The centralization of the procurement function within an organization, in which the purchase of goods and services is managed by a single department for all branches of the business, emerged in recent decades as a key operational strategy for increasing efficiency and reducing costs. This model makes it much easier for an organization to maintain policies and procedures that enable smarter buying across the company.
The results have been very positive. In addition to the financial benefits that centralized procurement has delivered to the bottom line, centralized procurement has also become a key business strategy for improving risk management. Seven out of 10 procurement officers surveyed by Deloitte for its 2019 Chief Procurement Officers Survey reported that “reducing costs” is a strong priority for their department this year and 55% said that “managing risk” is a strong priority for them, the top two objectives identified by survey respondents.
Unfortunately, the law firm sector has lagged behind its corporate peers when it comes to adoption of centralized procurement. While nearly all major U.S. companies employ centralized procurement teams, we estimate that roughly one-half of large law firms have made this transition so far. But the writing is on the wall: That number has risen sharply over the past five years.
Drivers of Law Firm Procurement Centralization
There are a variety of market forces driving law firms’ transition to centralized procurement:
- Organizational. The growing scale and complexity of global law firms makes it more important for firm leaders to get their arms around the processes they use in procuring goods and services;
- Risk management. Law firms are under greater scrutiny by their clients regarding the vendors with whom they conduct business, creating a need for consistent rigor in the vetting of vendors;
- Cost containment. With margins under greater pressure in 2020 than they have been in several years, law firms need to reduce costs everywhere they can, and leveraging their scale with negotiated pricing is a key area of opportunity; and
- Diversity. Clients are increasingly calling for improved vendor diversity as part of their overall diversity initiatives, so centralized procurement can play an important role in this strategic shift.
Of course, there are challenges to centralization, as well, including the difficulty in determining what can or should be centralized among a number of offices and cultural challenges if a firm’s offices tend to operate independently and are therefore resistant to centralization. Given the converging forces listed above, however, most large law firms still using a decentralized procurement model are beginning to recognize that centralization is best way to address those pressures, regardless of the challenges presented.
The First Step: Prioritization
Once the decision is made to centralize, the first step is to identify and prioritize the areas that should be centralized. Priorities should emphasize two main factors:
- Areas where a firm needs a consistent data source across the organization (particularly important for risk management) and
- Areas where there is an opportunity to collectively leverage the firm’s buying power, negotiating the best value relationships based on its needs.
There are some areas where centralization may not be necessary or may not be worth the effort (relatively unique or strictly regional purchases, for example), so firms should first look to those areas that trigger risk or that are fairly universal across their offices. Examples of likely candidates for centralization include technology and library needs.
Strategies for the Transition to Centralization
There are three primary strategic options for how law firms can successfully make the transition to a centralized procurement model.
- Assimilate existing resources. The first option is to centralize the firm’s procurement function by aggregating the currently disparate internal resources scattered around the firm and its various offices. This is often the most palatable approach to local and regional managers, as it leverages the employees they have gotten to know over the years. Issues to consider include how you will manage the process to best assimilate veteran staff members into a new team with a new centralized reporting line and potentially different processes. Depending on the individuals involved, there may be some resistance to change.
- Build a new department. The second option is to start from scratch and create a new centralized procurement function from the ground up. This strategy allows law firms to create the precise structure they have in mind for the department and to recruit the specific talent that is the best possible fit for the roles on the new procurement team. Considerable planning is required for this approach because of its logistical complexity. Some firms find it helpful to obtain advice from external procurement experts who can help navigate the path.
- Partner with managed services provider. The third option is to partner with an expert provider that has law firm experience and can assume day-to-day responsibility for the centralized procurement function. A managed services model delivers a guaranteed return on investment to the firm by transferring a traditional cost center to an outside service provider. The managed services partner uses an agile staffing model that provides operational efficiencies, scalability, cost containment, improved diversity scorecards and risk mitigation for the firm. Often, the largest hurdle to implementing a managed services arrangement can be cultural, if firms have an established culture that is resistant to outsourcing any operational duties to outside service providers. Recently, firms have become more open to the concept of using external providers for functions that are not directly practice-related.
HBR Consulting assists law firms that are interested in taking the next step toward centralizing their procurement functions and guides them toward the strategic approach that makes the most sense for their unique circumstances. The key is to get started and take action. Our research has found that organizations that actively manage their vendor base will realize a 5-7% overall reduction in costs, versus a 5-7% increase in year-over-year costs for those organizations that are not actively managing vendors.
For more information regarding steps that your firm can take, please contact me.