Legal Leaders Exchange - Podcast episode 18

Adventures and misadventures of managing budgeting and legal spend

For the 18th episode of Legal Leaders Exchange, Nathan Cemenska, our Director of Legal Operations and Industry Insights, welcomes Andie Lam to the podcast. As Director, Global Category Manager at Novartis, Andie is an expert on legal operations and procurement. She and Nathan discuss the contrasting motivations of in-house and outside counsel, as well as the role that procurement professionals play in the legal department’s relationship with law firms.

Listen to learn more about:

• The dynamic of SEM (“someone else’s money”) and how it can affect the way in-house lawyers engage outside counsel
• How procurement professionals’ focus on cost savings supports positive outside counsel relationships
• The key factors to keep in mind during annual rate negotiations with law firms
• The importance of good communication to the budgeting process and the range of stakeholders who are affected by budgeting issues
• What’s involved in establishing effective billing guidelines and how to ensure that they are working well after implementation  

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Transcript

Greg Corombos

Hi, I'm Greg Corombos, welcome to legal leaders exchange. This podcast series was created to deliver insights on optimizing legal operations for corporate legal and insurance claims professionals. Today we’ll address the SEM issue: someone else's money. When in-house counsel goes to outside counsel to work on a legal matter, they are not putting their own money at stake, whereas outside counsel puts out their best work as they have all the skin in the game. As partners of legal operations, procurement teams can help in-house counsel control budgeting, and put more pressure on outside counsel to manage legal spend and maximize results. To this end, our Nathan Cemenska invited procurement leader Andie Lam, Director of Global Category Manager at Novartis. Nathan and Andie, welcome to this episode. Please introduce yourselves.

Nathan Cemenska

Hi everybody, Nathan Cemenska, thought leader for Wolters Kluwer. I am joined here by a friend and client, Andie Lam of Novartis, the major pharmaceutical company, and we are going to be talking about legal ops stuff. Specifically, we're going to be talking about outside counsel guidelines, budgeting and rates – and the various adventures and misadventures that you can expect in dealing with those – and best practices about how to get the most out of those that you can. But before we do that, maybe we want to hear some background about our speaker. Andie, would you please introduce yourself?

Andie Lam

Hi, everyone, and happy to be here with you, Nate. I am Andie Lam. I've been with Novartis for 10 years now. And I'm in legal procurement and support the legal function full time, mostly working on litigation, but definitely on a lot of other practice areas as well.

Nathan Cemenska

Thank you, Andie. As she mentioned, she is a procurement person. So, she has a deep knowledge of legal operations. But she's not really legal operations. She is a procurement person who works together with legal operations and lawyers. And I think that that gives her a unique perspective that not everybody has. And I also think that it gives her a sort of a positional advantage that allows her to do certain things that legal ops and in-house attorneys might not always be able to do. And Andie, we talked a little bit about this in the buying legal counsel webinar that we did last week. We talked about the problem SEM, somebody else's money. And it was part of the explanation about why we think sometimes corporate law departments and legal ops can't do it all on their own, and they really need somebody like procurement to come in and help them with some of this stuff. Could you explain a little bit about what that conversation was?

Andie Lam

I think it's not necessarily just because it's not the attorneys own money that they don't care. I think it's just a lot of times they have a lot of other competing priorities. If not in their, quote unquote, “targets,” they may not pay as much close attention to it as some of the others may. Procurement, fortunately, or unfortunately, is always given a target on cost savings or controlling costs, and that’s where people like legal ops and procurement could help and put a little bit more focus on controlling the budget and the costs with the outside counsel and providers.

Nathan Cemenska

To kind of restate what you just said, when in-house counsel goes to use outside counsel on a legal matter. They are paying outside counsel with money that does not belong to them as individuals, whereas outside counsel actually personally has skin in this game. The partner is personally going to get at least some of the money that is going to the law firm, whereas in-house counsel, personally, financially speaking, does not have a dog in this fight. It's also somewhat rhetorically difficult for in-house counsel, to beat up too bad on outside counsel on things like rates and budgets, and so forth. But since procurement doesn't necessarily have to work on the actual subject matter, the legal work, they're in a better position to do that. Am I right?

Andie Lam

Yeah, it's just a lot easier, right? Because at the end of the day, the in-house team has day-to-day contacts with the outside counsel, they do have a little bit more concern over preserving the relationship. At the end of the day, they're still being judged on the outcome of the matters, that's priority number one for them. So the incentive is definitely not as big for legal as procurement in making sure we are controlling the costs with outside parties. Now, I do think that it depends from corporation to corporation – there are other companies that are focusing more on cost control, I could imagine that the in-house team may be watching their budgets as closely as some of the others. But I think it is easier in a way for someone like procurement to come in, give a little bit more pressure on the outside counsel, because we don't have that day-to-day work relationship with the outside counsel.

Nathan Cemenska

Okay. Now, let's talk a little bit about how the SEM, or somebody else's money, dynamics that we just talked about might show up in rate negotiations. And you and I have looked at some visualizations, without belaboring the point, that seem to suggest that rather than actually getting a better rate, the more volume that you buy out of a firm, you actually oftentimes get a worse rate. And there's various reasons for that. But one of the reasons that we talked about was that there is something called stealth rate increases. Could you talk a little bit about what that is?

Andie Lam

I'm pretty sure everyone who is either working in legal or working with legal, have seen this before, every year the law firms would come in to the client and say, “Hey, this is our new set of rack rates”. And it could range from five to double-digit increases. And I'm not even talking about step increases of associates, which are sometimes very scary to look at. So they would come in every year with those requests and some of them would preface it by saying that, this is our new rate, but I'm going to either keep the same discount with you as a client, or the nicer ones might even offer a higher discount rate. So this one looks good on the surface. But if you do the math, it's very simple math, you realize that, oh, shoot, this is still going to be quite an increase compared to last year. And you multiply that by the number of hours across the 12 months, then the effect could be pretty substantial if you don't pay attention.

Nathan Cemenska

So this is my opinion, tell me whether you agree with that, Andie, but rack rates are not only irrelevant, but they're actually misleading. And you should totally ignore them. And in fact, maybe you should even say something to outside counsel, like, you know, what, can we please not use the “RR: word anymore, and just talk about the actual rates that people are paying? Because that's reality. And the rack rate is a fictitious number that is invented by law firms in order to rhetorically frame rate negotiations in their favor? What do you think about that?

Andie Lam

We try. I have yet to stop them from talking about the rack rates. I think the only point that we could do is to ignore those, no matter how they present that the rack rates are, just to your point, meaningless. At the end of the day, we want to look at the real effective rates which is real discounted rates, at the end of the day, that we are paying. And in most occasions every year, they're still going in the upward trend?

Nathan Cemenska

Indeed. All right, let's talk a little bit about a different subject, which is budgeting. And you have tons of experience on budgeting, and I have enough experience to know that it is a headache. But could you explain to our audience of why this is so complicated? Because it is.

Andie Lam

Well, first of all, I definitely do not claim that we have mastered it, I think it's still a work in progress. Why it remains to be a challenge is, I think to a certain degree, having a tool or a solution helps quite a lot. But still, when you're dealing with all the uncertainties, and changes along the course of the matter, no one has a crystal ball of how a matter will evolve into at the very outset. So you know, whatever you originally budgeted, at this point in time could be totally wrong 12 months down the line. And I think that's the challenge in that there are so many unknowns and moving parts that make it difficult to keep track if we don't have a system and we don't have a process to make sure everyone's aligned. And a lot of times what I've seen is a breakdown of communications. And also, if nobody's really watching it closely, then it could get out of hand very quickly. And by the time somebody realizes it is probably too late, and nobody would be happy, because by then the law firm would feel defensive, they would have to justify why it’s getting x times higher than they originally told the client. And on the client side, the in-house team would look bad in front of the management, and they would also have to find a way to come to consensus with law firms and that becomes a very difficult process if we get to that point.

Nathan Cemenska

So it's hard to put the toothpaste back in the tube. In fact, it may be impossible in many cases. And to use another analogy, everybody ends up with egg on their face. I think that there are some people who are like, well, sure we blew the budget by 500%. But ultimately, it got approved and we got paid our extra money, so all's well that ends well. But in reality, what you're suggesting is that outside counsel looks disorganized, and unbusinesslike. In-house counsel looks disorganized, and unbusinesslike. It may also affect legal ops and procurement. It may affect the finance people. And so it basically injures everybody, and it probably also damages trust between those people and makes it harder for them to work together in the future. Do you believe that?

Andie Lam

Oh, absolutely. I think that a lot of tough discussions had to be held for that very reason. Because there are definitely different stakeholders within the organization that you have to answer to. It's not just the GC, but a lot of times finance, even the investor is a significant matter. And you don't book it in time, you don't make the necessary accruals, we could be in very deep trouble even with the investors.

Nathan Cemenska

Okay, now, let's move on to the third and final topic that we promised our audience, which is outside counsel guidelines. So, I think pretty much everybody who's anybody has got some kind of outside counsel guidelines at this point. Not everybody is enforcing them and not everybody is enforcing every single guideline that is in the document. But you have got a relatively mature outside counsel guideline program and enforcement regime there at Novartis. Could you talk a little bit about what you folks had to go through to get to where you are today?

Andie Lam

You know, looking back, I have to say it was it wasn't a painless process. I would say that much. I think, as with a lot of other companies, we did have a set of billing guidelines for a very long time. But no one's really enforcing it. And there were definitely a lot of non compliances. But it wasn’t until a few years ago that we took it more seriously. We refined it, took out things that we did not think made sense anymore, and just updated it to what we think would be more concise and just focus on a few things. And it was definitely a painstaking process, especially in the beginning, because it's not just like, “Oh, here's our new billing guideline ticket, relationship partner, tell everyone your law firm and be done.” Well, it doesn't work like that. I think it takes a team effort both internally, and externally with the outside counsel, to make sure everybody within the organization understands what those are, because if you don't tell them, chances are they will be tossed aside. No one is reading it. And nobody understands the importance of complying with it. So it takes multiple iterations of communications, both up and down within the organization and also with the outside counsel, to explain to them why it's important. And we definitely made dashboards and reports at that time and showed them, these are the things that you have improved, but here are all the things that you haven't complied with yet. Make sure that your team understands that and make those necessary corrections. So it did take, I would say, probably the first year, a lot of work back and forth, reporting dashboards, showing them where they stand to turn them into more of a compliant process.

Nathan Cemenska

So now let's talk about a horror story that I experienced about invoice timeliness, which should be in most people's outside counsel guidelines, and are probably in the guidelines of Novartis, I was on a consulting arrangement, and we were nearing the end of the year, I think it was something like December first. And the legal ops director, who I was working with, gave a huge PowerPoint to the entire law department, he even made up a little song to celebrate because it was going to be the first year in, I think, five or six years that we were actually going to hit our budget. And he gave this huge laudatory PowerPoint, and everyone was so excited that they had finally got it licked. And literally two days later, an invoice for $600,000 from April hit the system. And there was no way for us to not pay these people. They really did do the work, of course, and you can't just not pay someone $600,000. What we did do was we audited the invoices of a bunch of other providers and found a bunch of stuff that we thought was illegitimate. And we called them up and we told them we're not going to pay and they said, okay, but then they fired us as clients about a month later. That's cool, right?

Andie Lam

I don't know if I would call that cool. There must be some breakdown in between, which is definitely unfortunate. I mean, I firmly believe that, at least from our culture, we don't fire a provider or firm just because they don't bill us in time. I mean, yeah, it's probably not good. And then we require a conversation to make sure it doesn't happen the next time. But I find it hard to believe that someone will fire a firm just for that very reason. You know, there must be some other issues that have been bothering the client.

Nathan Cemenska

The client did not fire the law firm. The law firm fired us. (Laughs)

Andie Lam

(Laughs) I don’t know what to say. I would ask what happened. I would at least try to get an explanation of it.

Nathan Cemenska

What can corporate law departments do to make sure that the invoices come in in a timely way so that they are not surprises, like what I just described?

Andie Lam

Other than telling you that you don't bill us in time, we won't pay you? (Laughs) The burden is on you guys to design the billing. As long as you bill us in time and correctly, there's no reason why we shouldn't pay you. And usually in guidelines, the time period is pretty generous, so there's really no reason. If there are, let's say, extraordinary circumstances that prevent you from billing us, I think that's where complications come in, where you just need to have that conversation up front, not wait until the last minute when you are about to send us the bill like twelve months or eight months later. That wouldn't be good. A warning or discussion way ahead would help everyone.

Nathan Cemenska

I couldn't agree more. Okay. Thank you so much, Andie, for sharing your experience and wisdom with us. I'm certain that the audience learned something from this, and I certainly did as well. Thank you to everybody.

Andie Lam

Well, thank you. Thank you for having me, have a good one.

Greg Corombos

That was Wolters Kluwer ELM Solutions’ Nathan Cemenska, Director of Legal Operations and Industry Insights, and Andie Lam, Director of Global Category Manager at Novartis. This podcast is hosted by Wolters Kluwer ELM Solutions, the market-leading provider of enterprise legal spend and matter management, contract lifecycle management, and legal analytics solutions. For more information and additional guidance, please visit www.WoltersKluwer.com or call 1- 713-572-3282. Please join us for future podcasts on optimizing legal operations and achieving your legal and business goals.