Who's Next After the Lawyers are Reverse Auctioned?

Yesterday’s WSJ shared an interesting story about the application of reverse auctions to the legal profession. For those of you who don’t know what these are, we have a long list of rants and articles about this “procurement tool” that have accumulated since people started using them back in 2000…..including the original founders of the tool, Freemarkets. That is not to say that reverse auctions are not all bad – they can be effective when used for appropriate types of purchases, using a well-defined set of criteria for their application.

I am also not averse to the legal profession feeling the pain of having their services exposed to a competitive bid. For years, law firms have cozied up to senior executives, and have developed relationships that have provided significant barriers to procurement to extract a fair price, let alone creating room for adverse legal consequences. The journal notes that “legal expenses for Fortune 500 companies range from $20M to $200M a year”, which is not an insignificant amount of change that deserves competitive bidding.

Lawyers are already on the ropes with the advent of Business Process Outsourcing. In an earlier report, we discovered significant amount of legal outsourcing was occurring to India, with companies such as United Lex, Premata, and Pangea3 providing solid support for routine legal transactions. But to be honest, a lot of the low hanging fruit has already gone in that direction.

Companies don’t want to spend resources dissecting every element in a contract, or inputting it into a contract management system, and are outsourcing when they want someone qualified to make those decisions. This is true particularly as companies assign risk level. Outsourced legal services have trained people in India who can go through contracts using methodology and quality is part of the process – and can turn it very fast. And companies are beginning to throw more complex parts of their legal spend. And once you define triggers you no longer have your people doing the administration piece. But for the negotiation of the deals – no one is going that route.

And this is where my concern comes in with the application of reverse auctions in legal services. How do you define a statement of work in such a way that you can bid this out. There will always be some element of trust and context that occurs in a legal relationship, and how do you quantify that? I know that for some of the companies listed as heavy users of reverse auctions, they have been bitten in the past by assuming that EVERYTHING can be reverse auctioned. This doesn’t work. Rather, the situation should be approached like any other category strategy approach – whereby you segment your spend into low value-added, less complex work, and work that requires a true “hands-on approach”, and which is higher value work. The former could be run on a reverse auction (or a simple competitive bid for that matter!) while the latter requires much more careful scoping and multiple stakeholders engaged in the decision.

So what is next for reverse auctions? My guess is the big consulting companies will begin to see their services put on the auction block – and they are the very ones that are advocating the use of the reverse auctions on others….watch out when it is turned back on them…