Centralizing Management to Control Costs

Problems/Issues

GlaxoSmithKline (GSK) has an inefficient procurement process in the legal department. The traditional procurement methods were not suited to the unique needs of the legal department. In short, standard procurement practices were not working. The lawyers were skeptical about having to use the same procurement processes as other departments, and their skepticism led to resistance.

Another issue was the high legal spend. GSK’s litigation exposure was to the hundreds of millions of dollars. The legal department spent a lot on outside counsel. There was no budget for individual lawyers, which contributed to the high legal spend—an unnecessary cost.

Plus, a lack of a central management made it difficult for the company to monitor and control its legal spend. It also meant that the company was not totally aware of its potential spending power, which it should have been leveraging so as to get better rates with other firms.

Possible Solutions

One possible solution could be to introduce a new system with a reverse auction mechanism. In a reverse auction, law firms would bid for GSK's legal work (Horlen et al., 2005). This would allow for direct competition among the bidding firms, and it could help GSK to get the best legal services at the lowest possible cost.

Another possible solution is to use Alternative Fee Arrangements (AFAs). AFAs would let GSK pay a fee structure based on the value of the services rendered (Corrigan, 2021). This could include flat fees for specific services or contingency fees where the law firm is paid only if the case is won (Kritzer, 2004). It could also include a retainer fee where the law firm is paid a fixed amount for a specific period.

A third possible solutions is for GSK to create a new Global External Legal Relations Team. This team would be for managing GSK's outside legal spend and would help the company keep better oversight of its legal spend (Cremona, 2008).

Recommended Solutions

First, it is recommended that GSK implements a new procurement process that includes a reverse auction system so as to encourage law firms to propose their best lawyers at the most competitive prices. Second, GSK should use AFAs to shift the focus from the number of hours worked to the value of the services provided. Third, GSK should centralize the management of its outside legal spend by creating a new Global External Legal Relations Team to oversee all of GSK's legal spend.

Expected Outcomes

The new procurement process that includes a reverse auction system and adopting AFAs would help GSK to see increased efficiency and significant cost savings. The reverse auction system would put more emphasis on getting firms that can render best services at competitive prices (Van Tulder & Mol, 2002). At the same time, AFAs would also emphasize value of services rendered, and, thus, this combination of increased efficiency and cost savings would help GSK to spend more effectively and efficiently, and free up capital in so doing—capital that could then be deployed elsewhere more profitably.

Additionally, centralizing the management with the Global External Legal Relations Team would let the company better identify areas for cost reduction, negotiate more effectively with law firms, develop a more transparent approach to legal spend by ensuring that all funds and budgets are tracked and managed centrally.