Strategic Sourcing

Law firms face an ongoing challenge to reduce costs. Proactive firms can reduce their recurring costs for goods, equipment and services while maintaining quality and service levels by developing and implementing strategic sourcing programs. Strategic sourcing involves systematically examining spending as a whole and developing a holistic strategy to achieve greater savings than could be gained by “one off” cost-cutting measures. While strategic sourcing does not include payroll costs, enhancing the quality of non-payroll services will indirectly help payroll cost management.

The benefits of well-managed strategic sourcing can be substantial, positively impacting the bottom line and increasing competitive advantage. Huron Consulting Group's clients that engage in strategic sourcing have reduced their recurring costs 5%-15% within six months to a year, through addressing issues such as sourcing, demand management, consumption and contract compliance. For some large firms, these savings can add up to millions of dollars. Following are some commodity categories where significant, repeatable savings can be seen:

• Courier;
• Document storage;
• Facilities;
• Food services;
• Ground transportation;
• Insurance and benefits;
• IT hardware;
• IT software and services;
• Office-related products;
• Printing and publishing;
• Reprographic services;
• Subscription services;
• Telecommunications;
• Temporary labor and executive placement services; and
• Travel and entertainment.

Because cost is part of the value chain, a firm's strategic sourcing program can also strengthen client relationships and marketing initiatives. Firms that can show clients they are taking active steps to control not only passed-through costs but also internal overhead costs, also demonstrate that they are efficiently run, cost-aware organizations. Value-driven corporate law departments appreciate firms with a similar respect for economy and efficiency.

Guiding Principles of Strategic Sourcing

Rather than addressing purchases on an ad hoc basis, strategic sourcing involves taking a comprehensive view of all aspects of procurement to achieve sustainable savings. The guiding principles and goals of a good strategic sourcing plan include:

• Creating and maintaining supplier relationships that are “built to last”;
• Having the necessary information to support fact-based negotiations;
• Focusing on total delivered cost reduction rather than on individual line items;
• Rationalizing the choice of suppliers; and
• Maintaining and enhancing quality.

Developing a Strategic Sourcing Plan

Several steps are needed to apply the principles of strategic sourcing: collecting and analyzing information regarding current spend, products and consumption; identifying target areas for improvement; developing a plan to select vendors and negotiate contracts; and implementing processes and systems for maintaining and auditing the resulting savings.

Collecting and Analyzing Information

Effective strategic sourcing is fact-based and data-driven. An important first step is to develop a clear understanding of the firm's actual consumption and demand of products and services. The most effective analyses are firm-wide, spanning all the firms' operations and locations.

Current accounts payable data and invoices are a preliminary source of information. Review of existing or historical contracts, price lists, written correspondence, network diagrams, etc., can also contribute useful information. Existing vendor relationships should come under scrutiny, not only as to cost, but also considering issues of quality, delivery and service. This information can be analyzed and balanced against an understanding of the firm's consumption drivers, such as number of locations, timing of planned recurring purchases, etc.

Identifying Target Areas

The value of a comprehensive, firm-wide analysis will be apparent as the firm identifies and prioritizes target areas. The results may be surprising. For example, there may be low-priced items or services with very high-volume consumption where the incremental effect of even a small reduction in unit price can be quite significant to the bottom line. By contrast, there may be areas whose costs appear significant at first glance but are actually relatively small when seen from the firm-wide perspective.

Vendor Selection

Once target product and vendor areas have been identified, the firm can begin to develop its sourcing strategy, focusing on vendor selection and contract negotiations. Short-term goals should be to achieve price reductions or lock in prices, create a simple purchasing administration structure, and set the stage for further value discussions.

Vendor selection can be based on a number of factors, including price, quality, service and historical contract compliance. Consolidating suppliers will give the firm leverage for the negotiation of price and other contract terms. Benchmarking data from other law firms and the marketplace can often be helpful in price negotiation. Many firms are utilizing creative contracting and aligning incentives in order to manage costs, including flat-fee agreements, discount-based pricing or tiered pricing structures.

Implementing a Sourcing Strategy

A systematic execution of the plan, along with the development of firm-wide procurement processes and systems, will ensure that cost savings are sustained in the long-term. Following are considerations in developing the firm-wide processes:

• Development of organized procurement and contracting policies/ processes;
• Standardization of purchasing roles and responsibilities, as well as the firm-wide organizational structure;
• Improvement and enforcement of controls and monitoring capabilities;
• Identification and implementation of technology to enhance the procurement function; and
• Leveraged economies of scale and maximized vendor relationship value.

If the firm is sufficiently large or has sufficient purchasing volume, it may be advantageous to develop an internal procurement organization to optimize the procurement strategy. As a general rule, AmLaw 200 firms fit in this category, but smaller firms will also benefit from establishing a formal organization. The responsibilities of such an organization typically include vendor management, contract management, demand management, process management and related data management.

Managing and Maintaining The Strategic Sourcing Program

To sustain the resulting cost savings, the firm must ensure that its strategic sourcing/procurement program is dynamic. That means regularly reevaluating sourcing decisions and routinely monitoring compliance, as well as ensuring the existence of a history/knowledge base for ongoing operations. Firms that have established procurement policies and procedures will have the necessary tools to measure and manage ongoing strategic sourcing. Performance measurement standards or “scorecards” for vendors can provide a basis for evaluating and managing supplier relationships. Consistency in internal compliance throughout the firm's offices and departments will further support sustained savings.

Responsible firm administrators must continually seek ways to maximize a firm's profitability. Strategic sourcing is a proven method for reducing recurring, non-staff costs. When sustained over time, these savings can have a significant positive effect on a firm's bottom line, while also enabling the firm to demonstrate its value and cost consciousness, thereby increasing its competitive advantage.