Introduction
In the post-pandemic era, law firms are facing challenges in meeting client expectations due to economic uncertainties. They are trying to distinguish themselves as client spending returns to normal, but struggle to balance efficiency, outstanding client service, and risk mitigation in the face of a potential recession and political upheaval.
To address these concerns, law firms are considering strengthening and centralizing their procurement functions. Four key concerns have emerged:
- Managing vendor risk
- Improving operational processes
- Expanding vendor governance
- Prioritizing sustainability and supplier diversity
Managing vendor risk
Managing third-party vendor risks is a top priority due to legal, operational, reputational, and cybersecurity risks. Non-compliance with regulations by vendors can lead to legal consequences for both parties. Dependency on third-party vendors poses the risk of service disruptions, impacting operations and causing financial losses. Ambiguities in contracts may lead to misunderstandings and disputes.
Data security and privacy are major concerns, with the potential for cyber threats highlighted by a case where a law firm's 184,000 files were accessed and exposed on an unsecured vendor's cloud server for six months.
Three steps to address third-party risks
1. Survey the risk landscape
- Identify all active vendors using a centralized spend visibility system.
- Assess vendor risk by creating a risk-value matrix, considering factors like data access, relationship duration, performance, and reputation.
- Evaluate criticality based on spend.
- Obtain cross-functional feedback to determine high-risk vendors with significant value.
2. Build a risk mitigation program
- Integrate risk management into the vendor relationship lifecycle.
- Include pre-onboarding questionnaires, compliance validation, and data-sharing protocols.
- Incorporate a supplier's risk profile into contracts with clear obligations, breach triggers, and indemnification levels.
- Conduct quarterly vendor reviews using key performance indicators.
- Collect qualitative feedback to improve vendor performance.
- Internally measure program effectiveness with metrics like vendor onboarding, risk assessments, and compliance.
- Implement a flexible dashboard for automated updates, reducing manual effort and adapting to changing regulations and firm needs.
The key is to find a flexible, sustainable system that reduces the manual effort required to maintain the program and reflects changing regulations and firm needs.
Improving operational processes
Law firms face challenges in making optimal buying decisions consistently. To address this, they need a procurement model with standardized processes, including centralized procurement activities and unified policies.
About half of surveyed firms lack a centralized structure, presenting an opportunity for improvement. Standardization involves structured workflows, from requisition to contract management, fostering transparency.
Technology and automation contribute significantly to enhancing consistency in the procurement process. The goal is to consolidate purchasing power, negotiate better deals, and leverage volume discounts.
Procurement software and e-procurement platforms streamline requisitions, approvals, and order processing, reducing manual work. They should provide analytics tools for insights into spending and vendor performance.
Procurement's strategic role includes deploying AI for cost reduction, with applications in spend analytics, cost optimization, supplier management, contract management, demand forecasting, and supplier performance monitoring. However, concerns about security, privacy, and accuracy suggest a cautious, gradual approach to AI implementation is advisable.
Increasing the scope of vendor governance
Vendor governance has shifted from the second to the third priority for the upcoming year, but it remains crucial for the procurement team to ensure consistency in vendor oversight.
Assessing risk
The risk assessment process was covered in the previous section. The following will cover four pillars, offering best practices for firms to enhance service delivery and achieve sustainable cost savings.
Sourcing
The first step in sourcing involves assessing the firm's needs to identify the required goods or services. The procurement team then conducts market research to find potential vendors based on reputation, track record, and expertise. An RFP is sent to gather detailed information, and qualification criteria are established, considering factors like financial stability and compliance. A scorecard helps compare vendors, and input from a cross-functional team, including end users, provides a comprehensive perspective on proposals.
Contracting
The procurement team plays a crucial role in creating contracts between the law firm and the vendor. Key steps include defining timelines, milestones, and deliverables. Service-level agreements with specific standards and regular reviews are essential. The contract should have a termination clause outlining conditions, notice periods, and penalties. The vendor must adhere to the firm's policies, including ethical standards.
Controlling costs
The procurement team aids firms in understanding market pricing trends, setting budgets, and achieving favorable pricing through strategic measures like longer contracts and volume discounts. Data analysis guides smart pricing decisions based on vendor history. Negotiating flexible terms allows adjustments to services and quantities. Regular contract reviews ensure competitiveness and performance alignment. The team also monitors departmental costs for informed resource allocation and spending priorities.
Monitoring relationships
The procurement team is essential in overseeing vendor relationships and improving service delivery. Regular performance reviews and KPI comparisons help address concerns and find opportunities for enhancement. Collaborative efforts with vendors on continuous improvement initiatives, including efficiency improvements, contribute to a mutually beneficial relationship.
Strengthening sustainability and supplier diversity initiatives
About one-third of respondents believe that procurement departments should actively set sustainability goals for their firms, while another third sees procurement's role as supportive by reporting and identifying potential vendors. Surprisingly, the final third acknowledges that their procurement team plays no role in sustainability.
However, procurement teams are in a unique position to drive sustainability efforts, especially since 90% of law firms' carbon footprint comes from vendors. To improve environmental performance, firms should evaluate their current carbon footprint, understand vendors' contributions, and set progressive targets, making procurement a pivotal player in guiding law firms towards sustainability.
Supplier diversity has dropped to the fifth priority for firms, but this doesn't indicate deprioritization. In fact, 27% more firms have implemented or are implementing formal supplier diversity programs this year. Standardizing approaches, 67% of firms are integrating diverse suppliers into their RFP or bid process. They identify diverse suppliers through online research, partnerships with tech vendors, and referrals from diverse business leaders. Some educate stakeholders (42%), meet with potential suppliers (25%), while 8% have no process for expanding supplier diversity. Overall, there's an increased focus on active steps to boost diverse supplier utilization.
Law firms must recognize the full value of their procurement teams
Law firms should recognize the significant impact of their procurement teams in navigating the evolving business landscape. Procurement plays a crucial role in achieving operational efficiencies and managing vendor-related risks.
To fully leverage the value of procurement, firms need to go beyond fee structures and articulate a comprehensive service delivery package. This package should address key aspects such as risk management, robust vendor governance, process optimization, ESG considerations, and supplier diversity.
By adopting this holistic approach, law firms can strengthen themselves against future financial challenges and position themselves as strategic business partners.
To read the full report, download the PDF.
- Procurement
- Risk management
- Vendor governance