Tuesday, August 02, 2011

Lawyers, the Comorra, and Dutch Auctions

(thanks to movieaddicts)

There's a scene in Gomorrah (about the Neopolitan Comorra) where dress-makers compete to win an haute couture contract for a major clothing designer. They are asked to bid for the work in money and time--the lowest amount for each. Pasquale pleads with his boss not to go below a certain number of days which of course he does to win the contract. It's a reverse auction. These are also known as Dutch auctions, in contrast to "normal" English auctions where the price ascends not declines (see Smith 1990: 120). Later in the film Pasquale sees Scarlett Johansson on TV wearing one of his dresses.

Dutch auctions are very desirable for buyers of services although not so good for the sellers. Lawyers are now finding out what it is like to be on the receiving end of a Dutch auction. With a hat tip to my friend, Peter Lederer, the Wall St Journal has run a fascinating article on the machinations of corporate counsel to impel lawyers and law firms to embrace reverse auctions. (Here's an alternative location if it's hiding behind Murdoch's paywall.)

Here's the opening:
Spurred on by budget pressures, companies' use of a controversial auction process to negotiate contracts with law firms has surged in recent years, a trend that could eventually reduce the revenue attorneys can expect to reap from clients.

Several big companies—including GlaxoSmithKline PLC, eBay Inc., Toyota Motor Corp. and Sun Microsystems—have used the tactic, known as reverse auctions or competitive bidding, to pressure law firms to lower prices, especially on high-volume work such as tax filings and intellectual-property transactions. Many lawyers now worry these auction-based pricing strategies are spreading to more complex projects.

"Is it making all of us uncomfortable? Yes. Especially when you start to move away from the more routine sort of work," says Toby Brown, the director of pricing at Vinson & Elkins LLP.
What is interesting is that this isn't being done through beauty parades and pitches but instead through websites where law firms bid against each other and against the clock. Sounds like a chess game, no?

Despite the tender feelings of law firms and lawyer that this might all be a bit infra dig--"not very professional is it, old chap?"--it's gathering pace and market share.
Ariba Inc., the maker of one of the main reverse-auction software tools, claims that around 40% of today's market for legal work—a threefold increase from just a few years ago—is contracted through electronic, online means, most of which involve a reverse auction, according to Sundar Kamakshisundaram, a marketing manager for the company.

And David Baumann, general counsel for TechNexxus LLC, which helps companies cut down on legal, technology and business-services costs, says more than a third of the work they do involves reverse auctions, about four times more than in 2008.
Lawyers will plead that their work is complex and varied and can't be priced like other products. It doesn't really wash when one sees investment banks pricing complicated deals every day. How many other suppliers are able to say, "I won't tell you the price now. Wait until I think I've done enough, then I'll let you know."

As one general counsel so aptly put it:
"Every lawyer will tell you that every piece of work they do is incredibly important and risky and has to be custom-made, and that's just nonsense," says Jeff Carr, FMC Technologies' general counsel. "No matter how legally brilliant you are, there is always an alternative."
What's the difference between a loaf of bread and a lawyer? You eat one and the other eats you.
Smith, Charles W. 1990, Auctions: The Social Construction of Value. California.

1 comment:

John Flood said...

Or as one correspondent put it:

What's the difference between a rooster and a lawyer? A rooster clucks defiance, while a lawyer.... :)