Improving Decision Making Through Better Legal Support
Lucchini S.p.A. is the second largest steel producer in Italy, with annual revenues of 2 billion euros. The small in-house legal department outsourced its 400-plus legal matters to more than 30 law firms. This model was unsustainable, however, as the company could not afford uncontrolled expenses over the long term. Upon becoming general counsel in 2010, Ernest Sultanov was charged with overhauling business as usual to reduce expenses, increase efficiency, and bring greater budget predictability.
"The company had been facing a difficult market situation since 2008," Sultanov says. "We were wasting money when we should have been focusing on debt restructuring and M&A. My mission as general counsel was to reduce dramatically the expense of outside law firms without doing harm to the company."
Sultanov launched Project Dobra (an Italianized Russian word that means "good") in January of 2011, with the following goals:
- Reduction of day-to-day spending
- Reliable, transparent, and timely budgets
- Zero tolerance of inefficiency
- More control on each and every legal matter
The project's initial phases included research and the creation of new policies and procedures. "We contacted leading legal firms to learn their best practices, and tried to understand the practices of other companies in Italy and throughout Europe," he says. A significant first step was the creation of terms and conditions for legal services provision. "Lucchini was probably the first Italian company to implement terms and conditions for all legal outsourcing," Sultanov says. "We wanted the firms to use our systems and requirements to increase control, while decreasing the number of matters and firms."
The terms include a ban on lump expenses, hidden charges (faxes, phone calls, copying, and so forth), and billing for idle time. Sultanov requires law firms to submit quotes before matters are undertaken and detailed, uniform invoices and timesheets. The application of the terms and conditions alone saved Lucchini 12.5 percent in its first year.
"It really changed our relationships with the law firms. We're no longer working to their rules; it's now more of a joint venture, a partnership. And the more they are compliant, the more we come to rely on them," he says.
Sultanov also tackled IT issues. "It was not something that we could avoid; we had to make it more efficient," he says. "We needed a robust data reporting system that would enable improved decision making by management and supervisors." Surprisingly, no suitable European system for legal needs was available on the market. Lucchini selected a U.S. platform that still required "huge customization" by the project team, including the creation of customized templates for each matter of substantive law (civil, administrative, criminal). Data is automatically converted from the IT platform to SAP. Automating processes, coupled with improved planning, resulted in a decrease in legal expenses of 35 percent compared to the previous year. Reports that used to take two weeks can now be generated in five minutes, and the legal team has real-time access to every matter.
Planning is improved by a new level of consistency. Every matter is divided into specified steps and procedures, and every step or procedure has a limited cost. The legal team ranks each single matter based on its importance and difficulty. For M&A activities, Sultanov implemented an added value-based fee structure with capping and bonuses, which is transparent and beneficial both to Lucchini and the law firms.
The approach underwent a profound shift from reactive to proactive. Sultanov created a new risk policy that included identification, assessment, prevention, and monitoring, and he brought in the law firms as well. A $350 million M&A project in 2011 was successful largely due to improved management decision making resulting from Project Dobra provisions, as was a comprehensive debt restructuring at the end of the year.
"The firms are now part of our risk prevention method, which makes the professional work really important. It brings the best to them and to us," says Sultanov.
The outside lawyers agree. "As a law firm, we are also in pursuit of transparency, efficiency, and clarity in our relationships with clients such as Lucchini. The implementation of the project has actually improved our internal ability to monitor the efficacy of the work of our associates and partners, resulting in improved efficiency of our operations," says Maurizio Delfino, a partner with the Rome office of Willkie Farr & Gallagher.
The legal team has had success increasing the efficiency of other departments within Lucchini as well. They collaborate with other departments to identify the problems of the company and devise strategies to solve or avoid them. Other departments, from human resources to manufacturing, have emulated the legal department's disciplined management systems with their own consultants.
"Many companies think they must make a choice between reducing costs and increasing control," says Lucchini. "We were able to have both."