Last week, I noted an article in the Wall Street Journal about corporate clients using reverse auctions to get law firms to price work better.
My post (and the accompanying diagram) caught the attention of one of the early adopters of reverse auctions, Jeffrey W. Carr, Senior Vice President, General Counsel & Secretary of FMC Technologies Inc. Jeff responded to my post in a forum entry on Legal OnRamp, expanding on the WSJ article (he was interviewed). He also set me (and the record) straight.
Jeff graciously granted permission to reprint his comments here; I do so below.
We were also cited in the WSJ article. Reserve auctions in and of themselves, are interesting, but only in part. I told the writer that the really story was about change and the resistance in the legal industry to that necessary change. I also told him that this “great debate” has been going for years and that we’re simply doing what lawyers are exceedingly good at — debating and protecting the status quo. We’re not really very good at moving forward and changing. As such, real change will occur when stories about the inefficiencies in the legal industry and the need for change break into the mainstream press. That’s when CEO’s and CFO’s might just walk into their CLO/GC’s office, throw the paper or magazine on their desk and ask them the hard question of what, precisely, are they doing and when?
Thus, the real story is the story itself appearing in the Markeplace section. Like the front page WSJ story in August of 2009, about Pfizer, a few other companies and the ACC Value Challenge, perhaps this story might spur some action. My advice to GC’s — get in front of this issue before your CEO or CFO visits you about it.
Now, with all that said, I thought [your readers] might like to see the context provided to the WSJ reporter upon which he based his comments about FMC Technologies and reverse auctions:
We have used reverse auctions â€“ they can work great in certain instances but they can be relationship destructive if used for every matter, and as such, I wouldnâ€™t use reverse auctions all the time.
As is the case in so many things, I have learned from our business and industry. There are only 4 companies in the world that can credibly do what we do in our marquee business (subsea oil and gas equipment). Our customers are the major oil companies and even though they see value in â€œalliancesâ€ and â€œpartnershipsâ€, they tend to technically qualify at least 2 of the players and then run what amounts to an auction on price. As Iâ€™ve said before, what our company does every day is far more sophisticated than any work done by any lawyer â€“ and in our industry, it always still comes down to value (efficiency and effectiveness).
Hereâ€™s our experience as a Legal Team:
1. To the best of our knowledge, we ran the first internet-based reverse auction back in 1998-99 (before GE did). We used eLaw Forum as a platform â€“ primarily because the platform we were using for sourcing (I think it was called Open Markets) imposed a % fee as a service charge. I was able to get John Henry at eLaw Forum to do this at a fixed price of $5000 as a trial. We did this for a specific case â€“ a plaintiffâ€™s IP case where the annual revenue of the product would not support the ten industry standard estimate of $1.5m-$2.0m, and I find pure contingencies too much of a zero sum game. This was where we rolled out ACES for litigation (not the report card model, but the more complex econometric model) â€“ and it was a condition to move through the process to agree to use that model. It worked great â€“ a bunch of firms responded, first cut was approx $1m in proposed cost, we then went down to 9 in the live reverse auction â€“ result was target cost of less than $500K. The firms in the room included some of the premier IP litigation firms in the country â€“ and Fulbright was chosen. Shortly after getting into the case they found some issues and determined success was unlikely â€“ they crafted an alternative strategy to further our IP. We spent less than $150K and had a great path forward. In a traditional model, we would have spent at least $1m before the firm â€œdiscoveredâ€ the challenge.
2. In about 2003, We used a reverse auction model to select our national HR/Labor firm.
3. From 2002-2005, we used a fast track modified reverse auction model for certain types of litigation â€“ we selected and pre-qualified 6 firms as our preferred provider, all willing to work under ACES, and then when a new case came in, there were 4 questions: Do you want it? Do you have a conflict? Have you handled this specific type of case before? Whatâ€™s your ACES target budget? Worked great, but we had so few cases that it didnâ€™t get much use. We also agreed to share the annual savings with the firms 40% to FMC, 10% to each of the firms. [Note: more info on the ACES model is here.]
4. In 2009-10 we used Legal On Ramp as part of a reverse auction model to select the firms for our new litigation panel â€“ as part of that they had to give indicative target budgets for categories of cases. Rather than select a firm, or use the model in 3 above, we created a JV with these firms and we form a team for each new case from those firms. Taking the lowest target budget proposals in the reverse auction, we established the baseline target case budget for the team. We have 1.5 years of experience â€“ again few cases, but our costs are down and performance is up.
5. In 2011, we used LOR and precisely the same technique to select a legal recruiter we would use exclusively to assist us in filling at least 3 open lawyer positions.
Hereâ€™s when we would consider use of a pure reverse auction:
1. When we have a new type of matter and we either have no incumbent firm or are dissatisfied with the firms we do have.
2. When there is a large volume of repetitive, low risk matters (e.g., slice and dice litigation, commercial leases, immigration, workers comp, EEOC, etc).
3. When we need to validate pricing/value from an incumbent service provider.
4. When we are pushing for adoption of new terms or conditions of service and the firms are resistant.
In summary, reverse auctions are just one of a series of tools in the kit we use and others can use in what should be the omnipresent focus on value in the delivery of legal service to our companies.
I appreciate Jeff’s comments and intensity regarding legal services quality and cost control. That intensity generates some heat; perhaps enough to boil the ocean and melt a few icebergs.