Thursday, June 08, 2006

Beauty Contests and Legal Fees

There's an interesting article in the June 2006 issue of the ABA Journal about the rising popularity of RFPs, or Requests for Proposals, in corporate transactions. That is, clients are increasingly putting large legal projects out for bidding to a selected number of firms. Then the client compares the bids and decides which firm to pick. This is generally known as a Beauty Contest. The article isn't posted online to my knowledge, but the ABA does have some materials on RFPs on its ABA Journal website.

Some of the primary points made in that article are as follows:
  • RFPs are partly counterpressure to the rising costs of outside counsel, who charge fees triple what they were a decade ago.
  • RFPs are mercantilistic--meaning they are a zero sum game. You either get the work, or you don't. And if you get it, someone else loses it.
  • Even if you get awarded the project, that does not mean the project will go forward. It may die.
  • Even if the project goes forward, your estimates of the work involved may have been way off, and you may lose money on the project (or suffer significant opportunity costs).

In other words, RFPs make lawyers think like business people and take big risks (and risk big losses) like business people.

During my time in private practice, I saw RFPs become increasingly popular. They were sometimes hard to respond to--was the proposal what the client wanted? Was our price in the client's "sweet spot," or was it too high? Or (heaven forbid) was it too low? RFPs certainly added some stress to an already stressful job. Working on an RFP meant taking time away from billable projects and sinking it into a nonbillable proposal that might go nowhere. I suppose you might say that being beautiful was hard work.

But interestingly enough, RFPs were also fun, in a challenging way. Overall, I think they are a positive development in the private practice of law.

Clearly RFPs are good for clients. Legal fees too high? Then cap them, or make lawyers compete for your business. As long as there are lawyers wanting to do a client's work, then the client can set some of the terms. The outside law firm is free to walk if the terms are bad--and maybe the client will have to modify its terms to actually get the kind of legal service it wants. But in my experience, law firms are reluctant to fire clients. Clients pay money, and that gives them leverage.

The funny thing is that in my view, RFPs are also good for lawyers. You really have to be at the top of your game all the time, but isn't that what you are paid for? I am not a big fan of the corporate grind/due diligence routine, whereby attorneys do boring grunt work for hundreds of dollars per hour. I'd rather take on a challenge and earn my high hourly rate. Those who can't handle this challenge don't get the work that really pays. Those that do get the high end work have to consistently excel to continue justifying it. And that includes being very, very efficient, so that the client can get its lower (capped?) fee, and the law firm can still make its desired profit margin.

So I am saying hurray for market forces, and hurray for Beauty Contests. The astute reader will notice that I am not suggesting that monopoly rights to practice law be lifted, which likely would lead to more lawyers and perhaps lower fees, at least in certain areas of practice. That's an important subject, but it's one for another day (and one I have blogged about previously). Suffice it to say for now that, even with the current restrictions on legal practice (have to go to law school; generally have to be admitted to the bar), there are self-correction mechanisms such as RFPs at work within the legal sector of the economy.

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