3/16/10

Convergence in a Buyers' Market? Whadya Stupid or Somethin?


In an attempt to out do the "X for Dummies" approach, Greg and I are going to use the "Whadya Stupid or Somethin?" brand and see what we can make of it.

This week I saw one too many RFPs stating something along the lines of, "in order to better control our costs, we are going to trim the number of outside firms we use." Like my ranting post on the term "Loss Leader," this was the proverbial last straw.

And like my Loss Leader post, I’d like to go back to Econ 101 thinking. In a market that has made a dramatic and lasting shift towards a buyers’ market, that also happens to be aligned with the biggest recession of the past 100 years, what’s the best buyers’ strategy?
  1. Take advantage of these market forces and get sellers bidding against each other along the lines of the good ole supply and demand graph? or
  2. Stifle that competitive force, cut out most of the sellers in the market and realize greater leverage with fewer providers.
The correct answer is 1. By definition, in a buyers’ market you already have that same leverage with every provider. Why would you want to eliminate competent competitors from bidding on your business, putting downward pressure on prices (a.k.a. your costs)?

My best guess: GCs (and their consultants) checked the ‘convergence cycle’ calendar and it said it was time to converge. I think they must have missed the "Spring Forward" announcements over the weekend.

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3 comments:

LP said...

I disagree with this post. Our company hired approximately 2000+ firms globally. Each firm averaged $70K in fees. Our convergence strategy is in the process of reducing the number of firms down to about 50. Our resources are now free to focus on law related stuff rather than managing firms. In addition we have experienced approximately 40% in hard savings by deploying a mix of fee structures and promising the firms a larger amount of our spend.

It's pretty simple; fewer firms mean less resources needed to manage those firms.

However at some point, it will negatively affect a firm's cost structure to handle a very large account. So the discounts for a $5MM account will not be much better than the discounts of a $2MM account.

Convergence at anytime is good house keeping.

Toby Brown said...

To LP's comment: I'm not saying clients should send every matter to a different outside firm. Yes - that would create a management burden.

My point is that it doesn't make sense to go through a process that removes competent law firms from the list of bidders when you're in a buyers' market. If anything, you would want to add strong vendors to the list - not remove them.

LP said...

Yes I agree with you that a convergence strategy should not eliminate the better firms (especially in this economy). However, that's not a convergence strategy. That's just stupid sourcing.

It's like buying your dream house, and then asking the construction company to only install the cheapest of material so that you can save 5% on the costs. Only to refinance and upgrade a few years later at much much higher cost.

 

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