New Approaches to Pricing and Legal Procurement

In the long wake of the recession, outside counsel face a rising tide of legal procurement requests as corporations continue to seek to reduce spending. According to a recent BTI Consulting Group report, client RFPs have hit a 15-year high, with “56% of corporate counsel issuing RFPs for law firms in 2015, up from 45% in 2014.” With the increased involvement and sophistication of procurement in the sourcing of legal work, lawyers and their firms must seek alternatives to the traditional playbook of a) quoting hourly rates; and then b) discounting those rates 10 percent or more. Some lawyers have equated dealing with procurement to “bringing a knife to a gunfight” and many firms are now turning to a new breed of pricing and legal project management (LPM) professionals to level the playing field. These individuals are trained and experienced in negotiation tactics and in the scoping and costing of legal work, skills which are required to meet these RFPs head-on. For smaller firms or those without the same resources, a growing literature and training on these disciplines has become available.

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As the breadth and complexity of today’s RFPs have grown, so too has the level of nuance in pricing inquiries. For many years, these requests merely alluded to desires for “creative” pricing or “alternatives to the billable hour.” Respondents were able to successfully pitch only vague notions of potential offerings never actually offered, with the parties ultimately reverting to an hourly rate structure. However, buyers are growing increasingly sophisticated, introducing concepts such as reverse auctions, most-favored nation clauses, and the like. In other cases, clients, through the direction of procurement teams, will dictate alternative fee arrangements (AFAs) for individual pieces of work, such as fixed-fee pricing, even on large litigation matters. This is achieved by pinning down counsel on detailed assumptions used to reach their price (down to the fact witnesses) to avoid the inevitable follow up request for fee adjustments due to inefficiencies.

As one could imagine, it doesn’t take long for a busy lawyer or team of lawyers to be worn down by what they may perceive as this level of minutiae. In fact, procurement depends on this. Although they are tenacious negotiators on the legal battlefield, in general, lawyers are notoriously eager to discount, and are often uncomfortable when it comes time to negotiate their own price. In the context of bidding for work, this often results in what has been called “suicide pricing” (i.e., doing whatever it takes to get the work in the door). The effect? Lower realization and eroded profit margins.

With already record low realization rates industry-wide, this race to the bottom is not sustainable. Enter the legal pricing and project management professionals. Just as procurement does for the client, the legal pricing professional acts as a buffer in the negotiation process. They are a creative breed, who brings with them a toolbox of tested pricing structures and AFAs. Students of pricing theory, they push hard to create options for clients and strategies for best framing those options in such a way that works for the client. They work tirelessly to survey the competitive landscape to ensure rates are positioned appropriately by researching publicly and privately published data. Ultimately, pricing professionals assist in strategically defending, communicating, and directly tying legal services to the financial benefits of the client.

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Working alongside the pricing professional, legal project managers or those trained in LPM help in the actual costing of any fee arrangement ultimately structured or price offered. (Note: the cost is not the same as hours multiplied by fees.) This is accomplished by merging historical data with matter templates, which form a work breakdown structure (i.e., the specific phases and tasks of work needed, along with any specific deliverables). In addition, legal project managers help assess potential risks (who or what could make a matter cost more or less than expected?) and build in detailed assumptions (the number of document “turns” or depositions). Consider this a more exact science than the back-of-the-hand math that has so often formed the basis of fee proposals.

Once the cost is established, the pricing professional then can run various scenarios, and empower the lawyers in making an informed and financially-sound decision. Equally as important, once the price is set, is monitoring for budget overruns and “scope creep,” with the goal of providing the client with full transparency into the management of the matter. If done correctly, the client will feel as if the lawyer or firm is spending the money as if it were their own.

Outside counsel need not fear procurement departments. While these professionals are incredibly process-driven and trained to wring every last penny out of a deal, they bring structure where it has been desperately needed. With lawyers and their staff applying these new tools, attorney-client relationships can not only survive, but flourish through enhanced collaboration and the development of win-win pricing arrangements.

About the Authors

Shoemaker Ferko
Jim Shoemaker (left) is the senior manager for project management and John Ferko (right) is the executive vice president for practice management, pricing and operations at Miles & Stockbridge P.C.

(Feature Image Credit: ShutterStock)

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