Preparing for Reverse Auctions

Articles have started to appear from general counsel regarding reverse auctions. The title of one recent article, “Let the Competition Begin,” appeared in The Texas Lawyer on Aug. 6, 2012. The focus of the article was on the transition from hourly billing to fixed-fee providers. Although such price sensitivity is typically for brand-name and commodity services, law firms must still respond. How does a law firm prepare? Here is what needs to be done.

What Is a Reverse Auction?

Rather than companies sending out RFPs to a number of law firms, they are now using a “reverse auction” to request quotes from law firms they trust. Single points of contact within the companies are focusing their attention on getting quotes from their outside law firms on certain services. As Silvia Hodges, a professor at Fordham Law School, stated in the article, “I strongly encourage law firms to understand competitive bidding in reverse auctions.”

In the last five years, the old law firm model of “time multiplied by billing rate” equals “value added” has died for most legal services. The relationship between in-house counsel and outside counsel has been transformed from a vendor to a trust relationship. As pressure increases on the chief legal officer (“CLO”) from the CFO and CEO to reduce costs, more sophistication in risk assessment has emerged. CLOs have moved to selective out-sourcing based upon risk to the company and price sensitivity. If the matter is a “bet your company” issue or there is a need for special expertise, clients may be willing to pay some hourly fees. But if the services or tasks are perceived as a brand-name or a commodity service, the activities are subject to establishing a price in the market. This is done by reverse auctions.

First, how do you play in the space called the reverse auction? The firm's team will be operating out of its own office through conferencing software. To participate, the firm must submit a fixed fee by phase-of-work before the auction starts. There are usually five or fewer bidders selected to participate, each of whom will be in the virtual room when the auction starts. Once in the auction room, the team must be prepared with optional bids and a bidding strategy. And then, the team must participate.

The following is a specific example of a reverse auction process. The example is of a sophisticated process developed by one client company. If the team is prepared for this type of process, it is probably prepared for any reverse auction.

1. Set your Strategy

Where would you like to be in your bids for each phase of work? What is your floor for each phase? Use the “L” numbers 100 through 400. The 100s phase includes investigation and analysis. The 200s phase includes the motion practice. The 300s phase includes discovery and is usually the most expensive phase. The 400s phase includes pre-trial and trial. Strategically, the team must be prepared to look at where the most expensive phases are in its own bid, and determine where the team can possibly lower its bids and find a more efficient way of performing the services. Later in this article, the skill sets needed to make such a determination will be explained.

Once in the bidding room (usually driven by the potential client's conferencing software), the team will see where its bid falls for each phase of effort. The screen will show all phases of effort and the rank of all the law firms in the room. For example, the team's bid may show up as number three on phase 300. The only firm bid numbers that will show up in the auction room are the team's dollars and the lowest bidder's dollars, the firm ranked number five.

Now the team will have 20 minutes to go through the phases. If any firm places a lower bid in the last three minutes, the bidding will continue for another five minutes to prohibit last-minute low-balling. Our experience is that the time in the auction room is usually between 20 and 30 minutes.

Usually, the system may set limits on how small a changed bid may be, for example 1% to 5%. Based upon what the team feels the client regards as critical, the team may change its bid on one (or more) phases. Once the team changes its bid, its ranking may change. The team needs to sit tight and see what happens. Did they move down to level number 4 or did nothing change? Strategically, the team now knows that it did or did not move the pile, and can re-evaluate its bid for that phase of work.

The price sensitivity of the client will be based upon two models. The first is the “Quality Service Grid” and the second is the “Cobb Value Curve,” which will explain the concept of brand-name or commodity service.

The Quality Service Grid

What is the difference between technical quality and service quality? In Figure 1 below, technical quality is along the “Y” axis from low to high according to the client's perception. On the “X” axis from low to high is the service quality. A proposal may be a perfectly worded document talking about the depth and education of the lawyer team and be high on the “Y” axis. But, on the “X” axis, another law firm may have completed an exhaustive interview process with client personnel and is providing a proposal that solves what the client perceives as problems. Guess who wins the competition? For confirmation of these concepts, please go to Susan Duncan's blog, http://rainmakingoasis.com/index.php/insights/blog, discussing the 2012 Meridian West Survey. The sponsors of the study are The Financial Times/Marketing Partners' Forum/Meridian West.

[IMGCAP(1)]

A firm can have a high technical quality on the “Y” axis, but low on the “X” axis. In other words, it can have high technical quality, but add little value. The winner will be the firm that is perceived by the client as high on both the “X” and the “Y” axes. For example, what is the value added of sending six very smart lawyers to a deposition that only needs two? Or, what might be the result of spending an extra 10 hours to fine-tune a document only to deliver it a day behind the client's expectations?

The Cobb Value Curve

Figure 2, below, outlines the sensitivity to price based upon the value added in the Quality Service Grid. On the “X” axis is the volume of work available. On the “Y” axis is the client's perceived value added. The more the service moves down the curve the lower the perceived value added and the more price sensitive the client will be. For example, a nuclear event (or a “bet your company” problem) will require the best of the best. In the “hired for experience” sector, the client wants specialized experience as the lead, but may use in-house resources for that portion of the work that falls in the commodity sector. Brand-name work is when the client continues to hire the same, traditional law firm, but will ask for discounts and may require budgets.

[IMGCAP(2)]

As the work moves into the commodity sector there is more volume but a very high sensitivity to price. Many of the tasks in any transaction or litigation fall within the commodity sector, e.g., research, document review, and initial drafting, to name a few. No matter what the lawyer thinks, if the client perceives a task as a commodity, it is a commodity.

For each phase of effort, there will be activities and tasks that will be perceived by the client to fall in one of these four categories. As the firm's team builds its bid on what has to be done based upon client expectations and perceptions, each activity will fall within one of the four categories and somewhere on the Value Curve. Use that information to strategically determine the bid for each phase.

2. Start the Process

If the firm does not have an internal consultant totally devoted to developing client-driven pricing strategies, it needs to establish a task force of a few lead client lawyers supervised by a respected client relationship lawyer who understands the problem and the urgency of reaching a solution. Pick the members carefully to ensure they also recognize the urgency of the problem. They will be creating a process that can be used by others in the firm. Each task force member should pick a high-profile client who is sensitive to price for certain services and will follow the process outlined below.

Step One. Assess the needs of the test client before any reverse auctions start. Identify the key areas of concern and sensitivities the client might have. This will require interviews with the client by the client relationship lawyer and the task force leader on its sensitivities and what the law firm can to do solve the client's problems. Is it cost, time, technical quality, and/or quality of service (see Figure 1)? For example, are they more sensitive to the price of discovery or the speed of discovery? Where is the legal service on the Value Curve? Build a map of what has happened on a typical matter and the process that was used to produce the result for the client. This is a map of major phases of effort and events needed to create the legal result. Do not get too detailed yet. This map is put together, based upon client needs, by the law firm on an initial approach and budget.

Once the test map is created, assign people (billing rates) to each major task and set up a time-line for how long each task should take (or has taken). Then conduct a dry run to see how the map and process conform to a current matter. Debrief with the matter team to see how the map conformed to actual experience. Where were the delays? Where was the budget busted? Were the right people assigned? Were firm resources used efficiently? Then debrief on the approach and the way it turned out in increased efficiencies and responsiveness to the client relationship.

Step Two. With a real matter, coordinate with a client to establish a base-line for what it should take to provide the service. Continue to manage the project and debrief with the client as part of the review. That would include going through the entire process to seek ways to move tasks to the client, use lower-rate people and substantive systems, and other methods for reducing costs or improving the schedule. For example, one firm used an executive summary of its map to walk a client through a transaction. The client was now capable of understanding where it fit into the transaction and the mutual expectations.

Now you are ready to start dealing with requests by a client for a reverse auction. Continue to develop more sophistication in building maps and estimating fees by using the above process to work with more and more matters.

So what must a law firm do to support the effort? As the task force goes through the steps above, begin to install the skill sets that will support the effort.

Skill Sets

Teach Project Management

As part of the task force preliminary tasks, start teaching project management. Take a very simple approach to setting up tasks, timelines, and resources required. Project management is: 1) planning the matter based upon primary client needs and the client's perception of the matter on the Value Curve; 2) organizing the matter into phases and major tasks; 3) staffing the matter to accomplish the result with the right people at the right levels of experience; 4) directing the team through focused meetings and objectives; 5) controlling the flow of work through feedback and debriefing meetings; and 6) creating formats for effective team debriefings.

Marketing Skills Training

This includes client interviewing techniques and critical questions required to assess a client's needs. Conduct a needs assessment from a holistic approach and not a product approach. The interviewer should not be responding to a need with a legal product, but with the solution to a problem. One law firm put a questionnaire together for each of its client relationship lawyers covering quality of service, cost, and schedule/responsiveness as a guide for annual client reviews. Create standard questions that lawyers can use to understand and respond to critical client needs.

Software

Select and install the software that is most useful and understandable in supporting the project managers.

Conclusion

There must be a disciplined approach to identifying those matters that fall in the four segments of the Value Curve. Clients will recognize value added activities. Law firms must recognize value added. Use the Quality Service Grid and the Value Curve to look at each proposal to the client. Start preparing for a possible reverse auction and make it part of the culture of the firm. Otherwise, the firm will suffer sustained losses in bidding for services, which will impact partnership compensation and its relationship with clients.

This article first appeared in Law Firm Partnership & Benefits Report, a sister publication of this newsletter.

William C. Cobb is the managing partner of Cobb Consulting (WCCI, Inc.), Houston. He has been a consultant in strategic issues affecting law firms and general counsel since 1978. E-mail: [email protected]. Website: http://www.cobb-consulting.com/. The author wishes to thank Toby Brown, director of Strategic Pricing and Analytics at Akin Gump, Houston, for his contributions to this article.

Articles have started to appear from general counsel regarding reverse auctions. The title of one recent article, “Let the Competition Begin,” appeared in The Texas Lawyer on Aug. 6, 2012. The focus of the article was on the transition from hourly billing to fixed-fee providers. Although such price sensitivity is typically for brand-name and commodity services, law firms must still respond. How does a law firm prepare? Here is what needs to be done.

What Is a Reverse Auction?

Rather than companies sending out RFPs to a number of law firms, they are now using a “reverse auction” to request quotes from law firms they trust. Single points of contact within the companies are focusing their attention on getting quotes from their outside law firms on certain services. As Silvia Hodges, a professor at Fordham Law School, stated in the article, “I strongly encourage law firms to understand competitive bidding in reverse auctions.”

In the last five years, the old law firm model of “time multiplied by billing rate” equals “value added” has died for most legal services. The relationship between in-house counsel and outside counsel has been transformed from a vendor to a trust relationship. As pressure increases on the chief legal officer (“CLO”) from the CFO and CEO to reduce costs, more sophistication in risk assessment has emerged. CLOs have moved to selective out-sourcing based upon risk to the company and price sensitivity. If the matter is a “bet your company” issue or there is a need for special expertise, clients may be willing to pay some hourly fees. But if the services or tasks are perceived as a brand-name or a commodity service, the activities are subject to establishing a price in the market. This is done by reverse auctions.

First, how do you play in the space called the reverse auction? The firm's team will be operating out of its own office through conferencing software. To participate, the firm must submit a fixed fee by phase-of-work before the auction starts. There are usually five or fewer bidders selected to participate, each of whom will be in the virtual room when the auction starts. Once in the auction room, the team must be prepared with optional bids and a bidding strategy. And then, the team must participate.

The following is a specific example of a reverse auction process. The example is of a sophisticated process developed by one client company. If the team is prepared for this type of process, it is probably prepared for any reverse auction.

1. Set your Strategy

Where would you like to be in your bids for each phase of work? What is your floor for each phase? Use the “L” numbers 100 through 400. The 100s phase includes investigation and analysis. The 200s phase includes the motion practice. The 300s phase includes discovery and is usually the most expensive phase. The 400s phase includes pre-trial and trial. Strategically, the team must be prepared to look at where the most expensive phases are in its own bid, and determine where the team can possibly lower its bids and find a more efficient way of performing the services. Later in this article, the skill sets needed to make such a determination will be explained.

Once in the bidding room (usually driven by the potential client's conferencing software), the team will see where its bid falls for each phase of effort. The screen will show all phases of effort and the rank of all the law firms in the room. For example, the team's bid may show up as number three on phase 300. The only firm bid numbers that will show up in the auction room are the team's dollars and the lowest bidder's dollars, the firm ranked number five.

Now the team will have 20 minutes to go through the phases. If any firm places a lower bid in the last three minutes, the bidding will continue for another five minutes to prohibit last-minute low-balling. Our experience is that the time in the auction room is usually between 20 and 30 minutes.

Usually, the system may set limits on how small a changed bid may be, for example 1% to 5%. Based upon what the team feels the client regards as critical, the team may change its bid on one (or more) phases. Once the team changes its bid, its ranking may change. The team needs to sit tight and see what happens. Did they move down to level number 4 or did nothing change? Strategically, the team now knows that it did or did not move the pile, and can re-evaluate its bid for that phase of work.

The price sensitivity of the client will be based upon two models. The first is the “Quality Service Grid” and the second is the “Cobb Value Curve,” which will explain the concept of brand-name or commodity service.

The Quality Service Grid

What is the difference between technical quality and service quality? In Figure 1 below, technical quality is along the “Y” axis from low to high according to the client's perception. On the “X” axis from low to high is the service quality. A proposal may be a perfectly worded document talking about the depth and education of the lawyer team and be high on the “Y” axis. But, on the “X” axis, another law firm may have completed an exhaustive interview process with client personnel and is providing a proposal that solves what the client perceives as problems. Guess who wins the competition? For confirmation of these concepts, please go to Susan Duncan's blog, http://rainmakingoasis.com/index.php/insights/blog, discussing the 2012 Meridian West Survey. The sponsors of the study are The Financial Times/Marketing Partners' Forum/Meridian West.

[IMGCAP(1)]

A firm can have a high technical quality on the “Y” axis, but low on the “X” axis. In other words, it can have high technical quality, but add little value. The winner will be the firm that is perceived by the client as high on both the “X” and the “Y” axes. For example, what is the value added of sending six very smart lawyers to a deposition that only needs two? Or, what might be the result of spending an extra 10 hours to fine-tune a document only to deliver it a day behind the client's expectations?

The Cobb Value Curve

Figure 2, below, outlines the sensitivity to price based upon the value added in the Quality Service Grid. On the “X” axis is the volume of work available. On the “Y” axis is the client's perceived value added. The more the service moves down the curve the lower the perceived value added and the more price sensitive the client will be. For example, a nuclear event (or a “bet your company” problem) will require the best of the best. In the “hired for experience” sector, the client wants specialized experience as the lead, but may use in-house resources for that portion of the work that falls in the commodity sector. Brand-name work is when the client continues to hire the same, traditional law firm, but will ask for discounts and may require budgets.

[IMGCAP(2)]

As the work moves into the commodity sector there is more volume but a very high sensitivity to price. Many of the tasks in any transaction or litigation fall within the commodity sector, e.g., research, document review, and initial drafting, to name a few. No matter what the lawyer thinks, if the client perceives a task as a commodity, it is a commodity.

For each phase of effort, there will be activities and tasks that will be perceived by the client to fall in one of these four categories. As the firm's team builds its bid on what has to be done based upon client expectations and perceptions, each activity will fall within one of the four categories and somewhere on the Value Curve. Use that information to strategically determine the bid for each phase.

2. Start the Process

If the firm does not have an internal consultant totally devoted to developing client-driven pricing strategies, it needs to establish a task force of a few lead client lawyers supervised by a respected client relationship lawyer who understands the problem and the urgency of reaching a solution. Pick the members carefully to ensure they also recognize the urgency of the problem. They will be creating a process that can be used by others in the firm. Each task force member should pick a high-profile client who is sensitive to price for certain services and will follow the process outlined below.

Step One. Assess the needs of the test client before any reverse auctions start. Identify the key areas of concern and sensitivities the client might have. This will require interviews with the client by the client relationship lawyer and the task force leader on its sensitivities and what the law firm can to do solve the client's problems. Is it cost, time, technical quality, and/or quality of service (see Figure 1)? For example, are they more sensitive to the price of discovery or the speed of discovery? Where is the legal service on the Value Curve? Build a map of what has happened on a typical matter and the process that was used to produce the result for the client. This is a map of major phases of effort and events needed to create the legal result. Do not get too detailed yet. This map is put together, based upon client needs, by the law firm on an initial approach and budget.

Once the test map is created, assign people (billing rates) to each major task and set up a time-line for how long each task should take (or has taken). Then conduct a dry run to see how the map and process conform to a current matter. Debrief with the matter team to see how the map conformed to actual experience. Where were the delays? Where was the budget busted? Were the right people assigned? Were firm resources used efficiently? Then debrief on the approach and the way it turned out in increased efficiencies and responsiveness to the client relationship.

Step Two. With a real matter, coordinate with a client to establish a base-line for what it should take to provide the service. Continue to manage the project and debrief with the client as part of the review. That would include going through the entire process to seek ways to move tasks to the client, use lower-rate people and substantive systems, and other methods for reducing costs or improving the schedule. For example, one firm used an executive summary of its map to walk a client through a transaction. The client was now capable of understanding where it fit into the transaction and the mutual expectations.

Now you are ready to start dealing with requests by a client for a reverse auction. Continue to develop more sophistication in building maps and estimating fees by using the above process to work with more and more matters.

So what must a law firm do to support the effort? As the task force goes through the steps above, begin to install the skill sets that will support the effort.

Skill Sets

Teach Project Management

As part of the task force preliminary tasks, start teaching project management. Take a very simple approach to setting up tasks, timelines, and resources required. Project management is: 1) planning the matter based upon primary client needs and the client's perception of the matter on the Value Curve; 2) organizing the matter into phases and major tasks; 3) staffing the matter to accomplish the result with the right people at the right levels of experience; 4) directing the team through focused meetings and objectives; 5) controlling the flow of work through feedback and debriefing meetings; and 6) creating formats for effective team debriefings.

Marketing Skills Training

This includes client interviewing techniques and critical questions required to assess a client's needs. Conduct a needs assessment from a holistic approach and not a product approach. The interviewer should not be responding to a need with a legal product, but with the solution to a problem. One law firm put a questionnaire together for each of its client relationship lawyers covering quality of service, cost, and schedule/responsiveness as a guide for annual client reviews. Create standard questions that lawyers can use to understand and respond to critical client needs.

Software

Select and install the software that is most useful and understandable in supporting the project managers.

Conclusion

There must be a disciplined approach to identifying those matters that fall in the four segments of the Value Curve. Clients will recognize value added activities. Law firms must recognize value added. Use the Quality Service Grid and the Value Curve to look at each proposal to the client. Start preparing for a possible reverse auction and make it part of the culture of the firm. Otherwise, the firm will suffer sustained losses in bidding for services, which will impact partnership compensation and its relationship with clients.

This article first appeared in Law Firm Partnership & Benefits Report, a sister publication of this newsletter.

William C. Cobb is the managing partner of Cobb Consulting (WCCI, Inc.), Houston. He has been a consultant in strategic issues affecting law firms and general counsel since 1978. E-mail: [email protected]. Website: http://www.cobb-consulting.com/. The author wishes to thank Toby Brown, director of Strategic Pricing and Analytics at Akin Gump, Houston, for his contributions to this article.