Outside Legal Support of Procurement and Contracting As a Managed Service
For several years, white has been the most popular color for new cars, attracting 35 percent of purchases worldwide. Other popular choices include black, gray, silver, and red. Industry observers say that our choice of car color reflects the condition of the economy, our concerns with possible resale, and a number of other purely personal factors. No matter what hue you select, however, there’s a good chance that the paint on your car was manufactured by Axalta Coating Systems in Philadelphia. The company, a carve-out from DuPont completed in February 2013, makes colorful paints for the world’s largest vehicle manufacturers and other coatings for industrial customers. Raw materials are sourced from all over the world for use in Axalta’s 36 manufacturing facilities on six continents. As a result, Axalta’s procurement contracting business is significant. The carve-out meant that the legal department was reinventing itself while building a legal function that would not only manage contracts in transition but position itself to ensure sound procurement practices for the now-independent company in the years ahead.
Mara Williams, Michael Finn, Mark Dugan
“All supplier-based contracts and services were coming through the procurement organization at a crazy volume,” says Mara Williams, assistant general counsel. “As we were setting up the new organization, we wanted to break away from the cumbersome contract templates and legacy sourcing practices of DuPont. We needed processes and templates that did not exist, and leveraged the opportunity of the clean slate.”
New General Counsel Michael Finn, who came to Axalta from General Dynamics and had some previous experience with value initiatives, wanted to build the new legal department as a value-based operation, giving proactive legal advice. “I had run contracts in other prior roles, and have spoken to other general counsel,” he says. “It seems easier to manage procurement contracts by exception, so lawyers only become involved when absolutely necessary.”
Axalta partnered with the sourcing practice group at Hunton & Williams LLP on a fixed-fee basis to create a more effective contracting system focusing on value, performance, and efficiency. The team’s goal was to develop a new set of procurement templates, each paired with a set of procedures guiding their use and negotiation. They collaborated to develop a collective view of unique commercial aspects and risk tolerance of the business, then drafted agreements that balanced the need for efficient negotiations with protecting Axalta’s interests.
“We tried to achieve autonomy for the contract professionals. Hunton & Williams ensured calibration to a fair spot in the documents, especially across multiple industries,” says Finn.
The timeframe was tight—three months—and there was a dearth of slick technology to leverage in service of the project. “We had to get off the DuPont IT network. That alone was a huge undertaking. In the meantime, we had no way to buy software and nowhere we could have put it,” says Finn.
The team created a cohesive suite of 13 new templates, each tailored to reflect Axalta’s distinctive commercial practices, and customized for local language, practice, and legal requirements. Each template is paired with a playbook that explains the circumstances for using each form, how to use it, and how to use the playbook in negotiations.
“It’s rare for a company to re-do its entire way of buying,” says Randall Parks, partner at Hunton & Williams. “The innovation is in the scale of this project and the legal team’s ability to rethink how Legal engaged a large swath of its business.”
Each playbook includes a chart detailing each contractual provision, an explanation of the provision, and alternative and fallback provisions that procurement professionals are authorized to use in negotiating the contract. Williams and then Axalta Associate General Counsel Mark Dugan conducted 15 to 20 web-based training sessions; Hunton & Williams offers continued phone support. “We really wanted the procurement team to negotiate contracts, and to understand them,” says Williams. The training sessions were recorded and are now a standard part of the onboarding process for people new to the procurement department.
Hunton & Williams was the perfect choice for the project, says Finn. “We talked to a number of firms about our goals. Hunton has always embraced alternative fee arrangements and worked at the sharp end of the spear. They understood what we were trying to do.”
“It was a great opportunity to help our client lower their costs and their risks,” says Parks. “Although procurement is often a legal backwater, it carries a fair amount of risk. It needs to be managed better.”
The Axalta procurement department now independently negotiates more than 500 contracts annually, worth roughly $2 billion. Its members process 62 percent of contracts without engaging the legal department; the goal is 80 percent. Average legal review time has been cut in half, and annual spend for commercial contract review by outside counsel has dropped 80 percent.
For other general counsel contemplating similar initiatives, Finn advises, “Don’t be deterred by the size of the task. Keep it simple.” He notes also, “We wanted to drive to the future. This is only step 1 of our evolution.”