Procurement: Part 2 — Pricing

Part two of a three-part series on how procurement impacts law firm selection.

Pricing is a major factor in the procurement process that enables clients and firms to find mutual advantages by concentrating focus and finding efficiencies.

Three procurement leaders, Marco Perez, Senior Director, Head of Procurement USA & Legal Global Category, Royal Bank of Canada (RBC); Vincent J. Cordo, Global Sourcing Officer, Shell; and, Justin Ergler, Director, Alternative Fee Intelligence and Analytics (Global), GlaxoSmithKline (GSK) joined Nancey Watson, a proposal consultant specializing in the legal, accounting, engineering, and telecommunications sectors at a September 17, 2015 seminar held in Toronto to talk about where the bucks stops and how firms can best position themselves to win work.

Reverse Auctions

Reverse auctions sound like what they are: a bid on a matter with the lowest price winning the work. Best used for contained issues, Justin Ergler commented that GSK will run a reverse auction on a specific matter.

Knowing your financial threshold and profit margins are critical for success. As Shell’s Vincent Cordo said, “Know your costs cold” and Marco Perez of RBC stated, “Auctions are used for mature matters when the firms know their costs.”

Alternative Fee Arrangements

There are a number of AFAs, including reverse contingency, success fees, holdbacks, fixed fees, budgeted fees with collar, and blended rates. Law firms need to know the distinctive hallmarks of each and when they’re best applied.

All three procurement leaders agreed that AFAs are a two-way street: clients need to be specific about which AFA they want and law firms need to ask. Once it’s clearly understood which AFA is desired, firms need to price the matter’s most likely path.

They said the most popular AFAs provide predictability around cost and that it’s best when clients and firms build an AFA together. This means engaging in conversations about which Ergler said, “Firms don’t talk with their clients enough and they’re missing a lot.”

Pricing Process

Procurement people know what they want, but like most of us can’t read minds. So, when determining a firm’s capability to deliver an AFA, Ergler, Perez and Cordo said respondents need to explain how they arrived at the fees they quote.

When procurement is able to clearly understand the thinking behind the costs, it can help illuminate issues that need further consideration, and go a long way to explaining extra fees and adjustments based on assumptions that may affect scope.

When no scope of work is provided and “shot-in-the-dark” pricing is the required response on a fixed fee arrangement, firms are advised to be very cognizant of details. As Ergler commented, “Little things will ding you, like expenses. We don’t want to pay for things like Westlaw.”

The Bottom Line

Pricing boils down to asking questions, clarifying scope, and knowing your numbers.

As Perez advised, “Challenge us if you don’t understand what we need. If you want to make assumptions, explain why.” Ergler chimed in with: “You need to know your threshold, clearly understand scope, and set milestones. And Cordo summed it all up by saying, “If you don’t know your true cost, don’t talk to me.”

Plain talk, yes, but advice that is business — not personal.

Handled with care and open communications, pricing can be beneficial for both the client and the firm rather than a zero-sum game.

Part One of this three-part series on legal procurement focuses on evaluation and process while Part Three explores performance measurement and provides best practice tips.