Supply chain financing is a practice that has received a bit of backlash in recent weeks, with critics accusing some large corporates of forcing discounts on small suppliers to speed up payment. But when used appropriately, supply chain finance can be a strategic way to align the incentives of corporate buyers and suppliers, enabling vendors to accelerate their cash flow while still providing buyers with the longer payment terms they need to manage their own cash.
While opportunities for supply chain finance and dynamic discounting can be found across verticals, demand for these capabilities is particularly high in the corporate legal services industry.
According to Aaron Pierce, general manager of LexisNexis CounselLink, that's because the relationship between law firms and corporate legal departments is unique.
"It's a very symbiotic relationship between the in-house legal department and outside counsel," he told PYMNTS in a recent interview.
While the relationship between a law firm and an individual client may be a straightforward one of service provider and consumer, when law firms work with corporate legal departments, there is more of a collaborative relationship between legal professionals. That makes this B2B relationship unique to buyer-supplier relationships in other industries, noted Pierce, introducing similarly unique financial arrangements between partners.
"You'll start to see things like alternative fee arrangements rather than hourly billing for legal work, which is the traditional model," he said. "Adding payment terms to the mix, and the ability to mutually benefit the two sides, from a payments perspective, seems like a natural next step."
That "next step" for CounselLink is the launch of CounselLink FastTrack, a supply chain financing capability developed with LSQ that enables corporate legal departments to initiate and manage their reverse factoring and discounting agreements with outside counsel and to pay invoices.
What's essential to the success of a supply chain financing agreement is that both the buyer and the supplier benefit from it, as Pierce explained. Like other industries, there is traditionally a misalignment of goals in the corporate legal services space: Businesses want to hold onto capital, but law firms want to get paid more quickly.
"Law firms are looking for consistency in payments to make sure they don’t have to weather long payment terms," he said. "Corporate legal departments are always looking for help in managing cash flow, reducing their outside legal expenses and holding onto money as long as they can."
Corporate legal departments are also looking to embrace opportunities like cash back incentives when paying law firms, a feature similar to rebates they may see from a corporate credit card, which cannot always manage the high-value transactions of a legal bill or provide the kind of payment data visibility necessary for cash flow management.
Early payment discount agreements are common in this field, but Pierce noted that these arrangements can be difficult to manage without technology that streamlines the buyer-supplier relationship. Corporate legal departments have also historically struggled to manage the complexities of law firm invoices, custom billing and fee arrangements, a challenge that he said can turn corporate lawyers into auditors and number-crunchers.
"Traditional review of those bills involves printing out stacks of invoices, which can sometimes be hundreds of pages," noted Pierce. "It involves attorneys manually reviewing those pages, crossing out lines for services that weren't billed the way they thought they should [have been], and potentially auditing against legal guidelines for expenses they may or may not pay."
From Cost Center to Strategist
The manual workload of managing law firm invoices adds the burden of an accounts payable (AP) department onto a company's legal department, further limiting that department's ability to provide the legal services their companies need. It's just one reason why Pierce said that historically, corporate legal departments have been considered expensive cost centers.
But adoption of FinTech platforms can lift that burden by optimizing law firm invoice processing and fee and payment arrangements, and by introducing a new revenue stream via cash back rewards. This is one way in which corporate legal departments are shifting how their C-suites view the function.
When applying a supply chain finance model to the particular requirements of corporate legal services, the buyer-supplier relationship offers an opportunity for those departments to further propel their strategic standing in the enterprise, according to Pierce.
"Traditionally, corporates will look at their legal departments as an expense for the business to help manage and mitigate risks," he said. "They're looked at as a cost center, rather than a center of value. In the past five to 10 years, we've seen a significant shift in law firms demonstrating strategic value to the organization that allows them to drive and inform corporate direction and strategy from a business perspective, and to demonstrate value, both to avoid risk and increase revenue or savings."