The use of Should Cost Analysis is a timely example of the magic which can happen when legal departments open their doors to business people, specifically Procurement.
In keeping with our desire to inform, educate and inspire, our own Simone Claudia has written an insightful article on Should Cost Analysis. She'll explain what it is and how it can benefit both buyers and sellers. She reached out to our Legal Procurement 2018 Award Winners for Innovation, Osama Hamdy and Jon Lane of GlaxoSmithKline (GSK) for their unique viewpoints.
Don't miss our special offer to claim a 20% discount for Thomson Reuters' inaugural Practical Law ‘2018 Legal & Technology Procurement Conference’ in London on the 8th of November. More information below!
Innovation thrives when individuals, groups, or teams from diverse backgrounds — professionally, academically, or even culturally — come together to confront a challenge, or conquer a task. These different points of view give birth to new ideas, concepts and ways of doing. This intersection of hard work and innovation is truly where the magic happens.
The legal industry is certainly no exception to this rule and the entrance of Procurement professionals into corporate legal departments is certainly a case in point. We are heading towards the year end and the 2019 budgets are beginning to press on the minds of in-house legal counsel. In light of these budgetary concerns, we will examine the use of Should Cost Analysis as a timely example of the magic which can happen when legal departments open their doors to business people, specifically Procurement.
What is a Should Cost Analysis?
The origins of the Should Cost Analysis approach actually stems from the US Department of Defense who were seeking to better understand their supplier's bottom line, that is the expenses suppliers face, in order to understand their price points and better leverage negotiations with them, to come up with fair pricing. It is a total bottom-up approach which differs greatly from the traditional strategic sourcing procurement model where vendors are invited to send in quotes for goods and services – but the buyer has no visibility of how these sums were formulated. With the Should Cost Analysis buyers are able to understand the economics behind the provision of a good or service – that is, what does it cost the supplier to deliver?
Benefits of Should Cost Analysis
A Should Cost Analysis can be beneficial for both the buyer and the seller. For the buyer, as mentioned above, it allows greater leverage when it comes to negotiations as they have a pretty good idea of what the supplier’s profit margins are. This understanding of a seller’s profit margins and processes, allows a buyer to estimate a fair price before a proposal is even requested. For the vendor, this process can actually flag up inefficiencies in their business model or process. For example, if a procurement professional sees or suspects that a particular supplier has baseline costs significantly above those of their competitors then it could be investigated to find out why. Perhaps the vendor in question has not modernized where other businesses submitting a competing bid had or perhaps the other bidders were more efficiently staffing their matters. All around, it leads to a better understanding of what exactly is being purchased.
Challenges of a Should Cost Analysis
The straightforward question is ‘what should it cost’? However, it does not have such a straightforward answer. The main challenge is getting vendors to provide information about their overheads and costs base.
Innovation at Work
Now add to this mix trying to ask law firms to provide the economics behind the services they provide and one is presented with quite a challenge. This is the exact dilemma that the GlaxoSmithKline (GSK) legal department recently faced when reviewing their litigation legal spend in a specific practice area. The solution was found by working together with their organization’s procurement team.
The road to success was certainly not straightforward, however through many discussions between the legal team and the procurement team they implemented a unique strategy to gain insight into their outside counsel’s baseline.
“At GSK we are constantly looking to find effective and innovative ways to engage with outside counsel. Our application of Should Cost Analysis allowed us to develop a sophisticated understanding of the cost drivers associated with the individual component parts that make up our matters”, says Osama Hamdy, Managing Attorney - Global External Legal Relations Team at GSK.
The process involved reviewing and analyzing previous litigation matters in the specific practice area, categorizing the specific elements of a typical matter where the company was the defendant, and outlining the typical cost drivers of a hypothetical “standard case”. It was only once this first internal process had been carried out that outside counsel was then approached, through a reverse auction process, to bid for work on the “standard case”.
“This understanding, combined with our competitive bidding process, has allowed us to quickly engage top quality firms at competitive flat fee rates for complex legal matters,” continues Osama Hamdy. “This innovation was made possible by combining the expertise of our attorneys with that of our legal procurement team.”
When talking about competitive flat fees we are speaking of an almost immediate 20% savings on litigation in the area which was studied. Other benefits which manifested were the firms engaged for these specific types of matters were 10% faster than normal in coming back with price quotes for specific matters as well as an increased ability in legal spend management projections. The results have led to requests to apply this same process to other types of work regularly handled by the in-house legal department.
Jon Lane, a Legal Category Manager in GSK’s Global Legal Procurement team, who spearheaded this innovative approach together with Osama concludes, “These results could not have been achieved by the Procurement Team nor by the Legal Team in isolation. It is only by working collaboratively that this new innovative approach to Should Cost modeling became reality. It is our intention that this new strategy will be implemented across many different practice areas throughout the legal department and will ultimately result in incremental value for GSK."
About Simone Claudia: Before joining the Buying Legal Council team, Simone ran an international consultancy assisting clients operating in the legal industry with marketing, communications, and positioning. A number of her clients have been recognized in the FT Innovative Lawyers Report as well as winning a number of prestigious awards from notable legal publications. Connect with Simone.
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The conference will present an excellent opportunity to meet with GCs, legal COOs, CFOs and operation heads, procurement consultants, providers of legal, alternative and ancillary legal services and other professionals involved in legal and legal tech procurement.
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NEW BENCHMARKING PRIMER
Check out Jason Winmill's (of legal management consultancy Argopoint LLC) practical, effective approach to navigate the challenges of benchmarking.
To access the largest repository on Legal Procurement, please go to www.buyinglegal.com/formembers. For specific information on legal services benchmarking go to www.argopoint.com.
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We regularly hold members-only calls for buyers of legal services. Our calls focus on practical information and solutions. We cover issues you face in your daily work, best practices, and the latest trends in buying legal services.
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