What were the main effects of the 2008 financial crisis for legal departments of corporations in Germany? As a result of that profound economic crisis, Chief Financial Officers and General Counsels started rethinking their purchasing of legal services. Corporations increasingly understood that the cost of legal departments should be subject to internal control, just like routine cost scrutiny in other business areas had been obligatory for many years. In hindsight, the 2008 financial crisis thus acted as a catalyst towards a more rational, more efficient and more well-structured procurement process. Surprisingly, this applied to both internal and external legal services, but in particular to (external) law firm services. This trend which, partly referred to as a ‘seismic change’ in the market, has since then solidified under the headline ‘Legal Procurement’ also in Germany. Numerous DAX 30 companies have, in the meantime, adapted their purchasing processes for external legal advice. And they have done so in a very strategic and foresighted manner.
The main drivers for legal procurement were predominantly that companies were
- “seeking to manage cost and reduce supplier spending;
- ensuring that they buy goods and services in compliance with company policies;
- making sure they get the best services from the best available law firms;
- wanting to achieve more objective comparisons of legal service providers; and
- increasing predictability and transparency.“
(Source: Hodges Silverstein, Buying Legal Council, 2017.)
Will the 2020 Corona-crisis intensify the trend towards Legal Procurement?
The predictable consequences of the economic downturn in spring 2020 resulting from the Corona pandemic have, in many corporations, already had far-reaching effects: Not only have we seen drastic cost-cutting measures; moreover, there have also been steps towards strategic re-orientation. Hence, this crisis will in all likelihood further strengthen the trend towards legal procurement. The reasons for this development are twofold: First, many of these measures cannot be implemented by corporations based solely on their on-board resources, and will thus require external support. Second, further re-shaping of internal structures in the legal departments will be required, including further changes to current ’sub-standard’ procurement processes.
Richard Susskind, the visionary observer of international legal markets, may read this development as further evidence of the more-for-less-challenge diagnosed by him. Other, more cautious observers prefer to speak of a ‘changed ecosystem’. They see a shift of the legal markets where fundamental parameters regarding the ways of collaboration between corporations and law firms and other service providers already have, and increasingly will, change further (Hartung/BCG-Study, 2013). Given this, one thing seems for sure: In the future, legal departments will ‘watch the money’ more closely than ever before. We anticipate that these changes will increasingly take the form of ‘digital legal procurement’ processes.
In this situation, CFOs exercise a pivotal role: They will increasingly monitor that external instructions will be made based on objective criteria such as price, as well as scope and quality of services. They are aware that the set-up and maintenance of a law firm panel, as strenuous and time-consuming it may have been, does not, as such, guarantee optimum conditions for the instructing corporation on a concrete assignment. Thus, companies will focus even more strongly than before on the right balance between price and quality. In particular in times of the Corona pandemic and thereafter.