Of Profit Margins and RFP's

If "three anecdotes constitute a trend," as the possibly apocryphal credo of journalists has it, then I am here to announce a trend:  Corporations are beginning to apply professional purchase-manager techniques and metrics to selecting and overseeing outside counsel relationships. 

In this world, you can forget long-standing relationships, forget alumni networks, and even forget deep experience with and intimate knowledge of a client's business:  What matters is cost and cost alone.  The shock this can inflict on senior partners is a painful thing to watch, but it is evidently real, according to this fly-on-the-wall account from Legal Week.  Think you can sidestep the "RFP" (request for proposal) process through outflanking the purchase manager and going directly to the pertinent GC?  In the more rigid RFP procedures, contacting anyone outside the bounds of the RFP's written strictures is grounds for immediate disqualification.  In a particularly aggressive RFP, the corporation had already filled in (in an "example" response) hourly billing rates for various levels which drastically undercut a responding firm's customary rates.  Thinking they could win the business by splitting the difference, they took a deep breath and agreed to cut their margins.  They thought wrong:  No deal.

Meanwhile, Philip Morris International has installed a non-lawyer in a new position ("director of legal services") designed expressly to control both its internal and external legal expenses.  His brief?  To analyze procurement, planning, training, and technology support for the 100-lawyer in-house team, as well as to critique proposals and engagements by outside counsel including Arnold & Porter, Clifford-Chance, Covington & Burling, and Winston & Strawn.

Finally, some firms, including MoFo, Pillsbury, and Gray-Cary, are hiring consultants to have conversations with their clients that the firms evidently cannot, will not, or are too abashed to have themselves:  This starts by asking what is the top-most concern for the client, and "increasingly, that concern comes down to one thing—controlling costs."

By way of evidentiary "piling on" in support of the emphasis clients place on cost control is a separate Altman-Weil survey conducted of chief legal officers last year where "new ways to control costs" was cited as the single most important innovation outside counsel could implement.  And, the news gets worse:  Only 22% of CLO's could cite any innnovation by outside counsel.   What explains what might be called this radical conservatism on the part of firms?  As my friend Dan DiLucchio of Altman-Weil puts it:  "Firms feel pressure but they don't feel pain," and it will take pain to cause change.

Now, is this a situation where railing at "the dismal science" seems particularly apt?   In a static, zero-sum world, that would indeed be justified and understandable; the client's gain is your loss.  But more flexible and dynamic responses are also available, which start from the breathtakingly obvious realization that not all legal questions require the same sophistication to answer.  Consider:

We hope you can already compete effectively in the top left sector (the subject of an entirely different post if not).  The message our new breed of legal-service purchase managers are delivering is that to compete in the bottom right sector the name of the game is cost-effectiveness.

So you really do have a choice:

• essentially concede defeat, refuse to cut margins, and lose every RFP bake-off that comes your way;
• drastically cut margins and win the occasional RFP but, absent fundamental changes in your delivery model, hurt profitability; or
• re-imagine how you provide "bottom right" services:  For example, how much can be automated?  How much can (that word again) be outsourced?   How much investment, in other words, are you willing to make to simultaneously (a) respond to what is, economically speaking, a highly justified request by your clients; and (b) reconfigure your delivery method to maintain your margins?