6/7/11

Setting Market Prices (a.k.a Fees) with Reverse Auctions

We have previously mentioned on 3 Geeks the need for effective pricing mechanisms in the legal market at the fee level, versus the hourly rate level. One possible tool to achieve this is using an online reverse auction tool.
We have also noted the increased involvement of the Procurement Department in selecting outside counsel. In following this subject, this blog post popped up on our radar. The blog is a straight-up procurement blog for all sorts of corporate procurement types. This specific post focuses on the use of reverse auctions. The post is actually skeptical of using them as they can focus evaluations of vendors “almost exclusively on price.”
This somewhat harsh evaluation focuses too much attention on the technology and not enough on the procurement process. Like any technology, if used in a vacuum without good process and procedure, of course it will generate less-than-ideal results.
The post generated a number of thoughtful comments, including one from Justin Ergler. Justin has a job title that includes. “Legal Services Procurement,” a unique role for sure. He notes that “Typically, reverse auctions have been thought of as a tool that is only applicable to commodities, but this is not the case.” He goes on to note “that cost should not be the only factor in a sourcing decision.” He describes how Procurement’s job is making sure the right suppliers participate in an auction. “Once you have these defined you can use an auction to get the best price the market will bare from the most qualified suppliers.” And there you have your market pricing mechanism.
Reverse auctions are nothing new. However, online technologies make them simple, accessible tools. From a law firm perspective, such tools will seem scary and intimidating. Will they take hold on a larger scale? It’s too early to tell. My advice: Be proactive. Even if your clients embrace these tools, having deep trusting relationships with clients will continue to be key to a successful legal practice. If you fail on that front, then online reverse auction rooms will indeed be a troubling development.
In any event, at some point law firms will be faced with competitive, fee-level market pricing mechanisms. Online reverse auctions are just one potential iteration to consider.

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