they previously served.

How do you handle negotiations from a purchasing perspective?

Our first focus is to work with the end user within our company who we are supporting.  We establish the internal expectations as to when they want the deal to be in place as well as the budget that needs to be met.  We generally pay net 75 days or via our corporate credit card. I also ask suppliers as to what they have done in the past to reduce cost, and whether we can work together to come up with creative ideas to make their fees more competitive. Sometimes, using lower cost subcontractors for nonessential aspects of the deal can be effective. It’s also vital to factor in the total cost of a deal, such as shipping costs, discounts, and rebates, that reduce the total cost of ownership on any arrangement.

What do you think of using strategic sourcing for legal services?

This opportunity depends on the company culture.  At my company, the culture is very open to considering new ideas.  Given the current state of the economy, it’s important to not leave any stone unturned in the purchasing space. At other companies, there is probably a good deal of resistance by legal departments to sourcing legal services due to control issues.

But isn’t the key expertise of an attorney better applied on challenging, unique legal issues rather than negotiating payment terms? It’s important to keep in mind the current situation where in-house counsel maintains the law firm relationship, thus the strategic sourcing of legal services does not need to end that traditional approach. We can layer over the relationship our objective research (from third party experts) to negotiate with law firms regarding such issues as hourly rate decreases, rate freezes, and payments via corporate credit card.  Many times, firms don’t like the idea of using a corporate credit card because of the merchant processing fee, but there’s a tremendous value proposition as well because the firm is getting paid more quickly.

Moreover, bringing a purchasing expertise into the legal department is a great way to ensure that budget parameters can be more easily met. Another interesting method that companies might consider is to use an outside consultant with extensive legal and strategic sourcing expertise to negotiate on behalf of the legal department.

Thank you, Chad.

Many people within companies are looking for persuasive arguments as to why they should shift to alternative billing arrangements with outside counsel, particularly to radically reduce expense.  Here are some of the key arguments that I find to be most persuasive:

• Too Much Legal Expense.  Most companies are spending way too much on legal services.  Moving away from the billable hour and turning towards alternative billing models focused on results creates a significantly better return on investment.
• Standard Procurement Fee Reduction Efforts Fail. Procurement departments routinely make the mistake of using a strategic sourcing manager without a strong understanding of the legal field, which makes their effort to cut outside counsel fees fail.
• Unique Nature of Legal Services.  Legal services are a unique animal.  In legal procurement, a strategic sourcing manager must dispense with the normal approach of treating a law firm as one company, as a law firm is not much more than a group of diverse people, each with a book of business, and the lawyers and staff that support each book.
• Use of Statistics. As a result, law firm wide statistics and quality management are often unhelpful and do not drive across the board quality improvement and spend reductions.  You are much better off measuring the performance of the handful of lawyers who are controlled by the equity partner who manages your relationship.
• Year Over Year Fee Targets Don’t Work.  You cannot set a target of year over year reductions in legal spending because the law department often has no idea, for any given year, what may materialize. A sudden class action lawsuit could be filed, a major construction vendor may walk off the job, or a sexual harassment lawsuit could result. Insisting that the law department spend less money than the previous year without taking this into account alienates the lawyers who are already reticent to support any kind of spend management.
  
• Compare Apples to Apples.  The better approach is to compare apples to apples, and try to get year over year reductions in purchasing the same kind of legal service that was previously acquired, as well as looking into whether a particular legal service is needed in the first place.
• Where to Start? The best areas to target include M&A, labor and employment disputes, regulatory research, commercial real estate, and litigation amenable to alternative billing models that use clearly defined objectives and efficiency bonuses to drive results oriented, more efficient legal services at lower fees.

You can read more on these issues here and see all of my strategic sourcing posts here (scroll down).