The next big thing in procurement? Reverse online legal auctions

[Australasian Law Management Journal,Compliance & Risk Management,Finance & Accounting,General Management,Strategy & Leadership] September 15, 2018

As organisations put increasing pressure on law firms to offer the best possible price for their services, expect auctions to become commonplace whereby firms have to bid for a chance to get their work, writes Trish Carroll.

When talk of alternative fee arrangements turned to reverse online auctions, the 100 people attending the APAC Legal Procurement Conference in Sydney in July 2018 sat up looking very alert.

It was during a question-and-answer session between Tom Daemen, director of corporate, external and legal affairs at Microsoft, and Andrew Price, COO of Barry Nilsson Lawyers, when things got interesting. In response to a question about how a reverse auction works, Price gave a hypothetical example of a global insurer using reverse auctions as a common pricing and procurement model. He painted a picture of an insurer wishing to establish a legal panel to service segments of its claims resolution work. First, the insurer would consult with its major insureds for the various lines of business being auctioned and invite those insureds to nominate firms to be invited to participate in the auction.

Firms that took up the invitation would then participate in an online auction conducted in a time-bound way that would see the price going down, hence the reason for calling it a ‘reverse auction’. From the pre-qualification process, the insurer would assume that all firms invited to the auction were capable of servicing the work and the only point of difference left would be the price.

A show of hands in the room indicated that few had experienced a reverse online auction. This surprised Microsoft’s Daemen, who said they were very common in his experience and had now progressed to organisations auctioning not just whole matters but phases of them – and, in addition, they sometimes used auctions for projects seeking something novel or creative. At this point the audience started looking slightly alarmed.

Advantage stakeholder

As I listened to this discussion, all I could think about was the efficiency for every stakeholder in the reverse online auction example Price had given. Hear me out. The insurer had undertaken an efficient pre-qualification process. It did not involve reams of written responses to be prepared by law firms or reviewed by those involved in the evaluation process. The insurer had consulted with its most important stakeholder, its customers, and a fast auction process determined the most cost-effective suppliers.

I found my mind wandering back to some of the complex, convoluted, drawn-out tender processes I have advised on over the years, and of all the time, money and energy expended only to find it really did come down to price when every other factor was about equal. This reverse auction process sounded refreshing in its transparency.

You do not need a crystal ball to see the advantages of reverse online auctions for those who administer the procurement process, particularly if the end game is about getting the lowest price.  Even if the goal is to seek new and creative ways to tackle a particular project or problem, as Daemen mentioned, then it is also a winner because the organisation laying down the auction parameters has defined the project or problem and the responding firms have something concrete to which to respond. Firms get a chance to demonstrate innovative ways of tackling something that is real.

Given that global companies such as GlaxoSmithKline, Toyota, eBay and Microsoft are using this form of procurement, and have been for some years, it must only be a matter of time before it becomes part of the Australian legal procurement suite of strategies.

If reverse auctions do become part of the procurement model in Australia, it will put pressure on law firms to become skilled at knowing how to properly scope, cost and use a variety of resourcing models – be they human, digital, outsourced or internal – to arrive at pricing in the pressured environment of a time-bound auction. The quality of existing relationships and performance would remain just as vital as it is now, or firms would risk not being invited to the auction at all.

Talking points

Concepts such as agile, scrums, sprints, tiger teams, Legal Lean Sigma, behavioural economics, big rock transformational outcomes, business velocity, legal as a service and failing fast all featured during the conference.

Failing fast is not something many law firms embrace, yet it is what may happen in a world of reverse auctions unless firms have analysed every available piece of data and variable so that bidding at reverse auctions and knowing when to withdraw becomes a core competency.

Many speakers at the conference came from the world of in-house legal counsel and procurement, and they spoke eloquently about their legal procurement and convergence strategies having multi-faceted objectives. I found it hard to shut down my inner cynic as I noticed how animated speakers got when speaking of the massive reductions in external legal expenditure they had achieved. And that is before the Australian legal market starts using reverse online auctions! As Daemen commented, “the world is awash with good law firms and good lawyers” and this makes it a great market when you are on the buy side and a hugely competitive one for those on the sell side.

Lawcadia, an Australian start-up that has developed a legal procurement platform, and Buying Legal Council, a US-based trade organisation supporting professionals responsible for sourcing and managing legal services supplier relationships, have formed a partnership and jointly hosted the APAC Legal Procurement Conference. This partnership is bound to help the legal procurement community in Australia become more sophisticated and effective in sourcing and evaluating legal services.

Procurement functions in large organisations were for many years seen as inappropriate to include in the process of procuring legal services. That has changed and evidence-laden examples provided by the BLC must be helping that change occur as it has a growing base of research showing that including procurement in the process can result in as much as a 20 per cent cost saving.

Interestingly, Lawcadia’s procurement platform does not currently have an online auction capability. Watch this space.

Trish Carroll is the principal of Galt Advisory, a firm focused on helping law firms devise and implement successful marketing and business development strategies. She can be contacted at trish@galtadvisory.com.au.