Auctions Gain Favor Among Companies Seeking to Hire CounselSilvia Hodges in New York Law Journal, August 02, 2012
Law firms competing to handle GlaxoSmithKline matters can no longer rely solely on their long-term relationship with the company or its in-house counsel. Instead, firms must use an electronic auction where they have the opportunity to underbid their competition.
Although the technique is not common, in-house legal departments increasingly are using various forms of auctions, mostly for flat-fee billing projects, to choose outside attorneys, according to corporate counsel and law firms.
In these "reverse auctions," the roles of buyers and sellers are switched, with sellers competing for business by undercutting other bidders.
"Our auction process has been very effective for GSK, even for matters that are not high-volume/repetitive legal work, and they could help many other companies reduce their legal spending while maintaining the same level of quality service," said associate general counsel Robert Harchut.
Since pharmaceutical giant GlaxoSmithKline began using reverse auctions globally in early 2011, it has conducted about 60 auctions involving some 85 firms, and has saved more than $21 million when it compares the winning firms' initial bids to their final offers, Harchut said.
At GlaxoSmithKline, each auction usually draws bids from three to six firms the company has already vetted, Harchut said. Firms are given access to the lowest bid so they can compare their own initial offers, but they are not told the names of their competitors.
Law firms have 24 hours to decide if they want to change their offer.
"There have been times we've had over 50 or 60 [different] bids," he added.
Harchut said the company doesn't always select the lowest offer, but looks for a quality firm with the best chance of success. The firms not chosen are given feedback on what they could improve, he said.
The idea to screen firms through reverse auctions came from Martin Harlow and Justin Ergler, GSK's procurement managers assigned to work with its legal department, Harchut said.
Reliance on reverse auctions is an example of the rising influence of procurement groups on legal departments, said Silvia Hodges, an adjunct professor at Fordham University School of Law who teaches law firm management and marketing.
"Auctions are basically one of the tools that we see procurement [departments] apply to rein in the costs," she said.
An April 2012 report on alternative fee arrangements sponsored by LexisNexis and conducted by ALM Legal Intelligence found that one-fifth of approximately 140 law departments surveyed said they had instituted reverse auction or competitive bidding on high-volume and repetitive work.
About 36 percent of the 194 firms surveyed said they had been asked to bid in such auctions.
Eye on Profit Margins
Anthony Licata, Dechert's CFO, said he began a few years ago to see auctions where firms are given access to competitors' bids.
Dechert has taken part in about five such auctions and declined to participate in about 15, Licata estimated. He said the firm will not participate if it believes it does not have enough facts about the matter to determine a bid or doesn't think it has a fair chance, he said.
Licata said he sees some possible risks linked to reverse auctions.
"This is not purchasing pencils or paper," he said. Some auctions "are just a race to the bottom and that's not the way to do it."
The cost of legal services includes not only attorney fees, but also the amount a client may have to pay as a result of the case—for example, does it have to settle for $3 million or can it get the case dismissed?—he said.
Licata said there is risk for both the law firm and the client.
"Sometimes you have to be wary of the lowest price," he said. "Maybe [low bidding firms] are desperate for work, they need revenue at any cost."
From a law firm's point of view, Licata said, bidding for work should not be a race to get the most revenue, but rather a race to maintain the best profit margins.
"At some point, your margins don't make sense and it's just not worth it," he said.
"Chasing risk today means telling the market tomorrow that you've changed your price point," Licata said, adding that reverse auctions have a place in low-risk or routine work after a company has vetted the participating firms.
In his experience, clients primarily select firms through relationships and legal credentials, but the use of auctions has grown since the economic downturn, he said.
For matters susceptible to flat fees, Marsh & McLennan Companies gives a group of law firms from three to five days to fill out a template of requested information, such as a legal plan, staffing model, experience and proposed pricing, said Michael Caplan, the COO for the general counsel's office at the New York-based risk, insurance and professional services firm.
If Marsh & McLennan is interested in a firm offering a higher price than its competitors, it may ask the firm if it submitted its best price, Caplan said.
"The initial pricing usually reflects room for negotiation," he said.
Unlike GSK's process, Marsh & McLennan does not share bids among the firms.
The auctions are used for projects with defined beginnings and endings, such as early case assessments in litigation and some corporate transactions, Caplan said.