23 March 2016

An increase in RFP’s as companies rein in legal spend

Insights

This Lawcadia Insight article is based on feature article published in Bloomberg BNA by Michael Greene, with our commentary noted in the conclusion. Read the original here.

As in-house legal departments look to cut costs and reduce inefficiencies, a process through which law firms submit competitive bids for providing legal services is becoming more mainstream.

Requests for Proposals (RFPs) — a process more commonly associated with the procurement of other services — hit a 15-year high in 2015 in the legal industry. According to a BTI Consulting Group survey more than half (56 percent) of corporate counsel respondents said they issued such a request last year.

Amar Sarwal, vice president and chief legal strategist for the Association of Corporate Counsel, told Bloomberg BNA reporter Michael Greene, that he wasn’t surprised that there was an uptick in the use of RFPs.

Sarwal said large companies are trying to use fewer law firms for their legal work, and sourcing the firms through the RFP process. RFPs are a useful means for a corporate in-house department to drive change with its law firm, he added.

Cost Cutting Tool

Since the 2008 financial crisis, there is a growing awareness among corporate counsel to reduce spending and do more with less.

“Project management is right at the core of what in-house lawyers do these days,” Sarwal said. “Many in-house attorneys don’t have a lot of experience managing budgets like other business divisions. However, they are starting to learn how to do it and RFPs are one of the “tools at hand” to cut outside legal spending,” he said.

Declining Confidence

In addition to cutting costs, the increased use of RFPs may also be a response to a growing disconnect between law firms and their clients, some observers say.

“Clients are using more RFPs because client service from law firms is down substantially,” BTI Consulting President Michael Rynowecer told Bloomberg BNA.

The consultant observed that in 2015, only one-third of in-house attorneys said they would recommend their primary law firm to corporate counsel peers, down from 41 percent a year ago. “This drop in client service is driving corporate counsel to seek out new law firms,” Rynowecer said. “Corporate counsel have learned client service saves them substantial time, money and gets them better outcomes. These benefits justify the time and effort of issuing RFPs when client service drops.”

Sarwal told Bloomberg BNA that he also wasn’t surprised by data suggesting that corporate counsel are less likely to recommend their law firms.

There is a “crisis of confidence” in law firms, he said. “The in-house folks aren’t getting the value they need,” and outside law firms don’t fully comprehend the “laser focus within companies on reducing costs.”

“Efficiency rules the day,” Sarwal continued. “In-house attorneys have become very frustrated because they don’t feel like they have a partner at the table that understands their bottom-line concerns.”

Other Benefits

While cost-cutting may be partly driving some of the shift towards using the competitive bidding process, experts said that corporate legal departments are seeing other benefits.

“It’s not just cost,” there is definitely a “value piece” as well, Sarwal said. RFPs can really help companies determine who are the better legal services providers for them. Law firms that have demonstrated that they have thought hard about a client’s problem or issue really stand out, he said.

Causing Tension?

If the RFP trend continues, Rynowecer warned that law firms face the prospect of losing out on work. “This trend invites competitors into a law firm’s client base,” he said.

The consultant suggested that law firms improve their client services, which would make them less inclined to move to the RFP process. “The chances of winning an RFP are between 12 and 15 percent, so the failure to improve client service costs real money,” Rynowecer said. “Clients would prefer to receive great client service and award work without the bidding process.”

In addition to losing clients, RFPs can also create other headaches for firms.

“There are definitely breakdowns in the RFP process,” Sarwal said. Because some of the RFP systems aren’t well-designed, law firms don’t know what really will convince companies to choose them, he said.

Downward Trend?

It remains to be seen whether the use of RFPs will continue to grow among corporate in-house departments.

Although Sarwal hasn’t seen any evidence suggesting that RFP usage is slowing down, he suggested that the pendulum could start swinging in the other direction. “We could get to a point where” law firms just throw their hands up and say, `We don’t see the value’” because the length of time taken to respond to an RFP may be wasted if they lose the bid—wasted hours that could have been spent elsewhere, he said.

However, beyond the RFP process, Sarwal said that law firms are getting the message from the market that they need to adjust their behaviour.

Sarwal noted that in-house departments are looking for any possible way to wring inefficiencies out of the process, to reduce spending and get better quality services. With or without RFPs, clients are not going to relent on this pressure.

Opinion’s from Lawcadia

In the search for greater efficiencies and cost control, we can see why there is a push for the use of RFP’s from companies. However, we do question the effectiveness of this without a disciplined cost management approach and control measures that keep accountability in check.

Law firms are notorious for over-billing and after being engaged it is not uncommon for matters to be poorly managed, work to be inefficiently allocated to team members and the relationship taken for granted.

So, we really question if the hard work of going through an RPF process at the beginning of a matter is of benefit unless it is partnered with a rigorous management of legal spend and appropriate checks and control that encourage the law firms to be accountable and spend the companies’ money wisely and respectfully.

We have structured our Procurement Tool to fit end to end with our Financial Reporting Tool and Ratings System, so that after going through the procurement process, our clients can easily have visibility and control over their legal spend and hold their law firms accountable for their pricing and service. It is only with this behaviour following an RFP process that the RFP process is in fact of value to companies.

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