A Comprehensive Refresh of External Spend
In their quest for value, many in-house legal departments have added new roles to their rosters: legal operations manager, controller/budget specialist, efficiency expert and so forth. Such is the case for Shell, which brought on Vincent Cordo as global sourcing officer for the legal department. An MBA with a background in economics, Cordo deploys niche expertise in pricing, compensation and profitability to provide pricing support for the legal department. His background and skills are very important to the department, says Gordon McCue, Associate General Counsel, Litigation – Strategy & Coordination, because Shell's AFA program was initially a "real challenge. It requires skills not naturally occurring in lawyers. We recognized that we needed non-legal expertise, and investigated the market for solutions." Ultimately, Shell hired Cordo away from a global law firm.
Vincent Cordo (seated), John Leffingwell, Jeanne Walker, Simon Bolanos, Robin Johnson, Trevor Toker. Absent: Sarah Walsh
Since Cordo joined the company in 2015, the department has been pursuing a multifaceted initiative aimed at deeper relationships with law firms—and far fewer of them. "At the scale at which Shell operates, that catchphrase, 'We hire lawyers, not law firms' results in fragmented, undisciplined external spend and missed opportunities to drive value," says McCue. "Deeper engagement has many benefits: superior outcomes, savings and predictability."
AFAs were the foundational step - but at Shell the acronym stands for Appropriate Fee Arrangements. "There's nothing alternative about them," says McCue. "We are always looking to put in place the appropriate fee arrangement for a given matter and, in some cases, that could conceivably be an hourly rate arrangement. We are trying to convey the importance of finding the right fee for each matter." Options include portfolio/volume tier pricing, capped fees, blended rates, flat fees, phased-based, collars, holdbacks, monthly fixed retainers and contingency fees. One of Cordo's innovations is a fee arrangement where a firm agrees to apply a Market Adjustment Discount tied to the price of crude oil; the discount will be earned back by the firm as the price of crude oil increases base on certain indexes. Shell's spend is automatically reduced during periods of budget constraints, but firms share in the upside of the cyclical market when oil prices rise.
"Firms really partner with us to offer a discount that isn't locked in for the duration of the matter but can be nimble, with monthly checkpoints to adjust," says Cordo. "For the firms, it's better than underbidding and committing to a price for the life of the matter. It's unique, but it was embraced."
To achieve convergence, the department undertook a yearlong comprehensive panel review program that reduced the number of outside counsel from 400 to fewer than 100. Via a six-step process that included an RFP and a reverse auction, the global panel was reduced to six firms and is now supported by 18 local and specialty panels around the world. The company has realized more than a 15 percent average rate reduction since 2013 and has cut external spend overall by more than 25 percent.
Shell is committed to diversity in its providers and works with a number of Minority and Women Business Enterprise (MBWE) firms in the United States. The company also measures the volume of Shell work being done by diverse timekeepers at their panel firms. Shell also focuses on non-law firm legal vendor spend, such as court reporting services, leveraging MBWE vendors that provide support services that add value."We are truly dedicated to a well-integrated supplier network," says Ching.
To pursue long-term value and continuous improvement, the department rolled out a document called the Quarterly Business Review, or QBR. It includes a relative qualitative scorecard that includes key performance metrics on efficiency, process management, responsiveness, budgeting and results delivered. Designated relationship counsel within Shell use the QBR to engage in structured dialogue with outside counsel at the portfolio level, and also to let them know where they stand relative to their peers.
Added value from firms is also assessed and tracked. Panel firms are asked to provide support that extends beyond individual matters, including secondments, advice hotlines, training and pro bono services. Cordo works with firms to ascribe dollar values to these items so that the firms that invest in the relationship are appropriately recognized.